10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)
x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2005.
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from                  to

Commission File Number 333-56365

FairPoint Communications, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	13-3725229
(State or Other Jurisdiction of	(I.R.S. Employer Identification No.)
Incorporation or Organization)
521 East Morehead Street, Suite 250	28202
Charlotte, North Carolina	(Zip code)
(Address of Principal Executive Offices)

Registrant’s Telephone Number, Including Area Code: (704) 344-8150.

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Exchange on Which Registered
Common Stock, par value $0.01 per share	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes oNo x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes oNo x

The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2005 (based on the closing price of $16.15 per share as quoted on the New York Stock Exchange as of such date) was approximately $442,591,000.

As of March 06, 2006, there were 35,015,019 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.

Documents incorporated by reference: Part III of the Annual Report incorporates information by reference from the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission not later than April 30, 2006.

FAIRPOINT COMMUNICATIONS, INC. ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

Item Number		Page Number
	Index		i
	PART I
1.	Business		2
1A.	Risk Factors		16
1B.	Unresolved Staff Comments		29
2.	Properties.		29
3.	Legal Proceedings		29
4.	Submission of Matters to a Vote of Security Holders.		30
	PART II
5.	Market for Registrant’s Common Equity and Related Stockholder Matters		31
6.	Selected Financial Data		34
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		36
7A.	Quantitative and Qualitative Disclosures about Market Risk.		54
8.	Independent Auditors’ Report and Consolidated Financial Statements		55
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.		99
9A.	Controls and Procedures		99
9B.	Other Information		99
	PART III
10.	Directors and Executive Officers of the Registrant		100
11.	Executive Compensation.		100
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.		100
13.	Certain Relationships and Related Transactions.		100
14.	Principal Accounting Fees and Services .		100
	PART IV
15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K.		100
	Signatures		101
	Exhibit Index		102

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PART I

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some statements in this Annual Report are known as “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. Forward-looking statements may relate to, among other things:

·future performance generally,

·our dividend policy and expectations regarding dividend payments,

·business development activities,

·future capital expenditures,

·future interest expense,

·distributions from minority investments and passive partnership interests,

·net operating loss carry forwards,

·technological developments and changes in the communications industry,

·financing sources and availability,

·regulatory support payments,

·the effects of regulation and competition, and

·pending litigation.

These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions and other statements contained in this Annual Report that are not historical facts. When used in this Annual Report, the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions are generally intended to identify forward looking statements. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results, events or developments to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors discussed under “Item 1A. Risk Factors” and other parts of this Annual Report. You should not place undue reliance on such forward-looking statements, which are based on the information currently available to us and speak only as of the date on which this Annual Report was filed with the Securities and Exchange Commission, or the SEC. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made on related subjects in our subsequent periodic reports filed with the SEC on Forms 10-K, 10-Q and 8-K and Schedule 14A.

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ITEM 1.   BUSINESS

Except as otherwise required by the context, references in this Annual Report to “FairPoint,” “our company,” “we,” “us,” or “our” refer to the combined business of FairPoint Communications, Inc. and all of its subsidiaries. Except as otherwise required by the context, all references to the “Company” refer to FairPoint Communications, Inc. excluding its subsidiaries.

Our Business

We are a leading provider of communications services in rural communities, offering an array of services, including local and long distance voice, data, Internet and broadband product offerings. We are one of the largest telephone companies in the United States focused on serving rural communities, and we are the 17th largest local telephone company, in each case based on number of access lines. We operate in 17 states with 288,899 access line equivalents (including voice access lines and high speed data lines, which include digital subscriber lines, or DSL, wireless broadband and cable modem) in service as of December 31, 2005.

We were incorporated in February 1991 for the purpose of acquiring and operating incumbent telephone companies in rural markets. We have acquired 32 such businesses, 28 of which we continue to own and operate. Many of our telephone companies have served their respective communities for over 75 years. The majority of the rural communities we serve have fewer than 2,500 access lines. All of our telephone companies qualify as rural local exchange carriers under the Telecommunications Act of 1996, or the Telecommunications Act.

Rural local exchange carriers generally are characterized by stable operating results and strong cash flow margins and operate in supportive regulatory environments. In particular, existing state and federal regulations permit us to charge rates that enable us to recover our operating costs, plus a reasonable rate of return on our invested capital (as determined by relevant regulatory authorities). Competition is typically limited because rural local exchange carriers primarily serve sparsely populated rural communities with predominantly residential customers, and the cost of operations and capital investment requirements for new entrants is high. As a result, in our markets, we have experienced virtually no wireline competition and limited voice competition from cable providers. We may already have some voice over Internet protocol, or VoIP, competition but there is no way to identify or measure it. While most of our markets are served by wireless service providers, their impact on our business has been limited. We periodically negotiate interconnection agreements with other telecommunications providers which could ultimately result in increased competition in those markets.

Access lines are an important element of our business. Historically, rural telephone companies have experienced consistent growth in access lines because of positive demographic trends, insulated rural local economies and little competition. Recently, however, many rural telephone companies have experienced a loss of access lines due to challenging economic conditions, increased competition and the introduction of DSL services (resulting in customers canceling second lines in favor of DSL). We have not been immune to these conditions. We have been able to mitigate our access line loss somewhat through bundling services, retention programs, continued community involvement and a variety of other focused programs.

Our Competitive Strengths

We believe we are distinguished by the following competitive strengths:

·Leading market share. We have the leading market position in the rural communities we serve, with limited competition. Demand for telephone services from our residential and local business customers has historically been very stable despite changing economic conditions. As a result, we have experienced less of a decline in access lines during the last two years as compared to regional

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bell operating companies. Additionally, our telephone companies operate in generally supportive regulatory environments. These factors have permitted us to generate consistent cash flows and strong margins.

·Geographically diversified markets. We currently operate 28 rural local exchange carriers in 17 states enabling us to capitalize on economies of scale and operating efficiencies. Our geographic diversity significantly enhances our cash flow stability by limiting our exposure to competition, local economic downturns and state regulatory changes. In addition, we believe that we have achieved significant scale efficiencies by centralizing many functions, such as sales and marketing, operations, network planning, accounting and customer service.

·Technologically advanced infrastructure. Our advanced network infrastructure enables us to provide a wide array of communications services. Our network consists of central office hosts and remote sites all with digital switches (primarily manufactured by Nortel and Siemens) and operating with current software. As a result of our historic capital investments, we believe that our network infrastructure requires predictable capital expenditures and allows us to implement certain broadband enabled services with minimal incremental cost. As of December 31, 2005, approximately 98% of our exchanges were capable of providing broadband services and approximately 79% of our access lines are high speed data capable.

·Broadest service offerings in our markets. As a result of our advanced network, switching and routing infrastructure, we believe that we offer the only comprehensive suite of communications services in our markets, including local and long distance voice, data and Internet services. In addition, we offer enhanced features such as caller identification, call waiting, call forwarding, teleconferencing, video conferencing and voicemail. We also offer broadband communications solutions to most of our customers primarily through DSL technology.

·Management team with proven track record. We have an experienced management team that has demonstrated its ability to grow our rural telephone business over the past decade. Our senior management team has an average of 23 years of industry experience. Our management team has successfully integrated 32 business acquisitions since 1993, improving revenues and cash flow significantly while enhancing service quality and broadening service offerings.

Our Strategy

The key elements of our strategy are to:

·Increase revenue per customer. We are focused on increasing our revenues by introducing innovative product offerings and marketing strategies for enhanced and ancillary services to meet the growing needs of our customers. Our long standing relationships with our customers have helped us to successfully cross-sell broadband and value-added services, such as DSL, long distance, Internet dial-up, voicemail and other services. We will continue to evaluate and implement technologies that will allow us to offer new products and services.

·Continue to improve operating efficiencies and profitability. We have achieved significant operating efficiencies by applying our operational, regulatory, marketing and management expertise to our acquired businesses. We intend to continue to increase our operating efficiencies by consolidating various administrative functions and implementing best practices across the Company.

·Enhance customer loyalty. We believe that our service driven customer relationships and long-standing local presence lead to high levels of customer satisfaction and increased demand for enhanced and ancillary services. We continue to build long-term relationships with our customers

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by actively participating in the communities we serve and by offering an array of communications services and quality customer care.

·Grow through selective acquisitions. We believe that our acquisition strategy has been successful because of our ability to integrate acquisitions and improve operating efficiencies in the businesses we acquire. Our management team has consistently produced strong operating cash flow improvements in our acquired businesses. We will continue to evaluate and pursue acquisitions which provide the opportunity to enhance our revenues and cash flows.

Our Services

We offer a broad portfolio of high-quality communications services for residential and business customers in each of the markets in which we operate. We have a long history of operating in our markets and have a recognized identity within each of our service areas. Our companies are locally staffed, which enables us to efficiently and reliably provide an array of communications services to meet our customer needs. These include services traditionally associated with local telephone companies, as well as other services such as long distance, Internet and broadband enabled services. Based on our understanding of our local customers’ needs, we have attempted to be proactive by offering bundled services designed to simplify the customer’s purchasing and management process.

Generation of Revenue

We primarily generate revenue through: (i) the provision of our basic local telephone service to customers within our service areas; (ii) the provision of network access to interexchange carriers for origination and termination of interstate and intrastate long distance phone calls; (iii) Universal Service Fund high cost loop payments; and (iv) the provision of other services such as long distance resale, data and Internet and broadband enabled services, enhanced services, such as caller name and number identification, and billing and collection for interexchange carriers.

See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information regarding our revenue sources.

Local Calling Services

Local calling service enables the local customer to originate and receive an unlimited number of calls within a defined “exchange” area. Local calling services include basic local lines, private lines and switched data services. We provide local calling services to residential and business customers, generally for a fixed monthly charge and service charges for special calling features. In a rural local exchange carriers’ territory, the amount that we can charge a customer for local service is determined by rate proceedings involving the appropriate state regulatory authorities.

Network Access Charges

Network access enables long distance companies to utilize our local network to originate or terminate intrastate and interstate calls. Network access charges relate to long distance, or toll calls, that typically involve more than one company in the provision of telephone service. Since toll calls are generally billed to the customer originating the call, a mechanism is required to compensate each company providing services relating to the call. This mechanism is the access charge and we bill access charges to long distance companies and other customers for the use of our facilities to access the customer, as described below.

Intrastate Access Charges.   We generate intrastate access revenue when an intrastate long distance call involving an interexchange carrier is originated by a customer in one of our rural local exchanges to a customer in another exchange in the same state, or when such a call is terminated to a customer in one of

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our rural local exchanges. The interexchange carrier pays us an intrastate access payment for either terminating or originating the call. We bill access charges relating to such calls through our carrier access billing system and receive the access payment from the interexchange carrier. Access charges for intrastate services are regulated and approved by the state regulatory authority.

Interstate Access Charges.   We generate interstate access revenue when an interstate long distance call is originated by a customer in one of our rural local exchanges to a customer in another state, or when such a call is terminated to a customer in one of our rural local exchanges. We bill interstate access charges in the same manner as we bill intrastate access charges; however, interstate access charges are regulated and approved by the Federal Communications Commission instead of the state regulatory authority.

Universal Service Fund High Cost Loop

The Universal Service Fund supplements the amount of local service revenue received by us to ensure that basic local service rates for customers in high cost rural areas are consistent with rates charged in lower cost urban and suburban areas. The Universal Service Fund, which is funded by monthly fees charged to interexchange carriers and local exchange carriers, makes payments to us on a monthly basis based upon our cost support for local exchange carriers whose cost of providing the local loop connections to customers is significantly greater than the national average. These payments fluctuate based upon our average cost per loop compared to the national average cost per loop. For example, if the national average cost per loop increases and our operating costs (and average cost per loop) remain constant or decrease, the payments we receive from the Universal Service Fund would decline. Conversely, if the national average cost per loop decreases and our operating costs (and average cost per loop) remain constant or increase, the payments we receive from the Universal Service Fund would increase.

Long Distance Services

We offer switched and dedicated long distance services throughout our service areas through resale agreements with national interexchange carriers. In addition, through our wholly-owned subsidiary FairPoint Carrier Services, Inc., or Carrier Services, we offer wholesale long distance services to communications providers that are not affiliated with us.

Data and Internet Services

We offer Internet access via DSL technology, dedicated T-1 connections, Internet dial-up, high speed cable modem and wireless broadband. Customers can utilize this access in combination with customer owned equipment and software to establish a presence on the web. In addition, we offer enhanced Internet services, which include obtaining Internet protocol addresses, basic web site design and hosting, domain name services, content feeds and web-based e-mail services. Our services include access to 24-hour, 7-day a week customer support.

Other Services

We seek to capitalize on our rural local exchange carriers’ local presence and network infrastructure by offering enhanced services to customers, as well as billing and collection services for interexchange carriers.

Enhanced Services.   Our advanced digital switch and voicemail platforms allow us to offer enhanced services such as call waiting, call forwarding and transferring, call hunting, three-way calling, automatic callback, call hold, caller name and number identification, voice mail, teleconferencing, video conferencing, store-and-forward fax, follow-me numbers, Centrex services and direct inward dial.

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Billing and Collection.   Many interexchange carriers provide long distance services to our rural local exchange carrier customers and may elect to use our billing and collection services. Our rural local exchange carriers charge interexchange carriers a billing and collection fee for each call record generated by the interexchange carrier’s customer.

Directory Services.   Through our local telephone companies, we publish telephone directories in the majority of our locations. These directories provide white page listings, yellow page listings and community information listings. These directories generate revenues and operating cash flow from the sale of yellow page and related advertising to businesses. We contract with leading industry providers to assist in the sale of advertising, compilation of information, as well as the production, publication and distribution of these directories.

Our Markets

Our 28 rural local exchange carriers operate as the incumbent local exchange carrier in each of their respective markets. Our rural local exchange carriers serve an average of approximately 13 access lines per square mile versus the non-rural carrier average of approximately 128 access lines per square mile. Approximately 77% of our access lines serve residential customers. Our business customers account for approximately 23% of our access lines. Our business customers are predominantly in the agriculture, light manufacturing and service industries.

The following chart identifies the number of access line equivalents in each of our 17 states as of December 31, 2005:

State	Access Line Equivalents
Maine		67,246
Florida		56,294
New York		51,979
Washington		46,695
Ohio		10,611
Illinois		8,218
Virginia		8,169
Vermont		7,355
Idaho		7,133
Kansas		6,892
Pennsylvania		6,648
Oklahoma		4,010
Colorado		3,532
Other States(1)		4,117
Total:		288,899

(1)Includes Massachusetts, New Hampshire, Georgia and Alabama.

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Sales and Marketing

Our marketing approach emphasizes customer-oriented sales, marketing and service. We believe most communications companies devote their resources and attention primarily toward customers in more densely populated markets. To the extent we experience competition for any of our services, we seek to differentiate ourselves from the competitors providing such services by providing a superior level of service to each of our customers.

Each of our rural local exchange carriers has a long history in the communities it serves. It is our policy to maintain and enhance the strong identity and reputation that each rural local exchange carrier enjoys in its markets, as we believe this is a significant competitive advantage. As we market new services, we will seek to continue to utilize our identity in order to attain higher recognition with potential customers.

To demonstrate our commitment to the markets we serve, we maintain offices in many of the population centers within our service territories. These offices are typically staffed by local residents and provide customer support services in the community. We believe that a local presence helps facilitate a direct connection to the community, which improves customer satisfaction and loyalty.

In addition, our strategy is to enhance our communications services by offering comprehensive bundling of services and deploying new technologies to build upon the strong reputation we enjoy in our markets and to further promote rural economic development in the rural communities we serve.

Many of the rural local exchange carriers acquired by us traditionally have not devoted a substantial amount of their operating budget to sales and marketing activities. After acquiring such rural local exchange carriers, we typically change this practice to provide additional support for existing products and services as well as to support the introduction of new services. As of December 31, 2005, we had 254 employees engaged in sales, marketing and customer service.

Information Technology and Support Systems

Our approach to billing and operational support systems focuses on implementing best-of-class applications that allow consistent communication and coordination throughout our entire organization. Our objective is to improve profitability by reducing individual company costs through the sharing of best practices, centralization or standardization of functions and processes, and deployment of technologies and systems that provide for greater efficiencies and profitability.

As of December 31, 2005, 17 of our operating companies had converted to a single outsourced billing platform. On October 7, 2005, we learned that the billing service bureau used by us for these 17 operating companies had contracted to sell the software underlying our billing system and agreed not to add any future customers to its service bureau platform. In addition to the short term difficulties experienced during the billing conversion, this potential sale raised concerns about the long-term reliability of the service bureau. On November 7, 2005, we reached an agreement with this outsourced service bureau to transition to another service provider of our choice by December 31, 2006. Subsequent to reaching this agreement, we selected Mid America Computer Corporation, or MACC, as our new provider of billing services. We expect to complete the conversion of 17 of our operating companies, or approximately two thirds of our access lines, by the middle of 2006 and the remaining companies by early to mid 2007.

Network Architecture and Technology

Our rural local exchange carrier networks consist of central office hosts and remote sites, all with advanced digital switches (primarily manufactured by Nortel and Siemens) and operating with current software. The outside plant consists of transport and distribution delivery networks connecting our host central office with remote central offices and ultimately with our customers. We own fiber optic cable,

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which has been deployed throughout our current network and is the primary transport technology between our host and remote central offices and interconnection points with other incumbent carriers.

Our fiber optic transport system is primarily a synchronous optical network capable of supporting increasing customer demand for high bandwidth transport services. This system supports advanced services including Asynchronous Transfer Mode, Frame Relay and/or Internet Protocol Transport, facilitating delivery of advanced services as demand warrants.

In our rural local exchange carrier markets, DSL-enabled integrated access technology is being deployed to provide significant broadband capacity to our customers. As of December 31, 2005, we had invested approximately $32.0 million in digital subscriber line technology and had deployed this technology in 145 of our 148 exchanges. Approximately 98% of our exchanges are capable of providing broadband services through cable modem, wireless broadband and/or DSL technology.

Rapid and significant changes in technology are expected in the communications industry. Our future success will depend, in part, on our ability to anticipate and adapt to technological changes. We believe that our network architecture will enable us to efficiently respond to these technological changes.

Competition

We believe that the Telecommunications Act and other recent actions taken by the Federal Communications Commission and state regulatory authorities promote competition in the provision of communications services; however, many of the competitive threats now confronting larger regulated telephone companies do not currently exist in the rural local exchange carrier marketplace. Our rural local exchange carriers historically have experienced little wireline competition as the incumbent carrier in their markets because the demographic characteristics of rural communications markets generally will not support the high cost of operations and significant capital investment required for new wireline entrants to offer competitive services. For instance, the per minute cost of operating both telephone switches and interoffice facilities is higher in rural areas, as rural local exchange carriers typically have fewer, more geographically dispersed customers and lower calling volumes. Also, the distance from the telephone switch to the customer is typically longer in rural areas, which results in increased distribution facilities costs. These relatively high costs tend to discourage other wireline competitors from entering territories serviced by our rural local exchange carriers.

Wireless Competition

In most of our rural markets, we face competition from wireless technology and as technology and economies of scale improve competition from wireless carriers may increase. In addition, the Federal Communications Commission’s requirement that telephone companies offer wireline-to-wireless number portability may increase the competition we face from wireless carriers.

Wireline Competition

We also face competition from new market entrants that provide close substitutes for the traditional telephone services we provide, such as cable television, satellite communications and electric utility companies. Cable television companies are entering the communications market by upgrading their networks with fiber optics and installing facilities to provide fully interactive transmission of broadband, voice, video and data communications. Electric utilities have existing assets and access to low cost capital that could allow them to enter a market rapidly and accelerate network development. While we currently have limited competition for voice services from cable providers and electric utilities for basic voice services, we may face increased competition from such providers in the future.

In addition, we could face increased competition from competitive local exchange carriers, particularly in offering services to Internet service providers.

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Voice Over Internet Protocol Competition

Voice over internet protocol service is increasingly being embraced by all industry participants. Voice over internet protocol service essentially involves the routing of voice calls, at least in part, over the Internet through packets of data instead of transmitting the calls over the existing public switched telephone network. While current voice over internet protocol applications typically complete calls using incumbent local exchange carrier infrastructure and networks, as voice over internet protocol services obtain acceptance and market penetration and technology advances further, a greater quantity of communication may be placed without utilizing the public switched telephone network. The proliferation of voice over internet protocol, particularly to the extent such communications do not utilize our rural local exchange carriers’ networks, may result in an erosion of our customer base and loss of access fees and other funding.

Internet Competition

The Internet services market is also highly competitive, and we expect that competition will continue to intensify. Internet services, meaning both Internet access (wired and wireless) and on-line content services, are provided by Internet service providers, satellite-based companies, long distance carriers and cable television companies. Many of these companies provide direct access to the Internet and a variety of supporting services to businesses and individuals. In addition, many of these companies, such as America Online, Inc., Microsoft Network and Yahoo, offer on-line content services consisting of access to closed, proprietary information networks. Long distance companies and cable television operators, among others, are aggressively entering the Internet access markets. Long distance carriers have substantial transmission capabilities, traditionally carry data to large numbers of customers and have an established billing system infrastructure that permits them to add new services. Satellite companies are offering broadband access to the Internet from desktop personal computers. Many of these competitors have substantially greater financial, technological, marketing, personnel, name-brand recognition and other resources than those available to us.

Long Distance Competition

The long distance communications market is highly competitive. Competition in the long distance business is based primarily on price, although service bundling, branding, customer service, billing service and quality play a role in customers’ choices.

Other Competition

Although we currently believe we offer the only comprehensive suite of communications services in our markets, existing service providers such as wireline, wireless, cable and utility companies could form, and in some cases are in the process of forming, strategic alliances to offer bundled services in our markets. We may face increased competition from such bundled service providers in the future.

Employees

As of December 31, 2005, we employed a total of 900 employees. 119 employees of our rural local exchange carriers are represented by four unions. We believe the state of our relationship with our union and non-union employees is generally good. Within our company, 99 employees are employed at our corporate offices and 801 employees are employed at our rural local exchange carriers.

Intellectual Property

We believe we have the trademarks, trade names and licenses that are necessary for the operation of our business as we currently conduct it. We do not consider our trademarks, trade names or licenses to be material to the operation of our business.

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Regulatory Environment

The following summary does not describe all present and proposed federal, state and local legislation and regulations affecting the communications industry. Some legislation and regulations are currently the subject of judicial proceedings, legislative hearings and administrative proposals which could change the manner in which this industry operates. Neither the outcome of any of these developments, nor their potential impact on us, can be predicted at this time. Regulation can change rapidly in the communications industry, and such changes may have an adverse effect on us in the future. See “Item 7. Management’s Discussion and analysis of Financial Condition and Results of Operations—Risk Factors—Risks Related to our Regulatory Environment.”

Our regulated communications services are subject to extensive federal, state and local regulation. We hold various regulatory authorizations for our service offerings. At the federal level, the Federal Communications Commission generally exercises jurisdiction over all facilities and services of communications common carriers, such as us, to the extent those facilities are used to provide, originate, or terminate interstate or international communications. State regulatory commissions generally exercise jurisdiction over such facilities and services to the extent those facilities are used to provide, originate or terminate intrastate communications. In addition, pursuant to the Telecommunications Act, state and federal regulators share responsibility for implementing and enforcing the domestic pro-competitive policies introduced by that legislation. In particular, state regulatory agencies have substantial oversight over the provision by incumbent telephone companies of interconnection and non-discriminatory network access to competitive communications providers. Local governments often regulate the public rights-of-way necessary to install and operate networks, and may require communications services providers to obtain licenses or franchises regulating their use of public rights-of-way. Additionally, municipalities and other local government agencies may regulate limited aspects of our business, including our use of public rights of way, and by requiring us to obtain construction permits and abide by building codes.

We believe that competition in our telephone service areas will increase in the future as a result of the Telecommunications Act and through increased deployment of various types of technology, although the ultimate form and degree of competition cannot be ascertained at this time. Competition may lead to loss of revenues and profitability as a result of: loss of customers; reduced usage of our network by our existing customers who may use alternative providers for long distance, voice and data services; and reductions in prices for our services which may be necessary to meet competition.

Federal Regulation

We must comply with the Communications Act which requires, among other things, that communications carriers offer services at just and reasonable rates and on non-discriminatory terms and conditions. The amendments to the Communications Act contained in the Telecommunications Act dramatically changed and are expected to continue to change the landscape of the communications industry. The central aim of the Telecommunications Act was to open local communications marketplaces to competition while enhancing universal service. Most significantly, the Telecommunications Act governs the removal of barriers to market entry into local telephone services, requires incumbent local exchange carriers to interconnect with competitors, establishes procedures pursuant to which incumbent local exchange carriers may provide other services, such as the provision of long distance services by regional bell operating companies, and imposes on incumbent local exchange carriers duties to negotiate interconnection arrangements in good faith.

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Removal of Entry Barriers.   Prior to the enactment of the Telecommunications Act, many states limited the services that could be offered by a company competing with an incumbent local exchange carrier. The Telecommunications Act generally preempts state and local laws that prevent competitive entry into the provision of any communications service. However, states can modify conditions of entry into areas served by rural local exchange carriers where the state regulatory commission determines that such modification is warranted by the public interest. Since the passage of the Telecommunications Act, we have experienced only limited competition from cable and wireless service providers.

Access Charges.   The Federal Communications Commission regulates the prices that incumbent local telephone companies charge for the use of their local telephone facilities in originating or terminating interstate transmissions. The Federal Communications Commission has structured these prices, also referred to as “access charges,” as a combination of flat monthly charges paid by the end-users and usage sensitive charges paid by long distance carriers. State regulatory commissions regulate intrastate access charges. Many states generally mirror the Federal Communications Commission price structure. A significant amount of our revenues come from network access charges, which are paid to us by intrastate carriers and interstate long distance carriers for originating and terminating calls in the regions served by our rural local exchange carriers. The amount of access charge revenues that we receive is based on rates set by federal and state regulatory bodies, and such rates are subject to change at any time.

The Federal Communications Commission regulates the levels of interstate access charges by imposing price caps on larger incumbent local telephone companies. These price caps can be adjusted based on various formulae, such as inflation and productivity, and otherwise through regulatory proceedings. Smaller incumbents may elect to base access charges on price caps, but are not required to do so unless they elected to use price caps in the past or their affiliated incumbent local telephone companies base their access charges on price caps. Each of our 28 incumbent local telephone subsidiaries elected not to apply the Federal Communications Commission’s price caps. Instead, our subsidiaries employ rate-of-return regulation for their interstate access charges.

The Federal Communications Commission has made, and is continuing to consider, various reforms to the existing rate structure for charges assessed on long distance carriers for connection to local networks. States often mirror federal rules in establishing intrastate access charges. In 2001, the Federal Communications Commission adopted an order implementing the beginning phases of the Multi Association Group plan to reform the access charge system for rural carriers. The Multi Association Group plan is revenue neutral to our operating companies. Among other things, the Multi Association Group plan reduces access charges and shifts a portion of cost recovery, which historically has been based on minutes-of-use, to flat-rate, monthly per line charges on end-user customers rather than long distance carriers. As a result, the aggregate amount of access charges paid by long distance carriers to access providers, such as our rural local exchange carriers, has decreased and may continue to decrease. In adopting the Multi Association Group plan, the Federal Communications Commission also determined that rate-of-return carriers will continue to be permitted to set rates based on the authorized rate of return of 11.25%. Additionally, the Federal Communications Commission initiated a rulemaking proceeding to investigate the Multi Association Group’s proposed incentive regulation plan and other means of allowing rate-of-return carriers to increase their efficiency and competitiveness. The Multi Association Group plan expires on May 30, 2006 and will need to be renewed or replaced at such time. In addition, to the extent our rural local exchange carriers become subject to competition in their own local exchange areas, such access charges could be paid to competing local exchange carriers rather than to us. Additionally, the access charges we receive may be reduced as a result of competition by other service providers such as wireless and voice over internet services. Such a circumstance could have a material adverse effect on our financial condition and results of operations. In addition, the Federal Communications Commission has sought comment on broad policy changes that could harmonize the rate structure and levels of all forms of intercarrier compensation, and could, as a result, substantially modify the current forms of carrier-to-

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carrier payments for interconnected traffic. Furthermore, in the notice of proposed rulemaking on voice over internet protocol services adopted by the Federal Communications Commission in February 2004, the Federal Communications Commission has sought comment on whether access charges should apply to voice over internet protocol or other internet protocol based services. It is unknown at this time what additional changes, if any, the Federal Communications Commission may eventually adopt and the effect of any such changes on our business.

Rural Local Exchange Carrier Services Regulation.   Our rural local exchange carrier services segment revenue is subject to regulation including regulation by the Federal Communications Commission and incentive regulation by various state regulatory commissions. State lawmakers will likely continue to review the statutes governing the level and type of regulation for communications services. It is expected that over the next few years, legislative and regulatory actions will provide opportunities to restructure rates, introduce more flexible incentive regulation programs and possibly reduce the overall level of regulation. We expect the election of incentive regulation plans and the expected reduction in the overall level of regulation to allow us to introduce new services and pricing changes more expeditiously than in the past. At the same time, however, the implementation of such new programs may also lead to reductions in intrastate access charges.

The Federal Communications Commission generally must approve in advance most transfers of control and assignments of operating authorizations by Federal Communications Commission-regulated entities. Therefore, if we seek to acquire companies that hold Federal Communications Commission authorizations, in most instances we will be required to seek approval from the Federal Communications Commission prior to completing those acquisitions. The Federal Communications Commission has the authority to condition, modify, cancel, terminate or revoke operating authority for failure to comply with applicable federal laws or rules, regulations and policies of the Federal Communications Commission. Fines or other penalties also may be imposed for such violations. Our interstate common carrier services are also subject to nondiscrimination requirements and requirements that rates be just and reasonable.

The Federal Communications Commission has required that incumbent independent local exchange carriers that provide interstate long distance services originating from their local exchange service territories must do so in accordance with “structural separation” rules. These rules require that our long distance affiliates (i) maintain separate books of account, (ii) not own transmission or switching facilities jointly with the local exchange affiliate, and (iii) acquire any services from its affiliated local exchange telephone company at tariffed rates, terms and conditions. The Federal Communications Commission has initiated a rulemaking proceeding to examine whether there is a continuing need for such requirements; however, we cannot predict the outcome of that proceeding.

State Regulation

Most states have some form of certification requirement that requires providers of communications services to obtain authority from the state regulatory commission prior to offering common carrier services. Each of our 28 rural local exchange carriers operates as the incumbent local telephone company in the states in which it operates and is certified in those states to provide local telephone services. State regulatory commissions generally regulate the rates incumbent local exchange carriers charge for intrastate services, including rates for intrastate access services paid by providers of intrastate long distance services. Although the Federal Communications Commission has preempted certain state regulations pursuant to the Telecommunications Act, states have retained authority to impose requirements on carriers necessary to preserve universal service, protect public safety and welfare, ensure quality of service and protect consumers. For instance, incumbent local exchange carriers must file tariffs setting forth the terms, conditions and prices for their intrastate services, and such tariffs may be challenged by third parties. From time to time, states conduct rate cases or “earnings” reviews. These reviews may result in the disallowance of certain investments or expenses for ratemaking purposes.

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Under the Telecommunications Act, state regulatory commissions have jurisdiction to arbitrate and review interconnection disputes and agreements between incumbent local exchange carriers and competitive local exchange carriers, in accordance with rules set by the Federal Communications Commission. State regulatory commissions may also formulate rules regarding fees imposed on providers of communications services within their respective states to support state universal service programs. States often require prior approvals or notifications for certain acquisitions and transfers of assets, customers, or ownership of regulated entities. Therefore, in most instances we will be required to seek state approval prior to completing new acquisitions of rural local exchange carriers. States generally retain the right to sanction a carrier or to revoke certifications if a carrier materially violates relevant laws and/or regulations.

Local Government Authorizations

We may be required to obtain from municipal authorities permits for street opening and construction or operating franchises to install and expand facilities in certain rural communities. Some of these franchises may require the payment of franchise fees. We have obtained such municipal franchises as were required. In some rural areas, we do not need to obtain such permits or franchises because the subcontractors or electric utilities with which we have contracts already possess the requisite authorizations to construct or expand our networks.

Promotion of Local Service Competition and Traditional Telephone Companies

As discussed above, the Telecommunications Act provides, in general, for the removal of barriers to entry into the communications industry in order to promote competition for the provision of local service. Congress, however, has recognized that states should not be prohibited from taking actions necessary to preserve and advance universal service, and has further recognized that special consideration should be given to the appropriate conditions for competitive entry in areas served by rural telephone companies, such as our 28 rural local exchange carrier subsidiaries.

Pursuant to the Telecommunications Act, all local exchange carriers, including both incumbents and new competitive carriers, are required to: (i) allow others to resell their services at retail rates; (ii) ensure that customers can keep their telephone numbers when changing carriers; (iii) ensure that competitors’ customers can use the same number of digits when dialing and receive nondiscriminatory access to telephone numbers, operator service, directory assistance and directory listing; (iv) ensure access to telephone poles, ducts, conduits and rights of way; and (v) compensate competitors for the competitors’ costs of completing calls to competitors’ customers. Competitors are required to compensate the incumbent telephone company for the cost of providing these interconnection services. Under the Telecommunications Act, our rural local exchange carriers may request from state regulatory commissions, suspension or modification of any or all of the requirements described above. A state regulatory commission may grant such a request if it determines that such exemption, suspension or modification is consistent with the public interest and necessary to avoid a significant adverse economic impact on communications users and generally avoid imposing a requirement that is technically unfeasible or unduly economically burdensome. If a state regulatory commission denies some or all of any such request made by one of our rural local exchange carriers, or does not allow us adequate compensation for the costs of providing interconnection, our costs could increase and our revenues could decline. In addition, with such a denial, competitors could enjoy benefits that would make their services more attractive than if they did not receive such interconnection rights. With the exception of the previously referenced requests to modify the May 24, 2004 implementation date for local number portability in certain states, we have not encountered a need to file any such requests for suspension or modification of the interconnection requirements.

The Telecommunications Act, with certain exceptions, imposes the following additional duties on incumbent telephone companies by requiring them to: (i) interconnect their facilities and equipment with

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any requesting communications carrier at any technically feasible point; (ii) unbundle and provide nondiscriminatory access to network elements such as local loops, switches and transport facilities, at nondiscriminatory rates and on nondiscriminatory terms and conditions; (iii) offer their retail services for resale at wholesale rates; (iv) provide reasonable notice of changes in the information necessary for transmission and routing of services over the incumbent telephone company’s facilities or in the information necessary for interoperability; and (v) provide, at rates, terms and conditions that are just, reasonable and nondiscriminatory, for the physical co-location of equipment necessary for interconnection or access to unbundled network elements at the premises of the incumbent telephone company. Competitors are required to compensate the incumbent local exchange carrier for the cost of providing these interconnection services. However, pursuant to the Telecommunications Act, rural telephone companies, including our rural local exchange carriers, are automatically exempt from these additional incumbent telephone company requirements. The exemption remains effective until an incumbent rural local telephone company receives a bona fide request for these additional interconnection services and the applicable state authority determines whether the request is not unduly economically burdensome, technically feasible, and consistent with the universal service objectives set forth in the Telecommunications Act. This exemption remains effective for all of our incumbent local telephone operations, except in Florida where the legislature has determined that all incumbent local exchange carriers are required to provide the additional interconnection services as prescribed in the Telecommunications Act. If a request for any of these additional interconnection services is filed by a potential competitor with respect to one of our other operating territories, we are likely to ask the relevant state regulatory commission to retain the exemption. If a state regulatory commission rescinds such exemption in whole or in part and if the state regulatory commission does not allow us adequate compensation for the costs of providing the interconnection, our costs would significantly increase, we would face new competitors in that state and we could suffer a significant loss of customers and resulting declines in our revenues. In addition, we could incur additional administrative and regulatory expenses as a result of the interconnection requirements.

Promotion of Universal Service

The payments received by our rural local exchange carriers from the Universal Service Fund are intended to support the high cost of our operations in rural markets. Payments from the high cost loop component of the Universal Service Fund represented 8% of our revenues for the year ended December 31, 2005. Under current Federal Communications Commission regulations, the total Universal Service Fund available to all rural local telephone companies, including our 28 rural local exchange carrier subsidiaries, is subject to a cap. In any given year, the cap may or may not be reached. In any year where the cap is reached, the per access line rate at which we can recover Universal Service Fund payments may decrease. In addition, the consideration of changes in the federal rules governing the distribution of Universal Service Fund is pending before the Federal Communications Commission. If our rural local exchange carriers were unable to receive Universal Service Fund payments, or if such payments were reduced, many of our rural local exchange carriers would be unable to operate as profitably as they have historically in the absence of our implementation of increases in charges for other services. Moreover, if we raise prices for services to offset loss of Universal Service Fund payments, the increased pricing of our services may disadvantage us competitively in the marketplace, resulting in additional potential revenue loss. Payments from the Universal Service Fund fluctuate based upon our average cost per loop compared with the national average cost per loop. For example, if the national average cost per loop increases and our operating costs (and average cost per loop) remain constant or decrease, the payments we receive from the Universal Service Fund would decline. Conversely, if the national average cost per loop decreases and our operating costs (and average cost per loop) remain constant or increase, the payments we receive from the Universal Service Fund would increase. Over the past year, the national average cost per loop in relation to our average cost per loop has increased and we believe the national average cost per loop will

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likely continue to increase in relation to our average cost per loop. As a result, the payments we receive from the Universal Service Fund will likely decline.

Universal service rules have been adopted by both the Federal Communications Commission and some state regulatory commissions. Universal Service Fund funds may be distributed only to carriers that are designated as eligible telecommunications carriers by a state regulatory commission. All of our rural local exchange carriers have been designated as eligible telecommunications carriers pursuant to the Telecommunications Act. However, under the Telecommunications Act, competitors could obtain the same support payments as we do if a state regulatory commission determined that granting such support payments to competitors would be in the public interest.

Two notable regulatory changes enacted by the Federal Communications Commission in the last four years are the adoption, with certain modifications, of the Rural Task Force proposed framework for rural high-cost universal service support and the implementation of the Multi Association Group plan. The Federal Communications Commission’s Rural Task Force order modifies the existing universal service support mechanism for rural local exchange carriers and adopts an interim embedded, or historical, cost mechanism for a five-year period that provides predictable levels of support to rural carriers. The Federal Communication Commission has stated its intention to develop a long-term plan based on forward looking costs when the five-year period expires on May 30, 2006. The Multi Association Group plan created a new universal service support mechanism, Interstate Common Line Support, to replace carrier common line access charges and the recovery of certain costs formerly recovered through traffic sensitive access charges. A recent Federal Communications Commission order merged long term support into its interstate common line support mechanism without reducing (at least initially) the aggregate universal service support from the two mechanisms (both of which had been previously transformed from access charge revenue streams into universal service support mechanisms). As a result of these changes, when a competitor is designated as an eligible telecommunications carrier, it also receives an increased level of Universal Service Fund support equal to the level received by the incumbent on a per line basis.

The Federal State Joint Board is currently considering recommendations on the question of which carriers can obtain Universal Service Fund support in a market. The Federal State Joint Board recommended that:

·a set of permissive federal guidelines be developed to ensure that the public interest is served before eligible telecommunications carriers are designated;

·support be limited to a single connection that provides access to the public telephone network; and

·the basis for providing support be considered and further clarified during the comprehensive review of the Universal Service Fund to be completed in 2006.

On February 28, 2005, the Federal Communications Commission issued a press release announcing additional requirements for the designation of competitive eligible telecommunications carriers for receipt of high-cost support. The written text of the Federal Communications Commission order was released on March 1, 2005 in which the Federal Communications Commission adopted additional mandatory requirements for eligible telecommunications carriers designation in cases where it has jurisdiction, and encourages states that have jurisdiction to designate eligible telecommunications carriers to adopt similar requirements. The Federal Communications Commission is still considering revisions to the methodology by which contributions to the Universal Service Fund are determined. These revisions will be part of an overall rulemaking regarding Universal Service Support which will be dealt with sometime in 2006.

In addition, there are a number of judicial appeals challenging several aspects of the Federal Communications Commission’s universal service rules. It is not possible to predict at this time whether the Federal Communications Commission or Congress will require modification to those rules, or the ultimate impact any such modification might have on us.

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Potential Internet Regulatory Obligations

In connection with our Internet access offerings, we could become subject to laws and regulations as they are adopted or applied to the Internet. There is currently only limited regulations applicable to the Internet. As the significance of the Internet expands, federal, state and local governments may adopt rules and regulations, or apply existing laws and regulations to the Internet, and related matters are under consideration in both federal and state legislative and regulatory bodies. The Federal Communications Commission is currently reviewing the appropriate regulatory framework governing broadband access to the Internet through telephone and cable operators’ communications networks. We cannot predict whether the outcome will prove beneficial or detrimental to our competitive position. In February 2004, the Federal Communications Commission initiated a proceeding to examine the regulatory implications of voice over Internet protocol technology. We cannot predict the results of these proceedings, the nature of these regulations or their impact on our business.

The Federal Communications Commission adopted FCC Order 05-150. This Order puts wireline broadband Internet access service, commonly delivered by digital subscriber line (DSL) technology, on an equal regulatory footing with cable modem service. This approach is consistent with a recent United States Supreme Court decision upholding the FCC’s light regulatory treatment of cable modem service. Specifically, the FCC determined that wireline broadband Internet access services are defined as information services functionally integrated with a telecommunications component. In the past, the FCC required facilities-based providers to offer wireline broadband transmission components separately from their Internet service as a stand alone service on a common-carrier basis, and thus classified that component as a telecommunications service. The FCC order also provides an option which allows rate of return carriers, such as our operating companies, the option to continue providing DSL service as a common carrier (status quo) offering.

Environmental Regulations

Like all other local telephone companies, our 28 rural local exchange carrier subsidiaries are subject to federal, state and local laws and regulations governing the use, storage, disposal of, and exposure to hazardous materials, the release of pollutants into the environment and the remediation of contamination. As an owner of property, we could be subject to environmental laws that impose liability for the entire cost of cleanup at contaminated sites, regardless of fault or the lawfulness of the activity that resulted in contamination. We believe, however, that our operations are in substantial compliance with applicable environmental laws and regulations.

ITEM 1A.RISK FACTORS

Any of the following risks could materially adversely affect our business, consolidated financial condition, results of operations or liquidity or the market price of our common stock. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business operations.

Risks Related to our Common Stock and our Substantial Indebtedness

Our stockholders may not receive the level of dividends provided for in the dividend policy our board of directors has adopted or any dividends at all.

Our board of directors has adopted a dividend policy which reflects an intention to distribute a substantial portion of the cash generated by our business in excess of operating needs, interest and principal payments on our indebtedness, dividends on our future senior classes of capital stock, if any, capital expenditures, taxes and future reserves, if any, as regular quarterly dividends to our stockholders. Our board of directors may, in its discretion, amend or repeal this dividend policy. Our dividend policy is

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based upon our directors’ current assessment of our business and the environment in which we operate, and that assessment could change based on competitive or technological developments (which could, for example, increase our need for capital expenditures) or new growth opportunities. In addition, future dividends with respect to shares of our common stock, if any, will depend on, among other things, our cash flows, cash requirements, financial condition, contractual restrictions, provisions of applicable law and other factors that our board of directors may deem relevant. Our board of directors may decrease the level of dividends provided for in the dividend policy or entirely discontinue the payment of dividends. Our credit facility contains significant restrictions on our ability to make dividend payments. There can be no assurance that we will generate sufficient cash from continuing operations in the future, or have sufficient surplus or net profits, as the case may be, under Delaware law, to pay dividends on our common stock in accordance with the dividend policy. If we were to use borrowings under our credit facility’s revolving facility to fund dividends, we would have less cash available for future dividends. The reduction or elimination of dividends may negatively affect the market price of our common stock.

To expand our business through acquisitions and service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control. We may not generate sufficient funds from operations to consummate acquisitions, pay dividends with respect to shares of our common stock or repay or refinance our indebtedness at maturity or otherwise.

We may not retain a sufficient amount of cash to finance a material expansion of our business, or to fund our operations consistent with past levels of funding in the event of a significant business downturn. In addition, because a substantial portion of cash available to pay dividends will be distributed to holders of our common stock under our dividend policy, our ability to pursue any material expansion of our business, including through acquisitions or increased capital spending, will depend more than it otherwise would on our ability to obtain third party financing. There can be no assurance that such financing will be available to us at all, or at an acceptable cost.

Our ability to consummate acquisitions and to make payments on our indebtedness will depend on our ability to generate cash flow from operations in the future. This ability, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. There can be no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs.

A significant amount of our cash flow from operations will be dedicated to capital expenditures and debt service. In addition, we currently expect to distribute a significant portion of our cash flow to our stockholders in the form of quarterly dividends. As a result, we may not retain a sufficient amount of cash to finance growth opportunities, including acquisitions, or unanticipated capital expenditures or to fund our operations. In addition, if we reduce capital expenditures, the regulatory settlement payments we receive may decline.

Borrowings under our credit facility bear interest at variable interest rates. Accordingly, if any of the base reference interest rates for the borrowings under our credit facility increase, our interest expense will increase, which could negatively impact our ability to pay dividends on our common stock. On February 8, 2005, we entered into three interest rate swap agreements, with notional amounts of $130 million each, to effectively convert a portion of our variable rate interest exposure to fixed rates ranging from 5.76% to 6.11%. These swap agreements expire beginning December 31, 2007 through December 31, 2009. On April 7, 2005, we entered into two additional interest rate swap agreements, one with the notional amount of $50.0 million to effectively convert a portion of our variable rate interest exposure to a fixed rate of 6.69% beginning on April 29, 2005 and ending on March 31, 2011, and one with the notional amount of $50.0 million to effectively convert a portion of our variable rate interest exposure to a fixed rate of 6.72% beginning on June 30, 2005 and ending on March 31, 2012. As a result of these swap agreements, as of

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December 31, 2005, approximately 82% of our indebtedness bore interest at fixed rates rather than variable rates. After these interest rate swap agreements expire, our annual debt service obligations with respect to borrowings under our credit facility will vary from year to year unless we enter into a new interest rate swap or purchase an interest rate cap or other interest rate hedge. If we choose to enter into a new interest rate swap or purchase an interest rate cap or other interest rate hedge in the future, the amount of cash available to pay dividends on our common stock may decrease. However, to the extent interest rates increase in the future, we may not be able to enter into a new interest rate swap or purchase an interest rate cap or other interest rate hedge on acceptable terms.

In addition, prior to the maturity of our credit facility, we will not be required to make any payments of principal on our credit facility, and it is not likely that we will generate sufficient funds from operations to repay the principal amount of our indebtedness at maturity. We therefore will need to refinance our debt. We may not be able to refinance our outstanding indebtedness under our credit facility, or if refinanced, the refinancing may occur on less favorable terms, which may materially adversely affect our ability to pay dividends. If we were unable to refinance our credit facility, our failure to repay all amounts due on the maturity date would cause a default under our credit facility. We expect our required principal repayments under the term loan facility of our credit facility to be approximately $588.5 million at its maturity in February 2012. Our interest expense may increase significantly if we refinance our credit facility on terms that are less favorable to us than the terms of our credit facility.

We may also be forced to raise additional capital or sell assets and, if we are forced to pursue any of these options under distressed conditions, our business and the value of your investment in our common stock could be adversely affected. In addition, these alternatives may not be available to us when needed or on satisfactory terms due to prevailing market conditions, a decline in our business, legislative and regulatory factors or restrictions contained in the agreements governing our indebtedness.

If we have insufficient cash flow to cover the expected dividend payments under our dividend policy we would need to reduce or eliminate dividends or, to the extent permitted under the agreements governing our indebtedness, fund a portion of our dividends with additional borrowings.

If we do not have sufficient cash to fund dividend payments, we would either reduce or eliminate dividends or, to the extent we were permitted to do so under our credit facility and the agreements governing future indebtedness we may incur, fund a portion of our dividends with borrowings or from other sources. If we were to use borrowings under our credit facility’s revolving facility to fund dividends, we would have less cash available for future dividends and other purposes, which could negatively impact our financial condition, our results of operations and our ability to maintain or expand our business.

Our substantial indebtedness could restrict our ability to pay dividends on our common stock and have an adverse impact on our financing options and liquidity position.

As of December 31, 2005, we had approximately $607.4 million of total consolidated indebtedness. Our substantial indebtedness could have important adverse consequences to the holders of our common stock, including:

·limiting our ability to pay dividends on our common stock or make payments in connection with our other obligations, including under our credit facility;

·limiting our ability in the future to obtain additional financing for working capital, capital expenditures or acquisitions;

·causing us to not be able to refinance our indebtedness on terms acceptable to us or at all;

·limiting our flexibility in planning for, or reacting to, changes in our business and the communications industry generally;

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·requiring a significant portion of our cash flow from operations to be dedicated to the payment of the principal and interest on our indebtedness, thereby reducing funds available for future operations, acquisitions, dividends on our common stock and/or capital expenditures;

·making us more vulnerable to economic and industry downturns and conditions, including increases in interest rates; and

·placing us at a competitive disadvantage compared to those of our competitors that have less indebtedness.

Subject to certain covenants, our credit facility permits us to incur additional indebtedness. Any additional indebtedness that we may incur would exacerbate the risks described above.

The Company is a holding company and relies on dividends, interest and other payments, advances and transfers of funds from its operating subsidiaries and investments to meet its debt service and other obligations.

The Company is a holding company and conducts all of its operations through its operating subsidiaries. The Company currently has no significant assets other than equity interests in its first tier subsidiaries. These first tier subsidiaries have no significant assets other than a direct or indirect equity interest in the Company’s operating subsidiaries. As a result, the Company will rely on dividends and other payments or distributions from its operating subsidiaries to pay dividends with respect to its common stock and to meet its debt service obligations generally. The ability of the Company’s subsidiaries to pay dividends or make other payments or distributions to the Company will depend on their respective operating results and may be restricted by, among other things:

·the laws of their jurisdiction of organization;

·the rules and regulations of state regulatory authorities;

·agreements of those subsidiaries;

·the terms of our credit facility; and

·the covenants of any future outstanding indebtedness the Company or its subsidiaries incur.

The Company’s operating subsidiaries have no obligation, contingent or otherwise, to make funds available to the Company, whether in the form of loans, dividends or other distributions. In addition, we have a number of minority investments and passive partnership interests from which we receive distributions. We do not control the timing or amount of distributions from such investments or interests and we may not have access to the cash flows of these entities.

Accordingly, our ability to pay dividends with respect to shares of our common stock and to repay our credit facility at maturity or otherwise may be dependent upon factors beyond our control. Subject to limitations in our credit facility, the Company’s subsidiaries may also enter into agreements that contain covenants prohibiting them from distributing or advancing funds or transferring assets to the Company under certain circumstances, including to pay dividends.

Our credit facility contains covenants that limit our business flexibility by imposing operating and financial restrictions on our operations and the payment of dividends.

Covenants in our credit facility impose significant operating and financial restrictions on us. These restrictions prohibit or limit, among other things:

·the incurrence of additional indebtedness and the issuance by our subsidiaries of preferred stock;

·the payment of dividends on, and purchases or redemptions of, capital stock;

·a number of other restricted payments, including investments;

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·the creation of liens;

·the ability of our subsidiaries to guarantee our and their indebtedness;

·specified sales of assets;

·the creation of encumbrances or restrictions on the ability of our subsidiaries to distribute and advance funds or transfer assets to us or any other subsidiary;

·specified transactions with affiliates;

·sale and leaseback transactions;

·our ability to enter lines of business outside the communications business; and

·certain consolidations and mergers and sales and/or transfers of assets by or involving us.

Our credit facility also contains covenants which require us to maintain specified financial ratios and satisfy financial condition tests, including, without limitation, a maximum total leverage ratio and a minimum interest coverage ratio.

As a result of general economic conditions, conditions in the lending markets, the results of our business or for any other reason, we may elect or be required to amend or refinance our credit facility, at or prior to maturity, or enter into additional agreements for indebtedness. Any such amendment, refinancing or additional agreement may contain covenants which could limit in a significant manner our operations and our ability to pay dividends on our common stock.

If we are unable to comply with the covenants in the agreements governing our indebtedness, we could be in default under our indebtedness which could result in our inability to make dividend payments on our common stock.

Our ability to comply with the covenants, ratios or tests contained in our credit facility or in the agreements governing our future indebtedness may be affected by events beyond our control, including prevailing economic, financial and industry conditions. A breach of any of these covenants, ratios or tests could result in a default under our credit facility. Certain events of default under our credit facility would prohibit us from making dividend payments on our common stock. In addition, upon the occurrence of an event of default under our credit facility, the lenders could elect to declare all amounts outstanding under our credit facility, together with accrued interest, to be immediately due and payable. If we were unable to repay those amounts, the lenders could proceed against the security granted to them to secure that indebtedness. If the lenders accelerate the payment of the indebtedness under our credit facility, our assets may not be sufficient to repay in full the indebtedness under our credit facility and our other indebtedness, if any.

Limitations on usage of net operating loss carry forwards, and other factors requiring us to pay cash taxes in future periods, may affect our ability to pay dividends to you.

Our initial public offering in February 2005 resulted in an “ownership change” within the meaning of the U.S. federal income tax laws addressing net operating loss carry forwards, alternative minimum tax credits and other similar tax attributes. As a result of such ownership change, there are specific limitations on our ability to use our net operating loss carry forwards and other tax attributes from periods prior to our initial public offering. Although it is not expected that such limitations will materially affect our U.S. federal and state income tax liability in the near-term, it is possible in the future that such limitations could limit our ability to utilize such tax attributes and, therefore, result in an increase in our U.S. federal and state income tax payments. In addition, in the future we may be required to pay cash income taxes because all of our net operating loss carry forwards have been used or have expired. Limitations on our usage of net operating loss carry forwards, and other factors requiring us to pay cash taxes in the future, would reduce

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the funds available for the payment of dividends and might require us to reduce or eliminate the dividends on our common stock.

The price of our common stock may fluctuate substantially, which could negatively affect holders of our common stock.

The market price of our common stock may fluctuate widely as a result of various factors, such as period-to-period fluctuations in our operating results, sales of our common stock by principal stockholders, developments in the communications industry, the failure of securities analysts to cover our common stock or changes in financial estimates by analysts, competitive factors, regulatory developments, economic and other external factors, general market conditions and market conditions affecting the stock of communications companies in particular. Communications companies have in the past experienced extreme volatility in the trading prices and volumes of their securities, which has often been unrelated to operating performance. Any such market volatility may have a significant adverse effect on the market price of our common stock. In addition, in the past, securities class action litigation has often been instituted against a company following periods of volatility in its stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources.

Future sales or the possibility of future sales of a substantial amount of our common stock may depress the price of our common stock.

Future sales, or the availability for sale in the public market, of substantial amounts of our common stock could adversely affect the prevailing market price of our common stock, and could impair our ability to raise capital through future sales of equity securities. Pursuant to a registration rights agreement entered into in connection with the offering, we registered 7,599,430 shares of common stock which would otherwise be restricted securities within the meaning of Rule 144 under the Securities Act and are held by persons who acquired our common stock before the offering.

We may issue shares of our common stock, or other securities, from time to time as consideration for future acquisitions and investments. In the event any such acquisition or investment is significant, the number of shares of our common stock, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be significant. We may also grant registration rights covering those shares or other securities in connection with any such acquisitions and investments.

Our restated certificate of incorporation and amended and restated by-laws and several other factors could limit another party’s ability to acquire us and deprive our investors of the opportunity to obtain a takeover premium for their securities.

A number of provisions in our restated certificate of incorporation and amended and restated by-laws make it difficult for another company to acquire us and for you to receive any related takeover premium for your securities. For example, our restated certificate of incorporation provides that certain provisions of our restated certificate of incorporation can only be amended by a vote of two-thirds or more in voting power of all the outstanding shares of capital stock and that stockholders generally may not act by written consent and only stockholders representing at least 50% in voting power may request that our board of directors call a special meeting. Our restated certificate of incorporation provides for a classified board of directors and authorizes the issuance of preferred stock without stockholder approval and upon such terms as the board of directors may determine. The rights of the holders of shares of our common stock will be subject to, and may be adversely affected by, the rights of holders of any class or series of preferred stock that may be issued in the future.

We may, under certain circumstances, suspend the rights of stock ownership the exercise of which would result in any inconsistency with, or violation of, any applicable communications law.

Our restated certificate of incorporation provides that so long as we hold any authorization, license, permit, order, filing or consent from the Federal Communications Commission or any state regulatory

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commission having jurisdiction over us, we will have the right to request certain information from our stockholders. If any stockholder from whom such information is requested should fail to respond to such a request or we conclude that the ownership of, or the existence or exercise of any rights of stock ownership with respect to, shares of our capital stock by such stockholder, could result in any inconsistency with, or violation of, any applicable communications law, we may suspend those rights of stock ownership the existence or exercise of which would result in any inconsistency with, or violation of, any applicable communications law, and we may exercise any and all appropriate remedies, at law or in equity, in any court of competent jurisdiction, against any stockholder, with a view towards obtaining such information or preventing or curing any situation which would cause an inconsistency with, or violation of, any provision of any applicable communications law.

Risks Related to our Business

We provide services to our customers over access lines, and if we lose access lines, our business and results of operations may be adversely affected.

Our business generates revenue by delivering voice and data services over access lines. We have experienced a net voice access line loss, adjusted for acquisitions and divestitures, of 7.1% for the period from January 1, 2002 through December 31, 2005 and 2.5% for the period from December 31, 2004 through December 31, 2005 due to challenging economic conditions and the introduction of digital subscriber line services. We may continue to experience net access line losses in our markets. Our inability to retain access lines could adversely affect our business and results of operations.

We are subject to competition that may adversely impact us.

As an incumbent carrier, we historically have experienced little competition in our rural telephone company markets. Nevertheless, the market for communications services is highly competitive. Regulation and technological innovation change quickly in the communications industry, and changes in these factors historically have had, and may in the future have, a significant impact on competitive dynamics. In most of our rural markets, we face competition from wireless technology, which may increase as wireless technology improves. We also face competition from wireline and cable television operators. We may face additional competition from new market entrants, such as providers of wireless broadband, voice over internet protocol, satellite communications and electric utilities. The Internet services market is also highly competitive, and we expect that competition will intensify. Many of our competitors have brand recognition, offer online content services and  have financial, personnel, marketing and other resources that are significantly greater than ours. In addition, consolidation and strategic alliances within the communications industry or the development of new technologies could affect our competitive position. We cannot predict the number of competitors that will emerge, especially as a result of existing or new federal and state regulatory or legislative actions, but increased competition from existing and new entities could have a material adverse effect on our business.

Competition may lead to loss of revenues and profitability as a result of numerous factors, including:

·loss of customers (in general, when we lose a customer for local service we also lose that customer for all related services);

·reduced usage of our network by our existing customers who may use alternative providers for long distance and data services;

·reductions in the prices for our services which may be necessary to meet competition; and/or

·increases in marketing expenditures and discount and promotional campaigns.

In addition, our provision of long distance service is subject to a highly competitive market served by large nation-wide carriers that enjoy brand name recognition.

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We may not be able to successfully integrate new technologies, respond effectively to customer requirements or provide new services.

The communications industry is subject to rapid and significant changes in technology, frequent new service introductions and evolving industry standards. We cannot predict the effect of these changes on our competitive position, profitability or industry. Technological developments may reduce the competitiveness of our networks and require unbudgeted upgrades or the procurement of additional products that could be expensive and time consuming. In addition, new products and services arising out of technological developments may reduce the attractiveness of our services. If we fail to adapt successfully to technological changes or obsolescence or fail to obtain access to important new technologies, we could lose customers and be limited in our ability to attract new customers and/or sell new services to our existing customers. An element of our business strategy is to deliver enhanced and ancillary services to customers. The successful delivery of new services is uncertain and dependent on many factors, and we may not generate anticipated revenues from such services.

We rely on a limited number of key suppliers and vendors to operate our business. If these suppliers or vendors experience problems or favor our competitors, we could fail to obtain sufficient quantities of products and services we require to operate our business successfully.

We depend on a limited number of suppliers and vendors for equipment and services relating to our network infrastructure. If these suppliers experience interruptions or other problems delivering these network components on a timely basis, subscriber growth and our operating results could suffer significantly. Proprietary technology of certain suppliers is an integral component of our network and, accordingly, we have become reliant upon a limited number of network equipment manufacturers, including Nortel Networks Corporation and Siemens Information and Communication Networks, Inc. In addition, when our new billing platform is completed, we will rely on a single outsourced supplier to support our billing and related customer care services. In the event it becomes necessary to seek alternative suppliers and vendors, we may be unable to obtain satisfactory replacement suppliers or vendors on economically attractive terms, on a timely basis, or at all, which could increase costs and may cause disruptions in services.

Our relationships with other communications companies are material to our operations and their financial difficulties may adversely affect our business and results of operations.

We originate and terminate calls for long distance carriers and other interexchange carriers over our network and for that service we receive payments for access charges. These payments represent a significant portion of our revenues. Should these carriers go bankrupt or experience substantial financial difficulties, our inability to then collect access charges from them could have a negative effect on our business and results of operations.

We face risks associated with acquired businesses and potential acquisitions.

We have grown rapidly by acquiring other businesses. Since 1993, we have acquired 32 rural telephone businesses and we continue to own and operate 28 such businesses. We expect that a portion of our future growth will result from additional acquisitions, some of which may be material. Growth through acquisitions entails numerous risks, including:

·strain on our financial, management and operational resources, including the distraction of our management team in identifying potential acquisition targets, conducting due diligence and negotiating acquisition agreements;

·difficulties in integrating the network, operations, personnel, products, technologies and financial, computer, payroll and other systems of acquired businesses;

·difficulties in enhancing our customer support resources to adequately service our existing customers and the customers of acquired businesses;

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·the potential loss of key employees or customers of the acquired businesses;

·unanticipated liabilities or contingencies of acquired businesses;

·unbudgeted costs which we may incur in connection with pursuing potential acquisitions which are not consummated;

·not achieving projected cost savings or cash flow from acquired businesses;

·fluctuations in our operating results caused by incurring considerable expenses to acquire businesses before receiving the anticipated revenues expected to result from the acquisitions;

·difficulties in finding suitable acquisition candidates;

·difficulties in making acquisitions on attractive terms due to a potential increase in competitors; and

·difficulties in obtaining and maintaining any required regulatory authorizations in connection with acquisitions.

In addition, future acquisitions by us could result in the incurrence of indebtedness or contingent liabilities, which could have a material adverse effect on our business and our ability to pay dividends on our common stock, provide adequate working capital and service our indebtedness.

There can be no assurance that we will be able to successfully complete the integration of the businesses that we have already acquired or successfully integrate any businesses that we might acquire in the future. If we fail to do so, or if we do so but at greater cost than we anticipated, there will be a risk that our business may be adversely affected.

We may need additional capital to continue growing through acquisitions.

We may need additional capital to continue growing through acquisitions. Such additional capital may be in the form of additional debt, which would increase our leverage. We may not be able to raise sufficient additional capital at all or on terms that we consider acceptable.

A system failure could cause delays or interruptions of service, which could cause us to lose customers.

To be successful, we will need to continue to provide our customers reliable service over our network. Some of the risks to our network and infrastructure include:

·physical damage to access lines;

·power surges or outages;

·software defects; and

·disruptions beyond our control.

Disruptions may cause interruptions in service or reduced capacity for customers, either of which could cause us to lose customers and incur expenses.

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Our billing systems may not function properly.

The failure of any of our billing systems could result in our inability to adequately bill and provide customer service to our customers. We are in the process of converting all of our companies on the ICMS platform, approximately two thirds of our access lines, to a new platform by the middle of 2006 and we plan to convert our remaining companies to this same platform by the middle of 2007. At the completion of this project, we will have a single integrated billing platform for our end-user customers.  The failure to successfully complete this conversion or the failure of any of our billing systems could have a material adverse effect on our business, financial condition and results of operations.

We depend on third parties for our provision of long distance services.

Our provision of long distance services is dependent on underlying agreements with other carriers that provide us with transport and termination services. These agreements are based, in part, on our estimate of future supply and demand and may contain minimum volume commitments. If we overestimate demand, we may be forced to pay for services we do not need. If we underestimate demand, we may need to acquire additional capacity on a short-term basis at unfavorable prices, assuming additional capacity is available. If additional capacity is not available, we will not be able to meet this demand. In addition, if we cannot meet any minimum volume commitments, we may be subject to underutilization charges, termination charges, or rate increases which may adversely affect our results of operations.

We may not be able to maintain the necessary rights-of-way for our networks.

We are dependent on rights-of-way and other permits from railroads, utilities, state highway authorities, local governments and transit authorities to install conduit and related communications equipment for any expansion of our networks. We may need to renew current rights-of-way for our networks and cannot assure you that we would be successful in renewing these agreements on acceptable terms. Some of our agreements may be short-term, revocable at will, or subject to termination upon customary default provisions, and we may not have access to existing rights-of-way after they have expired or terminated. If any of these agreements were terminated or could not be renewed, we may be required to remove our existing facilities from under the streets or abandon our networks. Similarly, we may not be able to obtain right-of-way agreements on favorable terms, or at all, in new service areas, and, if we are unable to do so, our ability to expand our networks, if we decide to do so, could be impaired.

Our success depends on our ability to attract and retain qualified management and other personnel.

Our success depends upon the talents and efforts of our senior management team. With the exception of Eugene B. Johnson, our Chairman and Chief Executive Officer, none of these senior executives are employed by us pursuant to an employment agreement. The loss of any member of our senior management team, due to retirement or otherwise, and the inability to attract and retain highly qualified technical and management personnel in the future, could have a material adverse effect on our business, financial condition and results of operations.

We may face significant future liabilities or compliance costs in connection with environmental and worker health and safety matters.

Our operations and properties are subject to federal, state and local laws and regulations relating to protection of the environment, natural resources, and worker health and safety, including laws and regulations governing the management, storage and disposal of hazardous substances, materials and wastes. Under certain environmental laws, we could be held liable, jointly and severally and without regard to fault, for the costs of investigating and remediating any contamination at owned or operated properties; or for contamination arising from the disposal by us or our predecessors of hazardous wastes at formerly

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owned properties or at third party waste disposal sites. In addition, we could be held responsible for third party property or personal injury claims relating to any such contamination or relating to violations of environmental laws. Changes in existing laws or regulations or future acquisitions of businesses could require us to incur substantial costs in the future relating to such matters.

We will be exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and related regulations implemented by the SEC, the New York Stock Exchange and the Public Company Accounting Oversight Board, are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. We will be evaluating our internal controls systems to allow management to report on, and our independent auditors to attest to, our internal controls as required by Section 404 of the Sarbanes-Oxley Act. Our evaluation of our internal controls may result in our identifying material weaknesses in our internal controls. While we anticipate being able to complete our initial controls assessment and remediation of any identified material weaknesses prior to the  December 31, 2006 deadline applicable to us, we cannot be certain as to the timing of such completion or the impact of the same on our operations. If we are not able to complete the assessment process required by Section 404 in a timely manner, or are unable to remediate any identified material weaknesses prior to December 31, 2006, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or the New York Stock Exchange. Any such action could adversely affect our financial results or investors’ confidence in us, and could cause our stock price to fall. If we fail to maintain effective controls and procedures, we may be unable to provide financial information in a timely and reliable manner.

Risks Related to our Regulatory Environment

We are subject to significant regulations that could change in a manner adverse to us.

We operate in a heavily regulated industry, and the majority of our revenues generally have been supported by regulations, including access revenue and Universal Service Fund support for the provision of telephone services in rural areas. Laws and regulations applicable to us and our competitors may be, and have been, challenged in the courts, and could be changed by Congress or regulators. In addition, any of the following have the potential to have a significant impact on us:

Risk of loss or reduction of network access charge revenues.   For the year ended December 31, 2005, almost 44% of our revenues came from network access charges, which are paid to us by intrastate and interstate long distance carriers for originating and terminating calls in the regions served. This 44% also includes Universal Service Fund payments for local switching support, long term support and interstate common line support. In recent years, several of these long distance carriers have declared bankruptcy. Future declarations of bankruptcy by a carrier that utilizes our access services could negatively impact our financial results. The amount of access charge revenues that we receive is based on rates set by federal and state regulatory bodies, and such rates could change. Further, from time to time federal and state regulatory bodies conduct rate cases and/or “earnings” reviews, which may result in rate changes. The Federal Communications Commission has reformed and continues to reform the federal access charge system. States often mirror these federal rules in establishing intrastate access charges. In October 2001, the Federal Communications Commission reformed the system to reduce interstate access charges and shift a portion of cost recovery, which historically has been based on minutes-of-use, to flat-rate, monthly per line charges on end-user customers rather than long distance carriers. As a result, the aggregate amount of access charges paid by long distance carriers to access providers, such as our rural local exchange carriers, has decreased and may continue to decrease. Although these changes were implemented on a revenue neutral basis (with commensurate increases in other charges and Universal

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Service Fund support), there is no assurance that future changes in access charge rates will be implemented on a revenue neutral basis. Furthermore, to the extent our rural local exchange carriers become subject to competition, such access charges could be paid to competing communications providers rather than to us. Additionally, the access charges we receive may be reduced as a result of wireless competition. Finally, the Federal Communications Commission is currently weighing several proposals to comprehensively reform the intercarrier compensation regime in order to create a uniform system of intercarrier payments. Any such proposal eventually adopted by the Federal Communications Commission will likely involve significant changes in the access charge system and could potentially result in a significant decrease or elimination of access charges altogether. Decreases or losses of access charges may or may not result in offsetting increases in local, subscriber line or Universal Service Fund revenues. Regulatory developments of this type could adversely affect our business, revenue and/or profitability.

Risk of loss or reduction of Universal Service Fund support.   We receive Universal Service Fund revenues to support the high cost of our operations in rural markets. For the year ended December 31, 2005, approximately 8% of our revenues resulted from the high cost loop support we received from the Universal Service Fund and was based upon our average cost per loop compared to the national average cost per loop. This revenue stream fluctuates based upon our average cost per loop compared to the national average cost per loop. For example, if the national average cost per loop increases and our operating costs (and average cost per loop) remain constant or decrease, the payments we receive from the Universal Service Fund would decline. Conversely, if the national average cost per loop decreases and our operating costs (and average cost per loop) remain constant or increase, the payments we receive from the Universal Service Fund would increase. The national average cost per loop in relation to our average cost per loop has increased and we believe that the national average cost per loop will likely continue to increase in relation to our average cost per loop. As a result, the payments we receive from the Universal Service Fund have declined and will likely continue to decline. This support fluctuates based upon the historical costs of our operating companies. In addition to the Universal Service Fund high cost loop support, we also receive other Universal Service Fund support payments, which include local switching support, long term support, and interstate common line support that used to be included in our interstate access charge revenues (the Federal Communications Commission has recently merged long term support into interstate common line support). If our rural local exchange carriers were unable to receive support from the Universal Service Fund, or if such support was reduced, many of our rural local exchange carriers would be unable to operate as profitably as they have historically, in the absence of our implementation of increases in charges for other services. Moreover, if we raise prices for services to offset loss of Universal Service Fund payments, the increased pricing of our services may disadvantage us competitively in the marketplace, resulting in additional potential revenue loss.

The Telecommunications Act of 1996, or the Telecommunications Act, provides that eligible communications carriers, including competitors to rural local exchange carriers, may obtain the same per line support as the rural local exchange carriers receive if a state commission determines that granting such support to competitors would be in the public interest. In fact, wireless communications providers in certain of our markets have obtained matching support payments from the Universal Service Fund, but that has not led to a loss of revenues for our rural local exchange carriers under existing regulations. Any shift in universal service regulation, however, could have an adverse effect on our business, revenue and/or profitability.

During the last four years, pursuant to recommendations made by the Multi Association Group and the Rural Task Force, the Federal Communications Commission has made certain modifications to the universal service support system that changed the sources of support and the method for determining the level of support. These changes have been revenue neutral to our operations. It is unclear whether the changes in methodology will continue to accurately reflect the costs incurred by our rural local exchange carriers, and whether it will provide for the same amount of Universal Service Fund support that our rural

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local exchange carriers have received in the past. In addition, several parties have raised objections to the size of the Universal Service Fund and the types of services eligible for support. A number of issues regarding the source and amount of contributions to, and eligibility for payments from, the Universal Service Fund are pending and will likely be addressed by the Federal Communications Commission or Congress in the near future. For example, a number of proposals to be examined by the Federal Communications Commission in its current rulemaking with respect to the reform of the intercarrier compensation system include reforms of the Universal Service Fund. The outcome of any regulatory proceedings or legislative changes could affect the amount of Universal Service Fund support that we receive, and could have an adverse effect on our business, revenue or profitability.

On February 28, 2005, the Federal Communications Commission issued a press release announcing additional requirements for the designation of competitive Eligible Telecommunications Carriers for receipt of high-cost support. In its corresponding order, released on March 17, 2005, the Federal Communications Commission adopted additional mandatory requirements for Eligible Telecommunications Carriers designation in cases where it has jurisdiction, and encourages states that have jurisdiction to designate Eligible Telecommunications Carriers to adopt similar requirements. The Federal Communications Commission is still considering revisions to the methodology by which contributions to the Universal Service Fund are determined. These revisions will be part of an overall rulemaking regarding Universal Service Support which will be dealt with sometime in 2006.

Risk of loss of statutory exemption from burdensome interconnection rules imposed on incumbent local exchange carriers.Our rural local exchange carriers are exempt from the Telecommunications Act’s more burdensome requirements governing the rights of competitors to interconnect to incumbent local exchange carrier networks and to utilize discrete network elements of the incumbent’s network at favorable rates. If state regulators decide that it is in the public’s interest to impose these more burdensome interconnection requirements on us, we would be required to provide unbundled network elements to competitors. As a result, more competitors could enter our traditional telephone markets than are currently expected and we could incur additional administrative and regulatory expenses, and experience additional revenue losses.

Risks posed by costs of regulatory compliance.   Regulations create significant compliance costs for us. Our subsidiaries that provide intrastate services are generally subject to certification, tariff filing and other ongoing regulatory requirements by state regulators. Our interstate access services are provided in accordance with tariffs filed with the Federal Communications Commission. Challenges to our tariffs by regulators or third parties or delays in obtaining certifications and regulatory approvals could cause us to incur substantial legal and administrative expenses, and, if successful, such challenges could adversely affect the rates that we are able to charge our customers.

Our business also may be impacted by legislation and regulation imposing new or greater obligations related to assisting law enforcement, bolstering homeland security, minimizing environmental impacts, or addressing other issues that impact our business. For example, existing provisions of the Communications Assistance for Law Enforcement Act and Federal Communications Commission regulations implementing the Communications Assistance for Law Enforcement Act require communications carriers to ensure that their equipment, facilities, and services are able to facilitate authorized electronic surveillance. We cannot predict whether and when the Federal Communications Commission might modify its Communications Assistance for Law Enforcement Act rules or any other rules or what compliance with new rules might cost. Similarly, we cannot predict whether or when federal or state legislators or regulators might impose new security, environmental or other obligations on our business.

For a more thorough discussion of the regulatory issues that may affect our business, see “Item 1. Business—Regulatory Environment.”

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Regulatory changes in the communications industry could adversely affect our business by facilitating greater competition against us, reducing potential revenues or raising our costs.

The Telecommunications Act provides for significant changes and increased competition in the communications industry, including the local communications and long distance industries. This statute and the Federal Communications Commission’s implementing regulations remain subject to judicial review and additional rulemakings of the Federal Communications Commission, thus making it difficult to predict what effect the legislation will have on us, including our operations and our revenues and expenses, and our competitors. Several regulatory and judicial proceedings have recently concluded, are underway or may soon be commenced, that address issues affecting our operations and those of our competitors. We cannot predict the outcome of these developments, nor can we assure that these changes will not have a material adverse effect on us or our industry.

For a more thorough discussion of the regulatory issues that may affect our business, see “Item 1. Business—Regulatory Environment.”

The failure to obtain necessary regulatory approvals could impede the consummation of a potential acquisition.

Our acquisitions likely will be subject to federal, state and local regulatory approvals. We cannot assure you that we will be able to obtain any necessary approvals, in which case a potential acquisition could be delayed or not consummated.

ITEM 1B.UNRESOLVED STAFF COMMENTS

We have received no written comments from the Securities and Exchange Commission staff regarding our periodic or current reports less than 180 days before the end of our fiscal year ended December 31, 2005 that remain unresolved.

ITEM 2.PROPERTIES

We own all of the properties material to our business. Our headquarters is located in Charlotte, North Carolina in a leased facility. We also have administrative offices, maintenance facilities, rolling stock, central office and remote switching platforms and transport and distribution network facilities in each of the 17 states in which we operate our rural local exchange carrier business. Our administrative and maintenance facilities are generally located in or near the rural communities served by our rural local exchange carriers and our central offices are often within the administrative building and/or outlying customer service centers. Auxiliary battery or other non-utility power sources are at each central office to provide uninterrupted service in the event of an electrical power failure. Transport and distribution network facilities include fiber optic backbone and copper wire distribution facilities, which connect customers to remote switch locations or to the central office and to points of presence or interconnection with the long distance carriers. These facilities are located on land pursuant to permits, easements or other agreements. Our rolling stock includes service vehicles, construction equipment and other required maintenance equipment.

We believe each of our respective properties is suitable and adequate for the business conducted therein, is being appropriately used consistent with past practice and has sufficient capacity for the present intended purposes.

ITEM 3.LEGAL PROCEEDINGS

On June 6, 2005, a purported class action complaint was filed in the General Court of Justice, Superior Court Division, of the State of North Carolina by Robert Lowinger on behalf of himself and all other similarly situated persons against the Company, the Company’s Chairman and Chief Executive

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Officer, certain of the Company’s current and former directors and certain of the Company’s stockholders. The complaint alleges violations of Sections 11 and 12(a)(2) and liability under Section 15 of the Securities Act, and alleges that the Company’s registration statement on Form S-1 (which was declared effective by the SEC on February 3, 2005) and the related prospectus dated February 3, 2005, each relating to the Company’s initial public offering of common stock, contained certain material misstatements and omitted certain material information necessary to be included relating to the Company’s broadband products and access line trends. The plaintiff, who has been a plaintiff in several other securities cases, seeks rescission rights and unspecified damages on behalf of a purported class of purchasers of the common stock “issued pursuant and/or traceable to the Company’s IPO during the period from February 3, 2005 through March 21, 2005”. The Company removed the action to Federal Court. The plaintiff filed a motion to remand the action to the North Carolina State Court, which was denied by the Federal Magistrate. The plaintiff has objected to and appealed the Magistrate’s decision to the District Court Judge. The Company has contested the appeal and filed a Motion to Dismiss the action. The Magistrate, on February 9, 2006, issued a Memorandum and Recommendation to the District Court Judge that the Motion to Dismiss be granted and that the complaint be dismissed with prejudice. The plaintiff has filed a Notice of Objection to the Magistrate’s Recommendation. Both the appeal of denial of the Motion to Remand and the Motion to Dismiss are pending before the District Court Judge. The Company believes that this action is without merit and intends to continue to defend the litigation vigorously.

We currently and from time to time are involved in other litigation and regulatory proceedings incidental to the conduct of our business, but currently we are not a party to any lawsuit or proceeding which, in our opinion, is likely to have a material adverse effect on us.

ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our security holders during the fourth quarter of fiscal 2005.

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PART II

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

General

Our common stock began trading on the New York Stock Exchange under the symbol “FRP” on February 4, 2005. Prior to that time, there was no trading market for our common stock.

The following table shows the high and low closing sales prices per share of the Company’s Common Stock as reported on the New York Stock Exchange for the periods indicated:

Year ended December 31, 2005	High		Low
First quarter	$	18.05	$	14.97
Second quarter	16.55		14.49
Third quarter	16.66		14.32
Fourth quarter	14.30		10.36

The following table shows the dividends which have been declared and/or paid on our common stock during 2005:

Year ended December 31, 2005	Per Share Dividend Declared		Date Declared	Record Date	Date Paid/Payable
First quarter(1)	$	0.22543	March 3, 2005	March 31, 2005	April 15, 2005
Second quarter	0.39781		June 16, 2005	June 30, 2005	July 19, 2005
Third quarter	0.39781		September 21, 2005	October 3, 2005	October 19, 2005
Fourth quarter	0.39781		December 14, 2005	December 30, 2005	January 18, 2006

(1)The Company’s initial public offering occurred in February 2005 and therefore, the Company paid a partial quarterly dividend in the first quarter of 2005.

As of March 6, 2006, there were approximately 80 holders of record of our common stock.

Dividend Policy and Restrictions

General

Our board of directors has adopted a dividend policy under which a substantial portion of the cash generated by our business in excess of operating needs, interest and principal payments on our indebtedness, dividends on our future senior classes of capital stock, if any, capital expenditures, taxes and future reserves, if any, would in general be distributed as regular quarterly dividend payments to the holders of our common stock, rather than retained by us and used for other purposes, including to finance growth opportunities. This policy reflects our judgment that our stockholders would be better served if we distributed to them such substantial portion of the excess cash generated by our business instead of retaining it in our business. However, our stockholders may not receive any dividends as a result of the following factors:

·nothing requires us to pay dividends;

·while our current dividend policy contemplates the distribution of a substantial portion of our cash in excess of operating needs, interest and principal payments on our indebtedness, dividends on our future senior classes of capital stock, if any, capital expenditures, taxes and future reserves, if any, this policy could be modified or revoked by our board of directors at any time;

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·even if our dividend policy was not modified or revoked, the actual amount of dividends distributed under this policy and the decision to make any distributions are entirely at the discretion of our board of directors;

·the amount of dividends distributed is subject to covenant restrictions under our credit facility;

·the amount of dividends distributed is subject to restrictions under Delaware law;

·our stockholders have no contractual or other legal right to receive dividends; and

·we may not have enough cash to pay dividends due to changes in our cash from operations, distributions we receive from minority investments and passive partnership interests, working capital requirements and/or anticipated cash needs.

We believe that our dividend policy limits, but does not preclude, our ability to pursue growth. If we continue paying dividends at the level currently anticipated under our dividend policy, we expect that we would need additional financing to fund significant acquisitions or to pursue growth opportunities requiring capital expenditures that are significantly beyond our current expectations. However, we intend to retain sufficient cash after the distribution of dividends to permit the pursuit of growth opportunities that do not require material capital investment.

Restrictions on Payment of Dividends

Under Delaware law, our board of directors may declare dividends only to the extent of our “surplus” (which is defined as total assets at fair market value minus total liabilities, minus statutory capital) or, if there is no surplus, out of our net profits for the then current and/or immediately preceding fiscal year.

Our credit facility restricts our ability to declare and pay dividends on our common stock as follows:

·We may use all of our available cash accumulated after April 1, 2005 plus certain incremental funds to pay dividends, but we may not in general pay dividends in excess of such amount. “Available cash” is defined in our credit facility as Adjusted EBITDA (a) minus (i) interest expense, (ii) repayments of indebtedness other than repayments of the revolving facility (unless funded by debt or equity), (iii) capital expenditures (unless funded by long-term debt, equity or the proceeds from asset sales or insurance recovery events), (iv) cash taxes, (v) cash consideration paid for acquisitions (unless funded by debt or equity), (vi) cash paid to make certain investments, and (vii) certain non-cash items excluded from Adjusted EBITDA and paid in cash and (b) plus (i) the cash amount of extraordinary gains and gains on sales of assets and (ii) certain non-cash items excluded from Adjusted EBITDA and received in cash. “Adjusted EBITDA” is defined in our credit facility as Consolidated Net Income (which is defined in our credit facility and includes distributions from investments) (a) plus the following to the extent deducted from Consolidated Net Income: provision for income taxes, interest expense, depreciation, amortization, losses on sales of assets and other extraordinary losses, and certain other non-cash items, and (b) minus, to the extent included in Consolidated Net Income, gains on sales of assets and other extraordinary gains and all non-cash items.

·We may not pay dividends if a default or event of default under our credit facility has occurred and is continuing or would exist after giving effect to such payment, if our leverage ratio (total debt (net of cash) divided by Adjusted EBITDA) is above 5.00 to 1.00 or if we do not have at least $10 million of cash on hand (including unutilized commitments under our credit facility’s revolving facility).

Our credit facility also permits us to use available cash to repurchase shares of our capital stock, subject to the same conditions.

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See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity” for a more detailed description of our credit facility and these restrictions.

Equity Compensation Plan Information

The table below provides information, as of the end of the most recently completed fiscal year, concerning securities authorized for issuance under our equity compensation plans.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights(1)		Weighted average exercise price of outstanding options, warrants, and rights(1)			Number of securities remaining available for future issuance under equity compensation plans(2)
Equity compensation plans approved by our stockholders		1,125,869		$	15.91		467,654
Equity compensation plans not approved by our stockholders		0		$	0		0

(1)Includes 832,888 options to purchase shares of our common stock under the FairPoint Communications, Inc. (formerly MJD Communications, Inc.) 1998 Stock Incentive Plan, 18,013 options to purchase shares of our common stock under the FairPoint Communications, Inc. 1995 Stock Option Plan, 240,638 options to purchase shares of our common stock under the FairPoint Communications, Inc. 2000 Employee Stock Incentive Plan, 26,442 restricted units granted under the FairPoint Communications, Inc. 2000 Employee Stock Incentive Plan and 7,888 restricted units granted under the FairPoint Communications, Inc. 2005 Stock Incentive Plan.

(2)Includes 467,654 shares under the 2005 Stock Incentive Plan. Available shares shown above for the 2005 Stock Incentive Plan include shares that have become available due to forfeitures or have been reacquired by the Company for any reasons without delivery of the stock, as allowed under the terms of the plan.

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ITEM 6.SELECTED FINANCIAL DATA

The following financial information should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto contained elsewhere in this Annual Report. Amounts are in thousands, except access lines and per share data.

	Year Ended December 31,
	2005			2004			2003			2002			2001
Statement of Operations:
Revenues	$	262,843		$	252,645		$	231,432		$	230,819		$	230,176
Operating expenses:
Operating expenses	141,075			128,755			111,188			110,265			115,763
Depreciation and amortization(1)	52,390			50,287			48,089			46,310			55,081
Stock based compensation expense	2,350			49			15			924			1,337
Total operating expenses	195,815			179,091			159,292			157,499			172,181
Income from operations	67,028			73,554			72,140			73,320			57,995
Interest expense(2)	(46,416		)	(104,315		)	(90,224		)	(69,520		)	(76,314		)
Other income (expense), net(3)	(75,156		)	6,926			9,600			(11,974		)	(6,670		)
Loss from continuing operations before income taxes	(54,544		)	(23,835		)	(8,484		)	(8,174		)	(24,989		)
Income tax (expense) benefit(4)	83,096			(516		)	236			(518		)	(431		)
Minority interest in income of subsidiaries	(2		)	(2		)	(2		)	(2		)	(2		)
Income (loss) from continuing operations	28,550			(24,353		)	(8,250		)	(8,694		)	(25,422		)
Income (loss) from discontinued operations	380			671			9,921			21,933			(186,178		)
Net income (loss)	28,930			(23,682		)	1,671			13,239			(211,600		)
Redeemable preferred stock dividends and accretion(2)	—			—			(8,892		)	(11,918		)	—
Gain on repurchase of redeemable preferred stock	—			—			2,905			—			—
Net income (loss) attributable to common shareholders	$	28,930		$	(23,682	)	$	(4,316	)	$	1,321		$	(211,600	)
Basic shares outstanding(5)	31,927			9,468			9,483			9,498			9,499
Diluted shares outstanding(5)	31,957			9,468			9,483			9,498			9,499
Basic and diluted earnings (loss) from continuing operations per share(5)	$	0.89		$	(2.57	)	$	(1.50	)	$	(2.17	)	$	(2.68	)
Operating Data:
Capital expenditures	$	28,099		$	36,492		$	33,595		$	38,803		$	43,175
Access line equivalents(6)	288,899			271,150			264,308			248,581			247,862
Residential access lines	188,206			189,668			196,145			189,803			191,570
Business access lines	55,410			49,606			50,226			51,810			53,056
High Speed Data subscribers	45,283			31,876			17,937			6,968			3,236
Summary Cash Flow Data:
Net cash provided by operating activities of continuing operations	$	61,682		$	45,975		$	32,834		$	55,632		$	35,717
Net cash used in investing activities of continuing operations	(42,807		)	(20,986		)	(54,010		)	(30,258		)	(57,161		)
Net cash provided by (used in) financing activities of continuing operations	(16,647		)	(23,966		)	(1,976		)	(12,546		)	101,234
Balance Sheet Data (at period end):
Cash	$	5,083		$	3,595		$	5,603		$	5,394		$	2,919
Property, plant and equipment, net	242,617			252,262			266,706			271,690			278,277
Total assets	908,139			819,136			843,068			829,253			875,015
Total long term debt	607,425			810,432			825,560			804,190			907,602
Preferred shares subject to mandatory redemption(7)	—			116,880			96,699			90,307			—
Total stockholders’ equity (deficit)	246,848			(172,952		)	(147,953		)	(146,150		)	(149,510		)

(1)On January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” Pursuant to the requirements of SFAS No. 142, we ceased amortizing goodwill beginning January 1, 2002, and instead test for goodwill impairment annually. Amortization expense for goodwill and equity method goodwill was $11,962 in 2001. Depreciation and amortization excludes amortization of debt issue costs.

(2)Interest expense includes amortization of debt issue costs aggregating $1,859, $4,603, $4,171, $3,664 and $4,018 for the fiscal years ended December 31, 2005, 2004, 2003, 2002 and 2001. We prospectively adopted the provisions of SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity,” effective July 1, 2003. SFAS No. 150 requires us to classify as a long-term liability our series A preferred stock and to reclassify dividends and accretion from

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the series A preferred stock as interest expense. Such stock is described as “Preferred Shares Subject to Mandatory Redemption” in the balance sheet and dividends and accretion on these shares are included in pre-tax income prior to repurchase in 2005 whereas previously they were presented as a reduction to equity (a dividend), and, therefore, a reduction of net income available to common stockholders. For the years ended December 31, 2005, 2004 and 2003, interest expense includes $2,362, $20,181 and $9,049, respectively, related to dividends and accretion on preferred shares subject to mandatory redemption.

(3)On January 1, 2001, we adopted the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Certain Hedging Activities,” as amended by SFAS No. 138. On the date of adoption, we recorded a cumulative adjustment of $4,664 in accumulated other comprehensive income for the fair value of interest rate swaps. Because the interest rate swaps did not qualify as accounting hedges under SFAS No. 133, the change in fair value of the interest rate swaps were recorded as non operating gains or losses, which we classify in other income (expense). We also recorded other income (expense) in 2003, 2002 and 2001 for the amortization of the transition adjustment of the swaps initially recognized in accumulated other comprehensive income. In the second quarter of 2002, we adopted SFAS No. 145 “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections.” This statement eliminates the requirement that gains and losses from the extinguishment of debt be required to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. In 2003, other income (expense) includes a $3,465 gain on the extinguishment of debt and a $4,967 loss for the write-off of debt issue costs related to this extinguishment of debt. In 2004, other income (expense) includes a $5,951 loss for the write-off of debt issuance and offering costs associated with an abandoned offering of Income Deposit Securities. In 2005, other income (expense) includes an $87.7 million loss on early retirement of debt and loss on repurchase of series A preferred stock.

(4)In 2005, we recorded an income tax benefit of $83.1 million which is primarily the result of the recognition of deferred tax benefits of $66.0 million from the reversal of the deferred tax valuation allowance that resulted from our expectation of generating future taxable income following the recapitalization that occurred as part of our initial public offering, or the offering, in February 2005.

(5)In connection with the offering we effected a 5.2773714 for 1 reverse stock split of our common stock. All share and per share amounts related to our common stock have been restated to reflect the reverse stock split.

(6)Total access line equivalents includes voice access lines and high speed data lines, which include DSL lines, wireless broadband and cable modem.

(7)In connection with the offering, we repurchased all of our series A preferred stock from the holders thereof.

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ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our financial statements and the notes thereto included elsewhere in this Annual Report. The following discussion includes certain forward-looking statements. For a discussion of important factors, including the continuing development of our business, actions of regulatory authorities and competitors and other factors which could cause actual results to differ materially from the results referred to in the forward-looking statements, see “Item 1A.—Risk Factors.”

Overview

We are a leading provider of communications services in rural communities, offering an array of services, including local and long distance voice, data, Internet and broadband product offerings. We are one of the largest telephone companies in the United States focused on serving rural communities and we are the 17th largest local telephone company, in each case based on number of access lines. We operate in 17 states with 288,899 access line equivalents in service as of December 31, 2005.

We were incorporated in February 1991 for the purpose of acquiring and operating incumbent telephone companies in rural markets. Since 1993, we have acquired 32 such businesses, 28 of which we continue to own and operate. Many of our telephone companies have served their respective communities for over 75 years. The majority of the rural communities we serve have fewer than 2,500 access lines. All of our telephone companies qualify as rural local exchange carriers under the Telecommunications Act.

Rural local exchange carriers generally are characterized by stable operating results and strong cash flow margins and operate in supportive regulatory environments. In particular, existing state and federal regulations permit us to charge rates that enable us to recover our operating costs, plus a reasonable rate of return on our invested capital (as determined by relevant regulatory authorities). Competition is typically limited because rural local exchange carriers primarily serve sparsely populated rural communities with predominantly residential customers, and the cost of operations and capital investment requirements for new entrants is high. As a result, in our markets, we have experienced virtually no wireline competition and limited voice competition from cable providers. We may already have VoIP competition but there is no way to identify or measure it. While most of our markets are served by wireless service providers, their impact on our business has been limited. We periodically negotiate interconnection agreements with other telecommunications providers which could ultimately result in increased competition in those markets.

Access lines are an important element of our business. Historically, rural telephone companies have experienced consistent growth in access lines because of positive demographic trends, insulated rural local economies and little competition. Recently, however, many rural telephone companies have experienced a loss of access lines due to challenging economic conditions, increased competition and the introduction of DSL services (resulting in customers canceling second lines in favor of DSL). We have not been immune to these conditions. We have been able to mitigate our access line loss somewhat through bundling services, retention programs, continued community involvement and a variety of other focused programs.

Despite our net loss of voice access lines, we have generated growth in our revenues each year since 2001. We have accomplished this by providing our customers with services not previously available in most of our markets, such as enhanced voice services and data services, including digital subscriber line services, and through acquisitions.

During 2005, 17 of our operating companies were converted to a single outsourced billing platform. On October 7, 2005, we learned that the billing service bureau used by us for these 17 operating companies had contracted to sell the software underlying our billing system and agreed not to add any future customers to its service bureau platform. In addition to the short term difficulties we experienced during

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the billing conversion, this potential sale raised concerns about the long-term reliability of the service bureau. On November 7, 2005, we reached an agreement with this outsourced service bureau to transition to another service provider of our choice by December 31, 2006. As part of this settlement, we will receive $4.0 million in cash as compensation from the outsourced billing provider in order to relieve it from its responsibilities under the original service bureau contract. In addition, we do not have to pay an additional $1.1 million which was scheduled to be paid to the service provider. We have selected MACC as our new provider of billing services. We expect to complete the conversion of 17 of our operating companies, or approximately two thirds of our access lines, by the middle of 2006 and the remaining companies by the middle of 2007.

Our dividend policy reflects our judgment that our stockholders would be better served if we distributed a substantial portion of the cash generated by our business in excess of operating needs, interest and principal payments on our indebtedness, dividends on future senior classes of our capital stock, if any, capital expenditures, taxes and future reserves, if any, as regular quarterly dividend payments to the holders of our common stock, rather than retained and used such cash for other purposes.

We are subject to regulation primarily by federal and state governmental agencies. At the federal level, the FCC has jurisdiction over interstate and international communications services. State telecommunications regulators exercise jurisdiction over intrastate communications services.

Our Initial Public Offering

On February 8, 2005, we consummated our initial public offering of 25,000,000 shares of our common stock at a price to the public of $18.50 per share. In connection with the offering, we entered into a new senior secured credit facility with a syndicate of financial institutions, including Deutsche Bank Trust Company Americas, as administrative agent, which we refer to as our credit facility.

We used the gross proceeds of $462.5 million from the offering together with borrowings of $566.0 million under the term facility of our credit facility as follows:

·$176.7 million to repay in full all outstanding loans under our old credit facility (including accrued interest);

·$122.1 million to repurchase $115.0 million aggregate principal amount of our 9 1¤2% senior subordinated notes due 2008, which we refer to as the 9 1¤2% notes, pursuant to the tender offer and consent solicitation for such notes (including accrued interest, tender premiums and consent payments);

·$51.8 million to repurchase $50.8 million aggregate principal amount of our floating rate callable securities due 2008, which we refer to as the floating rate notes, pursuant to the tender offer and consent solicitation for such notes (including accrued interest, tender premiums and consent payments);

·$193.4 million to repurchase $173.1 million aggregate principal amount of our 12 1¤2% senior subordinated notes due 2010, which we refer to as the 12 1¤2% notes, pursuant to the tender offer and consent solicitation for such notes (including accrued interest, tender premiums and consent payments);

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·$274.9 million to repurchase $223.0 million aggregate principal amount of our 117¤8% senior notes due 2010, which we refer to as the 117¤8% notes, pursuant to the tender offer and consent solicitation for such notes (including accrued interest, tender premiums and consent payments);

·$129.2 million to repurchase all of our series A preferred stock (together with accrued and unpaid dividends thereon) from the holders thereof;

·$10.6 million to repay a substantial portion of our subsidiaries’ outstanding long-term debt (including accrued interest);

·$7.0 million to repay in full a promissory note issued by us in connection with a past acquisition;

·$18.4 million to invest in temporary investments pending the redemption of the 91¤2% notes and the floating rate notes not tendered in the tender offers for such notes; and

·$44.4 million to pay fees and expenses, including underwriting discounts of $27.8 million, $8.2 million of debt issuance costs associated with our credit facility and a transaction fee of approximately $8.4 million paid to Kelso & Company, one of our investors.

On March 10, 2005, we used the $18.4 million which we had invested in temporary investments, together with $6.6 million of cash on hand, to redeem the $0.2 million aggregate principal amount of the 9 1¤2% notes (including accrued interest and redemption premiums) that were not tendered in the tender offers for such notes and the $24.2 million aggregate principal amount of the floating rate notes (including accrued interest) that were not tendered in the tender offer for such notes.

On May 2, 2005, we used $22.5 million of borrowings under the delayed draw facility of our credit facility to redeem the remaining $19.9 million aggregate principal amount of the 12 1¤2% notes (including accrued interest and redemption premiums) that were not tendered in the tender offer for such notes.

Revenues

We derive our revenues from:

·Local calling services.   We receive revenues from providing local exchange telephone services, including monthly recurring charges for basic service, usage charges for local calls and service charges for special calling features.

·Universal Service Fund high cost loop support.   We receive payments from the Universal Service Fund to support the high cost of our operations in rural markets. This revenue stream fluctuates based upon our average cost per loop compared to the national average cost per loop. For example, if the national average cost per loop increases and our operating costs (and average cost per loop) remain constant or decrease, the payments we receive from the Universal Service Fund would decline. Conversely, if the national average cost per loop decreases and our operating costs (and average cost per loop) remain constant or increase, the payments we receive from the Universal Service Fund would increase. The national average cost per loop in relation to our average cost per loop has increased, and we believe that the national average cost per loop will likely continue to increase in relation to our average cost per loop. As a result, the payments we receive from the Universal Service Fund have declined and will likely continue to decline.

·Interstate access revenue.   These revenues are primarily based on a regulated return on rate base and recovery of allowable expenses associated with the origination and termination of toll calls both to and from our customers. Interstate access charges to long distance carriers and other customers are based on access rates filed with the Federal Communications Commission. These revenues also include Universal Service Fund payments for local switching support, long term support and interstate common line support.

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·Intrastate access revenue.   These revenues consist primarily of charges paid by long distance companies and other customers for access to our networks in connection with the origination and termination of long distance telephone calls both to and from our customers. Intrastate access charges to long distance carriers and other customers are based on access rates filed with the state regulatory agencies.

·Long distance services.   We receive revenues from long distance services we provide to our residential and business customers. In addition, Carrier Services provides communications providers not affiliated with us with wholesale long distance services.

·Data and Internet services.   We receive revenues from monthly recurring charges for services, including high speed data, special access, private lines, Internet and other services.

·Other services.   We receive revenues from other services, including billing and collection, directory services and sale and maintenance of customer premise equipment.

The following summarizes our revenues and percentage of revenues from continuing operations from these sources:

	Year ended December 31,						Year ended December 31,
	2005		2004		2003		2005			2004			2003
	Revenue (in thousands)						% of Revenue
Local calling services	$	65,105	$	63,150	$	56,078		25	%		25	%		24	%
Universal Service Fund high cost loop	19,737		22,151		18,903			8			9			8
Interstate access	75,287		70,297		66,564			29			28			29
Intrastate access	40,009		42,389		43,969			15			17			19
Long distance services	20,868		17,766		15,440			7			7			7
Data and Internet services	24,168		19,054		13,431			9			7			6
Other services	17,669		17,838		17,047			7			7			7
Total	$	262,843	$	252,645	$	231,432		100	%		100	%		100	%

Operating Expenses

Our operating expenses are categorized as operating expenses, depreciation and amortization, and stock-based compensation.

·Operating expenses include cash expenses incurred in connection with the operation of our central offices and outside plant facilities and related operations. In addition to the operational costs of owning and operating our own facilities, we also purchase long distance services from the regional bell operating companies, large independent telephone companies and third party long distance providers. In addition, our operating expenses include expenses relating to sales and marketing, customer service and administration and corporate and personnel administration.

·Depreciation and amortization includes depreciation of our communications network and equipment.

·Stock based compensation consists of non-cash compensation charges incurred in connection with the employee stock options, restricted units and restricted stock granted to our executive officers and directors, and stockholder appreciation rights agreements granted to one of our current executive officers and one of our former executive officers. The stockholder appreciation rights agreements were all settled during March of 2005.

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Acquisitions

We intend to continue to pursue selective acquisitions:

·On January 25, 2006, we agreed to purchase the assets of Cass County Telephone Company Limited Partnership, or Cass County Telephone, for approximately $33.0 million in cash, subject to adjustment. Cass County Telephone serves approximately 8,600 access line equivalents in Missouri and Kansas. This acquisition is expected to close in the second quarter of 2006 after regulatory approvals.

·On May 2, 2005, we completed the acquisition of Berkshire Telephone Corporation, or Berkshire, for a purchase price of approximately $20.3 million (or $16.4 million net of cash acquired), subject to adjustment. Berkshire is an independent local exchange carrier that provides voice communication, cable and internet services to over 7,200 access line equivalents, as of the date of acquisition, serving five communities in New York State. Berkshire’s communities of service are adjacent to those of Taconic Telephone Corp., one of the Company’s subsidiaries.

·On September 1, 2005, we completed the acquisition of Bentleyville Communications Corporation,  or Bentleyville, for approximately $11.0 million (or $9.3 million net of cash acquired), subject to adjustment. Bentleyville, which had approximately 3,600 access line equivalents at the date of acquisition, provides telecommunications, cable and internet services to rural areas of Southwestern Pennsylvania which are adjacent to our existing operations in Pennsylvania.

·During 2004 we did not complete any acquisitions.

·On December 1, 2003, we purchased all of the capital stock of Community Service Telephone Co. and Commtel Communications Inc., which we refer to as the Maine acquisition. Community Service Telephone and Commtel Communications provided communication services to approximately 13,280 access line equivalents in central Maine as of the date of such acquisition.

·During 2002, we did not complete any acquisitions.

In the normal course of business, we evaluate selective acquisitions and may enter into non-binding letters of intent with respect to such acquisitions, subject to customary conditions. Management currently intends to fund future acquisitions through the use of the revolving facility of our credit facility or additional debt financing or the issuance of additional shares of our common stock. However, our substantial amount of indebtedness and our dividend payments could restrict our ability to obtain such financing on acceptable terms or at all.

Stock Based Compensation

In February 2005 and September 2005, we issued 473,716 shares and 50,000 shares, respectively, of restricted stock under our 2005 Stock Incentive Plan to our employees. Also, during 2005, 53,687 shares of restricted stock were forfeited bringing the total number of restricted shares outstanding under the 2005 Stock Incentive Plan to 470,029 shares. At December 31, 2005, 467,654 shares of our common stock may be issued in the future pursuant to awards authorized under our 2005 Stock Incentive Plan which could result in an additional compensation expense. In the second quarter of 2005, our board of directors approved an annual award to each of our non-employee directors in the form of restricted stock or restricted units, at the recipient’s option, which will vest on a quarterly basis, issued under the Company’s 2005 Stock Incentive Plan. The 2005 non-employee director awards began to vest on July 1, 2005. During 2005, we granted 1,870 shares of restricted stock with a total value at the grant date of approximately $30,000 and 7,480 restricted units with a total value at the grant date of approximately $120,000 to our non-employee directors. An additional 408 restricted units were granted in 2005 in lieu of dividends on the restricted units. In addition, we granted restricted units to certain employees in December 2003 of which

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26,442 remain outstanding at December 31, 2005. Non-cash compensation charges associated with restricted units and restricted stock were $2.4 million for the twelve months ended December 31, 2005. We did not recognize any additional charges associated with the stockholder appreciation rights that were settled in 2005.

Non-cash compensation charges associated with restricted units totaled $49,000 in 2004. These charges consisted of compensation charges of $0.2 million for restricted units, a charge of $0.3 million in connection with the modification of employee stock options and a non-cash benefit of $0.4 million associated with the reduction in estimated fair market value of stockholder appreciation rights. Non-cash compensation charges in 2003 were not material, primarily due to the fact that the fair market value per share of our common stock remained relatively stable.

Discontinued Operations

On September 30, 2003, MJD Services Corp., or MJD Services, a wholly-owned subsidiary of the Company, completed the sale of all of the capital stock owned by MJD Services of Union Telephone Company of Hartford, Armour Independent Telephone Co., WMW Cable TV Co. and Kadoka Telephone Co. to Golden West Telephone Properties, Inc. The sale was completed in accordance with the terms of the South Dakota purchase agreement. MJD Services received approximately $24.2 million in proceeds from the South Dakota disposition. The companies sold to Golden West provided communication services to approximately 4,150 voice access lines located in South Dakota as of the date of such disposition. The operations of these companies were presented as discontinued operations beginning in the second quarter of 2003. Therefore, the balances associated with these activities were reclassified as “held for sale.” All prior period financial statements have been restated accordingly. We recorded a gain on disposal of the South Dakota companies of $7.7 million during the third quarter of 2003.

In November 2001, we decided to discontinue the competitive local exchange carrier operations of FairPoint Carrier Services, Inc., or Carrier Services. This decision was a proactive response to the deterioration in the capital markets, the general slow-down of the economy and the slower-than-expected growth in Carrier Services’ competitive local exchange carrier operations. Carrier Services now provides wholesale long distance services and support to our rural local exchange carriers and communications providers not affiliated with us. These services allow such companies to operate their own long distance communication services and sell such services to their respective customers. Our long distance business is included as part of continuing operations in the accompanying financial statements.

The information in our year to year comparisons below represents only our results from continuing operations.

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Results of Operations

The following table sets forth the percentages of revenues represented by selected items reflected in our consolidated statements of operations. The year to year comparison of financial results are not necessarily indicative of future results:

	Year Ended December 31,						Year Ended December 31,						Year Ended December 31,
	2005			% of revenue			2004			% of revenue			2003			% of revenue
Revenues	$	262,843			100.0	%	$	252,645			100.0	%	$	231,432			100.0	%
Operating expenses, excluding depreciation and amortization and stock-based compensation	141,075				53.7		128,755				50.9		111,188				48.0
Depreciation and amortization	52,390				19.9		50,287				19.9		48,089				20.8
Stock based compensation	2,350				0.9		49				0.1		15				—
Total operating expenses	195,815				74.5		179,091				70.9		159,292				68.8
Income from operations	67,028				25.5		73,554				29.1		72,140				31.2
Other income (expense):
Net gain (loss) on sale of investments and other assets	(11		)		—		104				—		608				0.3
Interest and dividend income	2,499				1.0		2,335				0.9		1,792				0.8
Interest expense	(46,416		)		(17.7	)	(104,315		)		(41.3	)	(90,224		)		(39.0	)
Impairment of investments	(1,200		)		(0.5	)	(349		)		0.1		-				—
Equity in net earnings of investees	11,302				4.3		10,899				4.3		10,092				4.4
Realized and unrealized losses on interest rate swaps	—				—		(112		)		—		(1,387		)		(0.6	)
Other nonoperating, net	(87,746		)		33.4		(5,951		)		(2.5	)	(1,505		)		(0.7	)
Total other expense	(121,572		)		46.3		(97,389		)		(38.5	)	(80,624		)		(34.8	)
Loss from continuing operations before income taxes	(54,544		)		(20.8	)	(23,835		)		(9.4	)	(8,484		)		(3.6	)
Income tax benefit (expense)	83,096				31.6		(516		)		(0.2	)	236				0.1
Minority interest in income of subsidiaries	(2		)		—		(2		)		—		(2		)		—
Income (loss) from continuing operations	28,550				10.9	%	$	(24,353	)		(9.6	)%	$	(8,250	)		(3.5	)%

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

Revenues

Revenues.   Revenues increased $10.2 million to $262.8 million in 2005 compared to $252.6 million in 2004. Of this increase, $5.7 million was attributable to the Berkshire and Bentleyville acquisitions in 2005 and $4.5 million was attributable to our existing operations. We derived our revenues from the following sources:

Local calling services.   Local calling service revenues increased $2.0 million to $65.1 million in 2005. Of this increase, $1.2 million was attributable to the Berkshire and Bentleyville acquisitions in 2005 and $0.8 million was attributable to our existing operations. The increase in local revenues from existing operations is primarily due to increases in local calling features and local interconnection revenues, despite a 2.5% decline in net voice access lines.

Universal Service Fund high cost loop support.   Universal Service Fund high cost loop payments decreased $2.4 million to $19.7 million in 2005. Our existing operations accounted for all of this decrease. The national average cost per loop in relation to our average cost per loop has increased and, as a result, our receipts from the Universal Service Fund have declined. We expect this trend to continue as we anticipate the national average cost per loop will likely continue to increase in relation to our average cost per loop.

Interstate access.Interstate access revenues increased $5.0 million to $75.3 million in 2005 from $70.3 million in 2004. Of the increase, $1.6 million was attributable to the Bentleyville and Berkshire acquisitions. Our existing operations accounted for the remaining $3.4 million increase. In 2005, we recognized certain positive interstate revenue settlement adjustments related to prior years which accounted for approximately $4.3 million of interstate access revenue. Excluding these unusual items and acquired operations, interstate access revenue would have declined $0.9 million in 2005.

Intrastate access.   Intrastate access revenues decreased to $40.0 million in 2005 from $42.4 million in 2004. The decrease from our existing operations was $3.3 million. The decrease was mainly attributable to rate reductions as provided for under a rate re-balancing agreement in Maine.

Long distance services.   Long distance services revenues increased $3.1 million to $20.9 million in 2005 compared to 2004. This increase was attributable primarily to our existing operations as a result of promotional efforts and bundles with unlimited long distance designed to generate more revenue.

Data and Internet services.   Data and internet services revenues increased $5.1 million to $24.2 million in 2005 from $19.1 million in 2004. The increase is due primarily to increases in DSL customers as we continue to aggressively market our high speed data services. Our high speed data subscriber customer base as of December 31, 2005, increased to 45,283 subscribers compared to 34,824 subscribers as of December 31, 2004, a 30% increase during this period. The Bentleyville and Berkshire acquisitions contributed the remaining revenue increase of $0.5 million.

Other services.   Other services revenues decreased to $17.7 million in 2005 from 2004. The Berkshire and Bentleyville acquisitions increased other services revenues by $1.3 million. Excluding the impact of the acquisitions, other services revenue decreased $1.5 million. A portion of this decrease from existing operations was due to a $1.2 million one-time sale and installation of E911 system equipment in 2004. The remaining decrease was due to reductions in billing and collections revenues, as interexchange carriers continue to take back the billing function for their more significant long distance customers. We expect this billing and collections trend to continue.

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Operating Expenses

Operating expenses and cost of goods sold, excluding depreciation and amortization.   Operating expenses increased $12.3 million to $141.1 million in 2005 compared to 2004. Of the increase, $9.3 million is related to our existing operations and $3.0 million is related to expenses of the acquired operations in 2005. Consulting fees increased $1.8 million primarily related to preparation for compliance with Section 404 of the Sarbanes-Oxley Act. Expenses related to high speed data and long distance services increased $2.3 million principally due to the increase in HSD and long distance subscribers. Bad debt expense was $1.4 million higher in 2005 than 2004 due primarily to difficulties experienced in our billing conversion related to the delay of non-pay disconnect notices. Billing costs have increased $2.0 million as we incurred costs associated with the conversion of our billing systems into an integrated platform and recurring expenses from our outsourced billing service provider. The balance of the increase is attributable to smaller miscellaneous items.

Depreciation and amortization.   Depreciation and amortization from continuing operations increased $2.1 million to $52.4 million in 2005 from $50.3 million in 2004. The Berkshire and Bentleyville acquisitions accounted for $1.0 million of the increase and the remaining increase was attributable to the increased investment in our communications network for existing operations.

Stock based compensation.   For the year ended December 31, 2005, stock based compensation increased $2.3 million to $2.4 million in 2005 primarily due to the issuance of restricted stock and restricted units to certain key employees and directors under the 2005 Stock Incentive Plan.

Income from operations.   Income from operations decreased $6.5 million to $67.0 million in 2005 compared to 2004. This decrease is principally due to the increase in expenses discussed above.

Other income (expense).   Total other expense increased $24.2 million to $121.6 million in 2005 from $97.4 million in 2004. Interest expense decreased $57.9 million to $46.4 million in 2005 mainly due to the transactions associated with the offering which substantially de-leveraged us and provided a decrease in interest expense. In addition, in connection with the offering we repurchased our series A preferred stock (together with accrued and unpaid dividends thereon) which eliminated dividends and accretion on our series A preferred stock for the twelve months ended December 31, 2005. The dividends and accretion on our series A preferred stock were being reported as interest expense under SFAS 150. In connection with the offering, we also refinanced our old credit facility and repurchased and/or redeemed the 9 1¤2% notes, the floating rate notes, the 12 1¤2% notes and the 11 7¤8% notes, which resulted in significant charges of $87.7 million due to fees and penalties paid on the repurchase/redemption and for the write-off of unamortized debt issuance costs. Earnings from equity investments increased $0.4 million to $11.3 million in 2005. For the twelve months ended December 31, 2004, other non-operating income (expense) includes the write-off of debt issuance and offering costs of $6.0 million associated with an abandoned offering of Income Deposit Securities.

Income tax expense.   In 2005, income tax benefits of $83.1 million are primarily the result of the recognition of deferred tax benefits of $66.0 million from the reversal of the deferred tax valuation allowance that resulted from our expectation of generating future taxable income following the recapitalization. The income tax benefit for 2005 also includes deferred tax benefits of $29.3 million related to the extinguishment of debt and $1.6 million for an adjustment of our net deferred tax assets to an expected federal income tax rate of 35% from 34%, in anticipation of higher levels of taxable income in subsequent periods. These benefits were partially offset by income tax expense associated with taxable income generated following the recapitalization. During the twelve months ended December 31, 2004, the income tax expense related primarily to income taxes owed in certain states.

Discontinued operations.   During the twelve months ended December 31, 2005 and 2004, we recorded a reduction to our liability associated with the discontinuation of our competitive local exchange carrier

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operations, which, net of tax, resulted in a $0.4 million and $0.7 million adjustment to income from discontinued operations, respectively. The adjustment in 2005 related to the settlement of a lease obligation which reduced our future obligation under this lease. In 2004, the adjustment was mainly attributable to excise tax refunds received from the Internal Revenue Service as well as a reduction in liabilities associated with potential property tax payments.

Net income (loss).   Net income for the year ended December 31, 2005 was $28.9 million. Our 2004 net loss was $23.7 million. The difference between 2005 and 2004 is a result of the factors discussed above.

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

Revenues

Revenues.   Revenues increased $21.2 million to $252.6 million in 2004 compared to $231.4 million in 2003. Of this increase, $8.2 million was attributable to the Maine acquisition and $13.0 million was attributable to our existing operations. We derived our revenues from the following sources:

Local calling services.   Local calling service revenues increased $7.1 million from $56.1 million in 2003 to $63.2 million in 2004. Revenue from our existing operations increased $4.2 million. Of this increase, $3.6 million is attributable to the implementation of Basic Service Calling Areas in the state of Maine, which changes and expands basic service calling areas and has the effect of shifting revenues from intrastate access to local services. The remaining increase of $0.6 million in local revenues from existing operations is due to increases in local calling features and local interconnection revenues, despite a 2.9% decline in net voice access lines. The remaining increase in local calling service revenues was attributable to the Maine acquisition.

Universal Service Fund high cost loop support.   Universal Service Fund high cost loop payments increased $3.3 million to $22.2 million in 2004 from $18.9 million in 2003. Our existing operations accounted for all of this increase. A reclassification of plant increased our Universal Service Fund payments in our Maine and Idaho companies which more than offset a drop in payments from the Universal Service Fund related to increases in the national average cost per loop.

Interstate access.Interstate access revenues increased $3.7 million from $66.6 million in 2003 to $70.3 million in 2004. Of the increase, $3.1 million was attributable to the Maine acquisition. Our existing operations accounted for the remaining $0.6 million increase. This increase was due to expense increases from our regulated operations that resulted in higher interstate revenue requirements.

Intrastate access.   Intrastate access revenues decreased from $44.0 million in 2003 to $42.4 million in 2004. The decrease from our existing operations was $2.6 million before being offset by $1.0 million in revenues contributed by the Maine acquisition. The decrease was mainly attributable to the Basic Service Calling Areas plan implemented in Maine as discussed above in local calling services.

Long distance services.   Long distance services revenues increased $2.3 million from $15.4 million in 2003 to $17.7 million in 2004. This increase was all attributable to our existing operations as a result of promotional efforts and bundles with unlimited long distance designed to generate more revenue.

Data and Internet services.   Data and internet services revenues increased $5.7 million from $13.4 million in 2003 to $19.1 million in 2004. The increase is due primarily to increases in DSL customers as we aggressively marketed our high speed data products. Our high speed data subscriber customer base increased to 34,824 subscribers as of December 31, 2004, a 78% increase during the year. The Maine acquisition contributed the remaining revenue increase of $0.6 million.

Other services.   Other services revenues increased from $17.0 million in 2003 to $17.8 million in 2004. Of the increase, $0.6 million was attributable to the Maine acquisition. An increase of $0.2 million from existing operations was due to a $1.2 million one-time sale and installation of E911 system equipment. This

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was offset by approximately $1.0 million of reductions in billing and collections revenues, as inter-exchange carriers continued to take back the billing function for their more significant long distance customers.

Operating Expenses

Operating expenses and cost of goods sold, excluding depreciation and amortization.   Operating expenses increased $17.6 million to $128.8 million in 2004 from $111.2 million in 2003. Of the increase, $13.5 million is related to our existing operations and $4.1 million is related to expenses of the companies we acquired in 2003 in the Maine acquisition. Wages and benefits increased $4.4 million due to merit salary increases, an increase in our bonus compensation and an increase in the number of our employees compared to a year ago. Network operations expense, wholesale digital subscriber line charges and transport and network costs associated with our broadband initiatives increased $4.0 million. Cost of goods sold associated with the one-time sale and installation of E911 system equipment was $1.0 million in 2004. Bad debt expense was $1.6 million higher in 2004 than 2003 due primarily to a recovery received in 2003. Marketing and promotion expenses increased $0.6 million due to higher levels of activity related to the promotion of custom calling features, data services and other products. Billing costs have increased $1.0 million as we incurred costs associated with the conversion of our billing systems into an integrated platform. The balance of the increase is attributable to smaller miscellaneous items.

Depreciation and amortization.   Depreciation and amortization from continuing operations increased $2.2 million to $50.3 million in 2004 from $48.1 million in 2003. The Maine acquisition accounted for $1.2 million of the increase and $0.3 million was attributable to the increased investment in our communications network for existing operations we acquired prior to 2003. The other $0.7 million was related to accelerated depreciation on wireless equipment due to a decision to exit certain wireless markets.

Stock based compensation.   For the year ended December 31, 2004, stock based compensation of $49,000 was incurred as a result of modification of an employee stock option agreement with an executive officer, offset by the decrease in the estimated value of fully vested stockholder appreciation rights agreements. The restricted units issued in December of 2003 resulted in a compensation charge of $0.2 million. Stock based compensation for the year ended December 31, 2003 was $15,000.

Income from operations.   Income from operations increased $1.5 million to $73.6 million in 2004 from $72.1 million in 2003. A $1.5 million decrease attributable to our existing operations was offset by a $3.0 million increase attributable to the Maine acquisition.

Other income (expense).   Total other expense increased $16.8 million to $97.4 million in 2004 from $80.6 million in 2003. The increase consisted primarily of interest expense on long-term debt, which increased $14.1 million to $104.3 million in 2004 from $90.2 million in 2003, which was mainly attributable to the extinguishment of debt in connection with our issuance of the 11 7¤8% notes during the first quarter of 2003 and the adoption of Statement of Financial Accounting Standards 150 as of July 1, 2003, the latter of which resulted in our recording $20.2 million in interest expense related to dividends and accretion on our series A preferred stock for the year ended December 31, 2004 compared to $9.0 million for the year ended December 31, 2003. Earnings from equity investments increased $0.8 million to $10.9 million in 2004 from $10.1 million in 2003. For the twelve months ended December 31, 2004, other non-operating income (expense) includes the write-off of debt issuance and offering costs of $6.0 million associated with an abandoned offering of Income Deposit Securities. For the year ended December 31, 2003, other non-operating income (expense) of $1.5 million represents the net loss on the extinguishment of debt and expenses related to the loss on the write-off of loan origination costs. In conjunction with the issuance of $225.0 million of the 117¤8% notes during the first quarter of 2003, we recorded $3.5 million in non-operating gains on the extinguishment of a portion of the 9 1¤2% notes, the 12 1¤2% notes and loans under

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Carrier Services’ credit facility. These gains were offset by a non-operating loss of $5.0 million for the write-off of debt issue costs related to this extinguishment of debt in 2003.

The following is a summary of amounts included in realized and unrealized gains (losses) on interest rate swaps (dollars in thousands):

	2004			2003
Change in fair value of interest rate swaps	$	874		$	7,693
Reclassification of transition adjustment included in other comprehensive income (loss)	(103		)	(1,029		)
Realized losses	(883		)	(8,051		)
Total	$	(112	)	$	(1,387	)

Income tax expense.   Income tax expense from continuing operations increased $0.7 million to $0.5 million in 2004 from a benefit of $0.2 million in 2003. The income tax expense relates primarily to income taxes owed in certain states offset by investment tax credits in certain states.

Discontinued operations.   Net income from discontinued operations of our existing operations sold in the South Dakota disposition was $1.9 million in 2003. The companies were sold on September 30, 2003 and resulted in the recognition of a gain on disposal of the discontinued operations of $7.7 million during 2003. During the twelve months ended December 31, 2004 and 2003, we recorded a reduction to our liability associated with the discontinuation of our competitive local exchange carrier operations of $0.7 million and $0.3 million, respectively. This was mainly attributable to excise tax refunds received from the Internal Revenue Service as well as a reduction in liabilities associated with potential property tax payments.

Net income (loss).   Net loss attributable to common stockholders for the year ended December 31, 2004 was $23.7 million. Our 2003 net loss attributable to common shareholders was $4.3 million after giving effect to $8.9 million in dividends and accretion related to our series A preferred stock and the repurchase of our series A preferred stock at a discount of $2.9 million. The difference between 2004 and 2003 is a result of the factors discussed above.

Liquidity and Capital Resources

Our short-term and long-term liquidity needs arise primarily from: (i) interest payments primarily related to our credit facility; (ii) capital expenditures; (iii) working capital requirements as may be needed to support the growth of our business; (iv) dividend payments on our common stock; and (v) potential acquisitions. Our board of directors has adopted a dividend policy which reflects our judgment that our stockholders would be better served if we distributed a substantial portion of our cash available for distribution to them instead of retaining it in our business.

We expect to fund our operations, interest expense, capital expenditures, working capital requirements and dividend payments on our common stock from cash from operations and distributions from investments. To fund future acquisitions, we intend to use cash from operations and borrowings under our credit facility, or, subject to the restrictions in our credit facility, to arrange additional funding through the sale of public or private debt and/or equity securities, or obtain additional senior bank debt.

For the years ended December 31, 2005, 2004 and 2003, net cash provided by operating activities of continuing operations was $61.7 million, $46.0 million and $32.8 million, respectively. The increase in net cash provided by operating activities in 2005 was primarily due to a decrease in accrued interest resulting from our recapitalization in February 2005.

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Our ability to service our indebtedness depends on our ability to generate cash in the future. We are not required to make any scheduled principal payments under our credit facility’s term loan facility prior to maturity in February 2012. We will need to refinance all or a portion of our indebtedness on or before maturity. We may not be able to refinance our indebtedness on commercially reasonable terms or at all. If we were unable to renew or refinance our credit facility, our failure to repay all amounts due on the maturity date would cause a default under our credit facility. In addition, borrowings under our credit facility bear interest at variable interest rates. On February 8, 2005, we entered into three interest rate swap agreements, with notional amounts of $130.0 million each, to effectively convert a portion of our variable rate interest exposure to fixed rates ranging from 3.76% to 4.11%, plus a 2.0% margin. These swap agreements expire beginning December 31, 2007 through December 31, 2009. On April 7, 2005, we entered into two additional interest rate swap agreements, one with the notional amount of $50.0 million to effectively convert a portion of our variable rate interest exposure to a fixed rate of 4.69%, plus a 2.0% margin, beginning on April 29, 2005 and ending on March 31, 2011, and one with the notional amount of $50.0 million to effectively convert a portion of our variable rate interest exposure to a fixed rate of 4.72%, plus a 2.0% margin, beginning on June 30, 2005 and ending on March 31, 2012.

Effective on September 30, 2005, we amended our credit facility to reduce the effective interest rate margins on the $588.5 million term facility by 0.25% to 1.75% on Eurodollar loans and to 0.75% for Base rate loans. This amendment also effectively reduced the fixed interest rates on our interest rate swap agreements by 0.25%.

As a result of these swap agreements, as of December 31, 2005, approximately 82% of our indebtedness bore interest at fixed rates rather than variable rates. After these interest rate swap agreements expire, our annual debt service obligations on such portion of the term loans will vary from year to year unless we enter into a new interest rate swap or purchase an interest rate cap or other interest rate hedge. To the extent interest rates increase in the future, we may not be able to enter into new interest rate swaps or to purchase interest rate caps or other interest rate hedges on acceptable terms. An increase of 10% in the annual interest rates on our variable rate indebtedness (excluding variable rate indebtedness which has its interest rate effectively fixed under interest rate swap agreements) would result in an increase of approximately $0.7 million in our annual cash interest expense. To the extent interest rates increase in the future, we may not be able to enter into a new interest rate swap or to purchase an interest rate cap or other interest rate hedge on acceptable terms.

Based on the dividend policy with respect to our common stock, we may not have any significant cash available to meet any unanticipated liquidity requirements, other than available borrowings, if any, under the revolving facility of our credit facility. As a result, we may not retain a sufficient amount of cash to finance growth opportunities, including acquisitions, or unanticipated capital expenditures or to fund our operations. If we do not have sufficient cash for these purposes, our financial condition and our business will suffer. However, our board of directors may, in its discretion, amend or repeal the dividend policy to decrease the level of dividends provided for or discontinue entirely the payment of dividends.

We used net proceeds received from the offering, together with approximately $566.0 million of borrowings under the term loan facility of our credit facility, to, among other things, repay all outstanding loans under our old credit facility, repurchase all of our series A preferred stock and consummate tender offers and consent solicitations in respect of our outstanding 91¤2% notes, floating rate notes, 121¤2% notes and 117¤8% notes. On March 10, 2005, we redeemed the remaining outstanding 91¤2% notes and floating rate notes. We redeemed the remaining outstanding 121¤2% notes on May 1, 2005 with borrowings under the delayed draw facility of our credit facility.

Net cash used in investing activities of continuing operations was $42.8 million, $21.0 million and $54.0 million for the years ended December 31, 2005, 2004 and 2003, respectively. These cash flows primarily reflect capital expenditures of $28.1 million, $36.5 million and $33.6 million for the years ended December 31, 2005, 2004 and 2003, respectively, and acquisitions of telephone properties, net of cash

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acquired, of $25.7 million and $33.1 million for the years ended December 31, 2005 and December 31, 2003. There were no acquisitions during 2004.

Offsetting capital expenditures were distributions from investments of $10.9 million, $15.0 million and $10.8 million for the years ended December 31, 2005, 2004 and 2003, respectively. The $15.0 million received in 2004 included a one time $2.5 million distribution from our equity interest in Chouteau Cellular Telephone Company as the partnership sold the majority of its assets. In addition, distributions for the twelve months ended December 31, 2005 included $10.0 million from our equity interest in Orange County Poughkeepsie Limited Partnership as compared to $11.8 million during the twelve months ended December 31, 2004. The distributions declined mainly due to the timing of an additional distribution in 2004. All of these distributions represent passive ownership interests in partnership investments. We do not control the timing or amount of distributions from such investments.

Net cash used in financing activities from continuing operations was $16.6 million, $24.0 million and $2.0 million for the years ended December 31, 2005, 2004 and 2003, respectively. For the year ended December 31, 2005, net proceeds from the issuance of common stock of $431.9 million was used for the net repayment of long term debt of $205.7 million and the repurchase of series A preferred stock and common stock of $129.3 million. The remaining proceeds were used to pay fees and penalties associated with the early retirement of long term debt of $61.0 million, to pay a deferred transaction fee of $8.4 million and to pay debt issuance costs of $9.0 million. For the year ended December 31, 2004, these cash flows primarily represented net repayment of long-term debt of $15.2 million and $7.8 million in debt issuance and offering related costs. For the year ended December 31, 2003, net proceeds from the issuance of long term debt of $23.3 million were offset by debt issuance costs of $15.6 million and the repurchase of our series A preferred stock and class A common stock of $8.6 million.

Our annual capital expenditures for our rural telephone operations have historically been significant. Because existing regulations allow us to recover our operating and capital costs, plus a reasonable return on our invested capital in regulated telephone assets, capital expenditures have historically constituted an attractive use of our cash flow. Capital expenditures were approximately $28.1 million, $36.5 million and $33.6 million for the years ended December 31, 2005, 2004 and 2003, respectively.

We expect that our annual capital expenditures for our existing operations will be approximately $28.0 to $30.0 million for fiscal 2006. We expect to fund all of these capital expenditures through our cash flow from operations. If cash is available beyond what is required to support our dividend policy, we may consider additional capital expenditures if we believe they are beneficial. Although the amount of our capital expenditures can fluctuate from quarter to quarter, on an annual basis we do not expect capital expenditures for our existing operations through fiscal 2009 to vary significantly from our estimated amounts.

On January 5, 2006, we announced that we expect to receive proceeds of $26.7 million from the liquidation of our investment in the Rural Telephone Bank. We expect to receive the proceeds in the middle of 2006. On February 20, 2006, we announced that we had entered into an agreement to sell our investment in Southern Illinois Cellular Corp. Upon closing of this transaction, which is anticipated to be in the second quarter of 2006, we expect to receive proceeds of $16 to $17 million. On January 25, 2006, we agreed to purchase the assets of Cass County Telephone for approximately $33.0 million in cash, subject to adjustment.

On May 2, 2005, we used borrowings under our credit facility’s revolving facility to fund the Berkshire acquisition (including the repayment of $1.3 million of Berkshire’s debt). On September 1, 2005, we used borrowings under our credit facility’s revolving facility to fund the Bentleyville acquisition. We expect to fund the acquisition of Cass County Telephone through proceeds from the previously discussed asset sales and/or borrowings under our credit facility’s revolving facility.

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Our old credit facility consisted of an $85.0 million revolving loan facility, of which $45.0 million was available at December 31, 2004, and two term facilities, a tranche A term loan facility of $40.0 million with $40.0 million outstanding at December 31, 2004 that was to mature on March 31, 2007 and a tranche C term loan facility with $102.4 million outstanding as of December 31, 2004 that was to mature on March 31, 2007. We repaid all of the borrowings under our old credit facility with a portion of net proceeds from the offering together with borrowings under our credit facility.

Our credit facility consists of a revolving facility, or the revolver, in a total principal amount of up to $100.0 million, of which $86.7 million was available at March 1, 2006 and a term loan facility, or the term loan, in a total principal amount of $588.5 million with $588.5 million outstanding at March 1, 2006. The term loan matures in February 2012 and the revolver matures in February 2011. The revolver has a swingline subfacility in an amount of $5.0 million and a letter of credit subfacility in an amount of $10.0 million, which will allow issuances of standby letters of credit for our account. Net borrowings under the revolver were $12.0 million from February 8, 2005 through March 1, 2006 and were used primarily to fund the Berkshire acquisition and the Bentleyville acquisition (including the repayment of $1.3 million of Berkshire’s debt). A $1.3 million letter of credit was also outstanding as of March 1, 2006. Borrowings under our revolving facility bear interest, at our option, at either (i) the Eurodollar rate plus 2.0% or (ii) a base rate, as such term is defined in the credit agreement, plus 1.0%. Effective on September 30, 2005, the Company amended its credit facility to reduce the effective interest rate margins on the $588.5 million term facility by 0.25% to 1.75% on Eurodollar loans and to 0.75% for Base rate loans.

The credit facility contains financial covenants, including, without limitation, the following tests: a minimum interest coverage ratio equal to or greater than 3.0:1 and a maximum leverage ratio equal to or less than 5.25:1. The credit facility contains customary affirmative covenants. The credit facility also contains negative covenants and restrictions, including, among others, with respect to redeeming and repurchasing our other indebtedness, loans and investments, additional indebtedness, liens, capital expenditures, changes in the nature of our business, mergers, acquisitions, asset sales and transactions with affiliates. Subject to certain limitations set forth in the credit facility, we are permitted to pay dividends for the period from the closing date of the offering through July 30, 2005. In addition, we may use all of our Cumulative Distributable Cash (as defined in the credit facility) accumulated after April 1, 2005 to declare and pay dividends after July 30, 2005, but we may not in general pay dividends in excess of such amount. On March 11, 2005, April 29, 2005 and September 14, 2005, we entered into technical amendments to our credit facility.

Our credit facility requires us first to prepay outstanding term loans under the credit facility and, thereafter, to repay loans under the new revolver and/or to reduce revolver commitments (or commitments under the delayed draw facility) under the credit facility with, subject to certain conditions and exceptions, 100% of the net cash proceeds we receive from any sale, transfer or other disposition of any assets, 100% of net casualty insurance proceeds and 100% of the net cash proceeds we receive from the issuance of permitted securities and, at certain times if we are not permitted to pay dividends, with 50% of the increase in our cumulative distributable cash during the prior fiscal quarter. Reductions to the revolving commitments under the credit facility from the foregoing recapture events will not reduce the revolving commitments under the credit facility below $50.0 million. Our credit facility provides for voluntary prepayments of the revolver and the term loan and voluntary commitment reductions of the revolver (and the delayed draw facility), subject to giving proper notice and compensating the lenders for standard Eurodollar breakage costs, if applicable.

In 1998, the Company issued $125.0 million aggregate principal amount of the 91¤2% notes and $75.0 million aggregate principal amount of the floating rate notes. Both series of these notes were to mature on May 1, 2008. On February 9, 2005, we repurchased $115.0 million principal amount of the 91¤2% notes and $50.8 million principal amount of the floating rate notes tendered pursuant to the tender offers

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for such notes. We redeemed the remaining outstanding 91¤2% notes and floating rate notes on March 10, 2005.

In 2000, the Company issued $200.0 million aggregate principal amount of the 121¤2% notes. These notes were to mature on May 10, 2010. On February 9, 2005, we repurchased $173.1 million principal amount of the 121¤2% notes tendered pursuant to the tender offer for such notes. We redeemed the remaining outstanding 121¤2% notes on May 2, 2005.

In 2003, the Company issued $225.0 million aggregate principal amount of the 117¤8% notes. These notes were to mature on March 1, 2010. These notes are general unsecured obligations of the Company, ranking pari passu in right of payment with all existing and future senior debt of the Company, including all obligations under our credit facility, and senior in right of payment to all existing and future subordinated indebtedness of the Company. On February 9, 2005, we repurchased $223.0 million principal amount of the 117¤8% notes tendered pursuant to the tender offer for such notes. At December 31, 2005, $2.1 million principal amount of the 117¤8% notes remains outstanding.

Summary of Contractual Obligations

The tables set forth below contain information with regard to disclosures about contractual obligations and commercial commitments.

The following table discloses aggregate information about our contractual obligations as of December 31, 2005 and the periods in which payments are due:

	Payments due by period
	Total		Less than 1 year			1–3 years		3–5 years		More than 5 years
	(Dollars in thousands)
Contractual obligations:
Long term debt	$	607,425		$	677	$	1,467	$	2,359	$	602,922
Operating leases(1)	8,088			2,339		2,105		1,331		2,313
Minimum purchase contracts	2,438			1,878		477		83		—
Total contractual cash obligations	$	617,951		$	4,894	$	4,049	$	3,773	$	605,235

(1)Real property lease obligations of $1.2 million associated with the discontinued operations discussed in note 13 to our consolidated financial statements are stated in this table at total contractual amounts. However, we have negotiated lease terminations on these properties to reduce the total obligation. Operating leases from continuing operations of $6.9 million are also included.

The following table discloses aggregate information about our derivative financial instruments as of December 31, 2005, the source of fair value of these instruments and their maturities.

	Fair Value of Contracts at Period-End
	Total		Less than 1 year		1–3 years		3–5 years		More than 5 years
	(Dollars in thousands)
Source of fair value:
Derivative financial instruments(1)	$	8,779		3,130		5,429		207		13

(1)Fair value of interest rate swaps at December 31, 2005 was provided by the counterparties to the underlying contracts using consistent methodologies.

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Critical Accounting Policies

Our critical accounting policies are as follows:

·Revenue recognition;

·Allowance for doubtful accounts;

·Accounting for income taxes; and

·Valuation of long-lived assets, including goodwill.

Revenue recognition.Certain of our interstate network access and data revenues are based on tariffed access charges filed directly with the Federal Communications Commission; the remainder of such revenues are derived from revenue sharing arrangements with other local exchange carriers administered by the National Exchange Carrier Association.

The Telecommunications Act allows local exchange carriers to file access tariffs on a streamlined basis and, if certain criteria are met, deems those tariffs lawful. Tariffs that have been “deemed lawful” in effect nullify an interexchange carrier’s ability to seek refunds should the earnings from the tariffs ultimately result in earnings above the authorized rate of return prescribed by the Federal Communications Commission. Certain of the Company’s telephone subsidiaries file interstate tariffs directly with the Federal Communication Commission using this streamlined filing approach. As of December 31, 2005, the amount of our earnings in excess of the authorized rate of return reflected as a liability on the balance sheet for the 2005 to 2006 monitoring periods was approximately $1.6 million. The settlement period related to (i) the 2003 to 2004 monitoring period lapses on September 30, 2007 and (ii) the 2005 to 2006 monitoring period lapses on September 30, 2009. We will continue to monitor the legal status of any pending or future proceedings that could impact its entitlement to these funds, and may recognize as revenue some or all of the over-earnings at the end of the settlement period or as the legal status becomes more certain.

Allowance for doubtful accounts.In evaluating the collectibility of our accounts receivable, we assess a number of factors, including a specific customer’s or carrier’s ability to meet its financial obligations to us, the length of time the receivable has been past due and historical collection experience. Based on these assessments, we record both specific and general reserves for uncollectible accounts receivable to reduce the related accounts receivable to the amount we ultimately expect to collect from customers and carriers. If circumstances change or economic conditions worsen such that our past collection experience is no longer relevant, our estimate of the recoverability of our accounts receivable could be further reduced from the levels reflected in our accompanying consolidated balance sheet.

Accounting for income taxes.As part of the process of preparing our consolidated financial statements we were required to estimate our income taxes. This process involves estimating our actual current tax exposure and assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe the recovery is not likely, we must establish a valuation allowance. Further, to the extent that we establish a valuation allowance or increase this allowance in a financial accounting period, we must include a tax provision, or reduce our tax benefit in our consolidated statement of operations. In performing the assessment, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. We use our judgment to determine our provision or benefit for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.

There are various factors that may cause those tax assumptions to change in the near term. We cannot predict whether future U.S. federal income tax laws and regulations might be passed that could have a

52

material effect on our results of operations. We assess the impact of significant changes to the U.S. federal and state income tax laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when new regulation and legislation is enacted.

Based on certain assumptions, we had $291.9 million in federal and state net operating loss carry forwards as of December 31, 2005. In February 2005, we completed the offering which resulted in an “ownership change” within the meaning of the U.S. federal income tax laws addressing net operating loss carry forwards, alternative minimum tax credits and other similar tax attributes. As a result of such ownership change, there will be specific limitations on our ability to use our net operating loss carry forwards and other tax attributes. In order to fully utilize the deferred tax assets, mainly generated by the net operating losses, we will need to generate future taxable income of approximately $219 million prior to the expiration of the net operating loss carry forwards beginning in 2019 through 2025.

The valuation allowance for deferred tax assets as of December 31, 2004 was $66.0 million. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment, as well as all positive and negative evidence that would affect the recoverability of deferred tax assets. As a result of the offering, we have reduced our aggregate long term debt and expect a significant reduction in its annual interest expense. When considered together with our history of producing positive operating results and other evidence affecting the recoverability of deferred tax assets, we expect that future taxable income will more likely than not be sufficient to recover net deferred tax assets. Therefore, the valuation allowance was reversed in the first quarter of 2005, subsequent to the offering.

Valuation of long-lived assets, including goodwill.We review our long-lived assets, including goodwill for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Several factors could trigger an impairment review such as:

·significant underperformance relative to expected historical or projected future operating results;

·significant regulatory changes that would impact future operating revenues;

·significant negative industry or economic trends; and

·significant changes in the overall strategy in which we operate our overall business.

Goodwill was $481.3 million at December 31, 2005. As part of the Berkshire and Bentleyville acquisitions, the Company has recorded intangible assets related to the acquired companies’ customer relationships of $2.4 million and $1.4 million, respectively. These intangible assets will be amortized over 15 years. The intangible assets are included in Intangible Assets on the Consolidated Balance Sheet.

We are required to perform an annual impairment review of goodwill as required by Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. No impairment of goodwill resulted from the annual valuation of goodwill.

New Accounting Standards

In December 2004, the FASB issued SFAS No. 123(R). This new standard requires companies to adopt the fair value methodology of valuing stock-based compensation and recognizing that valuation in the financial statements from the date of grant. Accordingly, the adoption of SFAS No. 123(R)’s fair value method is not expected to have a significant impact on our results of operations. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as disclosed in Note 1(n). SFAS No. 123(R) also requires the benefits of tax deductions in

53

excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. We expect to adopt the provisions of SFAS No. 123(R) using the prospective application method, for awards granted prior to becoming a public company and valued using the minimum value method, and using the modified prospective application method for awards granted subsequent to becoming a public company. The Company will adopt SFAS No. 123(R) effective January 1, 2006, with no restatement of any prior periods.

In March 2005, the FASB issued FIN 47, “Accounting for Conditional Asset Retirement Obligations,” an interpretation of FASB No. 143. FIN  47 clarifies that the term conditional asset retirement obligation as used in FASB No. 143 refers to a legal obligation to perform an asset retirement activity in which the timing or method of settlement are conditional on a future  event that may or may not be within the control of the entity. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective for the year ended December 31, 2005. We account for our wireline operations under SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation”. Therefore, in accordance with federal and state regulations, we are following the FCC’s Part 32 accounting. As a result of our accounting under SFAS No. 71, the adoption of FIN 47 had no impact on us.

Inflation

We do not believe inflation has a significant effect on our operations.

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of December 31, 2005, approximately 82% of our indebtedness bore interest at fixed rates or effectively at fixed rates. Our earnings are affected by changes in interest rates as our long-term indebtedness under our credit facility has variable interest rates based on either the prime rate or LIBOR. If interest rates on our variable rate indebtedness (excluding variable rate indebtedness which has its interest rate effectively fixed under interest rate swap agreements) outstanding at December 31, 2005 increased by 10%, our interest expense would have increased, and our income from continuing operations before taxes would have decreased, by approximately $0.7 million for the twelve months ended December 31, 2005.

We have entered into interest rate swaps to manage our exposure to fluctuations in interest rates on our variable rate indebtedness. The fair value of these swaps was a net asset of approximately $8.8 million at December 31, 2005. The fair value indicates an estimated amount we would have received to cancel the contracts or transfer them to other parties. In connection with our credit facility, on February 8, 2005, we entered into three interest rate swap agreements, with notional amounts of $130.0 million each, to effectively convert a portion of our variable interest rate exposure to fixed rates ranging from 3.76% to 4.11%, plus a 2.0% margin. These swap agreements expire beginning December 31, 2007 through December 31, 2009. On April 7, 2005, we entered into two additional interest rate swap agreements, one with the notional amount of $50.0 million which will fix the interest rate at 4.69%, plus a 2.0% margin beginning on April 29, 2005 and ending on March 31, 2011 and one with the notional amount of $50.0 million which will fix the interest rate at 4.72%, plus a 2.0% margin, beginning on June 30, 2005 and ending on March 31, 2012.

In addition, effective on September 30, 2005, we amended our credit facility to reduce the effective interest rate margins on the $588.5 million term facility by 0.25% to 1.75% on Eurodollar loans and to 0.75% for Base rate loans. This amendment also effectively reduced the fixed interest rates on our interest rate swap agreements by 0.25%.

54

ITEM 8.INDEPENDENT AUDITORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS

	Page
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES:
Report of Independent Registered Public Accounting Firm	56
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003:
Consolidated Balance Sheets as of December 31, 2005 and 2004	57
Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004, and 2003	58
Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31, 2005, 2004, and 2003	59
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2005, 2004, and 2003	60
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004, and 2003	61
Notes to Consolidated Financial Statements for the Years Ended December 31, 2005, 2004, and 2003	63

55

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
FairPoint Communications, Inc.:

We have audited the accompanying consolidated balance sheets of FairPoint Communications, Inc. and subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity (deficit), comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of FairPoint Communications, Inc.’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005 in conformity with U.S. generally accepted accounting principles.

As described in notes 1 and 8 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, effective July 1, 2003.

/s/ KPMG LLP

Omaha, Nebraska
March 13, 2006

56

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2005 and 2004
(in thousands, except share data)

Assets	2005			2004
Current assets:
Cash	$	5,083		$	3,595
Accounts receivable, net	30,034			28,550
Other receivables	4,951			1,653
Material and supplies	4,285			3,866
Prepaid and other	1,786			1,939
Notes receivable - related party	—			1,000
Deferred income tax	29,190			—
Interest rate swaps	3,129			—
Assets of discontinued operations	90			102
Total current assets	78,548			40,705
Property, plant, and equipment, net	242,617			252,262
Goodwill	481,343			468,508
Investments	39,808			37,749
Intangible assets, net	3,662			—
Debt issue costs, net	9,145			18,812
Deferred income tax	47,160			—
Interest rate swaps	5,649			—
Other	207			1,100
Total assets	$	908,139		$	819,136
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable	$	12,030		$	14,184
Dividend payable	13,789			—
Other accrued liabilities	14,021			13,115
Accrued interest payable	288			16,582
Accrued bonuses	2,975			2,857
Deferred Credits	3,812			—
Current portion of long-term debt	677			524
Demand notes payable	338			382
Liabilities of discontinued operations	2,495			2,262
Total current liabilities	50,425			49,906
Long-term liabilities:
Long-term debt, net of current portion	606,748			809,908
Preferred shares subject to mandatory redemption	—			116,880
Other liabilities	4,108			12,667
Liabilities of discontinued operations	—			1,580
Total long-term liabilities	610,856			941,035
Minority interest	10			11
Common stock subject to put options, 16 shares at December 31, 2004	—			1,136
Stockholders’ equity (deficit):
Common stock:
Common stock	350			—
Class A voting stock	—			86
Class C nonvoting, convertible stock	—			8
Additional paid-in capital	590,131			198,519
Unearned compensation	(6,475		)	—
Accumulated other comprehensive income, net	5,477			—
Accumulated deficit	(342,635		)	(371,565		)
Total stockholders’ equity (deficit)	246,848			(172,952		)
Total liabilities and stockholders’ equity (deficit)	$	908,139		$	819,136

See accompanying notes to consolidated financial statements

57

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2005, 2004, and 2003
(in thousands, except per share data)

	2005			2004			2003
Revenues	$	262,843		$	252,645		$	231,432
Operating expenses:
Operating expenses, excluding depreciation and amortization and stock-based compensation	141,075			128,755			111,188
Depreciation and amortization	52,390			50,287			48,089
Stock-based compensation	2,350			49			15
Total operating expenses	195,815			179,091			159,292
Income from operations	67,028			73,554			72,140
Other income (expense):
Net gain (loss) on sale of investments and other assets	(11		)	104			608
Interest and dividend income	2,499			2,335			1,792
Interest expense	(46,416		)	(104,315		)	(90,224		)
Impairment on investments	(1,200		)	(349		)	—
Equity in net earnings of investees	11,302			10,899			10,092
Realized and unrealized losses on interest rate swaps	—			(112		)	(1,387		)
Other nonoperating, net	(87,746		)	(5,951		)	(1,505		)
Total other expense	(121,572		)	(97,389		)	(80,624		)
Loss from continuing operations before income taxes	(54,544		)	(23,835		)	(8,484		)
Income tax benefit (expense)	83,096			(516		)	236
Minority interest in income of subsidiaries	(2		)	(2		)	(2		)
Income (loss) from continuing operations	28,550			(24,353		)	(8,250		)
Discontinued operations:
Income from discontinued operations	—			—			1,929
Income on disposal of assets of discontiued operations	380			671			7,992
Income from discontinued operations	380			671			9,921
Net income (loss)	28,930			(23,682		)	1,671
Redeemable preferred stock dividends and accretion	—			—			(8,892		)
Gain on repurchase of redeemable preferred stock	—			—			2,905
Net income (loss) attributed to common shareholders	$	28,930		$	(23,682	)	$	(4,316	)
Basic weighted average shares outstanding	31,927			9,468			9,483
Diluted weighted average shares outstanding	31,957			9,468			9,483
Basic and diluted earnings (loss) per common share:
Continuing operations	$	0.89		$	(2.57	)	$	(1.50	)
Discontinued operations	0.02			0.07			1.04
Net income	0.91			(2.50		)	(0.46		)

See accompanying notes to consolidated financial statements.

58

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity (Deficit)
Years ended December 31, 2005, 2004, and 2003
(in thousands)

Common Stock		Class A Common		Class C Common		Additional paid-in	Unearned	Accumulated other comprehensive	Accumulated	Total stockholders’ equity
Shares	Amount	Shares	Amount	Shares	Amount	capital	compensation	income (loss)	deficit	(deficit)

Balance at December 31, 2002	—	$	—	8,643		$	86		809		$	8		$	207,347		$	—		$	(1,132	)	$	(352,459	)	$	(146,150	)
Net income	—	—		—		—			—		—			—			—			—			1,671			1,671
Compensation expense for stock-based awards	—	—		—		—			—		—			15			—			—			—			15
Other comprehensive loss from available-for-sale securities	—	—		—		—			—		—			—			—			1,469			—			1,469
Other comprehensive income from cash flow hedges	—	—		—		—			—		—			—			—			1,029			—			1,029
Repurchase redeemable preferred stock	—	—		—		—			—		—			—			—			—			2,905			2,905
Preferred stock accretion	—	—		—		—			—		—			(729		)	—			—			—			(729		)
Preferred stock dividends	—	—		—		—			—		—			(8,163		)	—			—			—			(8,163		)
Balance at December 31, 2003	—	—		8,643		86			809		8			198,470			—			1,366			(347,883		)	(147,953		)
Net income	—	—		—		—			—		—			—			—			—			(23,682		)	(23,682		)
Compensation expense for stock-based awards	—	—		—		—			—		—			49			—			—			—			49
Other comprehensive loss fromavailable-for-sale securities	—	—		—		—			—		—			—			—			(1,469		)	—			(1,469		)
Other comprehensive income from cash flow hedges	—	—		—		—			—		—			—			—			103			—			103
Balance at December 31, 2004	—	—		8,643		86			809		8			198,519			—			—			(371,565		)	(172,952		)
Net income	—	—		—		—			—		—			—			—			—			28,930			28,930
Net proceeds from issuance of common stock	25,000	250		—		—			—		—			431,671			—			—			—			431,921
Transfer of Class A and Class C to common stock	9,452	94		(8,643	)	(86		)	(809	)	(8		)	—			—			—			—			—
Exercise of stock options	98	1		—		—			—		—			183			—			—			—			184
Issuance of restricted shares, net of forfeitures	471	5		—		—			—		—			8,545			(8,550		)	—			—			—
Recognition of compensation expense	—	—		—		—			—		—			275			2,075			—			—			2,350
Dividends declared	—	—		—		—			—		—			(49,062		)	—			—			—			(49,062		)
Other comprehensive income from cash flow hedges	—	—		—		—			—		—			—			—			5,477			—			5,477
Balance at December 31, 2005	35,021	$	350	—		$	—		—		$	—		$	590,131		$	(6,475	)	$	5,477		$	(342,635	)	$	246,848

See accompanying notes to consolidated financial statements.

59

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
Years ended December 31, 2005, 2004, and 2003
(in thousands)

	2005				2004				2003
Net income (loss)			$	28,930			(23,682	)			$		1,671
Other comprehensive income (loss):
Available-for-sale securities:
Unrealized holding gains (losses)	$	—			(1,243	)			1,618
Less reclassification adjustment for gain realized in net income (loss)	—				(226	)			(149	)
Reclassification for other than temporary loss included in net income	—		—		—		(1,469	)	—		1,469
Cash flow hedges:
Change in net unrealized gain, net of tax expense of $3.3 million	5,477				—				—
Reclassification adjustment	—		5,477		103		103		1,029		1,029
Other comprehensive income (loss)			5,477				(1,366	)			2,498
Comprehensive income (loss)			$	34,407			(25,048	)			$	4,169

See accompanying notes to consolidated financial statements.

60

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2005, 2004, and 2003
(in thousands)

	2005			2004			2003
Cash flows from operating activities:
Net income (loss)	$	28,930		$	(23,682	)	$	1,671
Adjustments to reconcile net income (loss) to net cash provided by operating activities of continuing operations:
Income from discontinued operations	(380		)	(671		)	(9,921		)
Dividends and accretion on shares subject to mandatory redemption	2,362			20,181			9,049
Depreciation and amortization	52,390			50,287			48,089
Loss of preferred stock subject ot mandatory redemption	9,899			—			—
Amortization of debt issue costs	1,859			4,603			4,171
Provision for uncollectible revenue	3,245			1,718			1,028
Deferred income taxes	(84,208		)	—			—
Income from equity method investments	(11,302		)	(10,899		)	(10,092		)
Deferred patronage dividends	(77		)	(84		)	(233		)
Minority interest in income of subsidiaries	2			2			2
Loss on early retirement of debt	77,847			—			1,503
Write-off of offering costs	—			5,951			—
Net (loss) gain on sale of investments and other assets	11			(104		)	(608		)
Impairment on investments	1,200			349			—
Amortization of investment tax credits	(16		)	(27		)	(37		)
Stock-based compensation	2,350			49			15
Other non-cash item	(212		)	—			—
Change in fair value of interest rate swaps and reclassification of transition adjustment recorded in comprehensive income (loss)	—			(772		)	(6,664		)
Changes in assets and liabilities arising from continuing operations, net of acquisitions:
Accounts receivable	(3,103		)	(3,068		)	(3,801		)
Prepaid and other assets	576			(89		)	(771		)
Accounts payable	(3,428		)	(390		)	(7,185		)
Accrued interest payable	(16,309		)	(44		)	7,786
Other accrued liabilities	338			2,302			418
Income taxes	(363		)	(138		)	(149		)
Other assets/liabilities	71			501			(1,437		)
Total adjustments	32,752			69,657			31,163
Net cash provided by operating activities of continuing operations	61,682			45,975			32,834
Cash flows from investing activities of continuing operations:
Acquisition of telephone properties, net of cash acquired	(26,258		)	(225		)	(33,114		)
Acquisition of property, plant, and equipment	(28,099		)	(36,492		)	(33,595		)
Proceeds from sale of property, plant, and equipment	698			531			377
Distributions from investments	10,859			15,017			10,775
Payment on covenants not to compete	(110		)	(145		)	(536		)
Acquisition of investments	(12		)	—			(17		)
Proceeds from sale of investments and other assets	115			328			2,100
Net cash used in investing activities of continuing operations	(42,807		)	(20,986		)	(54,010		)

See accompanying notes to consolidated financial statements.

61

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Years ended December 31, 2005, 2004, and 2003
(in thousands)

	2005			2004			2003
Cash flows from financing activities of continuing operations:
Proceeds from issuance of long-term debt	699,959			178,550			317,680
Repayment of long-term debt	(905,675		)	(193,761		)	(294,414		)
Payment of fees and penalties associated with early retirement of long term debt	(61,037		)	—			—
Payment of deferred transaction fee	(8,445		)	—			—
Repurchase of shares of common stock subject to put options	(136		)	(1,000		)	(1,000		)
Repurchase of redeemable preferred stock	(129,141		)	—			(8,645		)
Loan origination and offering costs	(8,975		)	(7,750		)	(15,593		)
Dividends paid to minority stockholders	(4		)	(5		)	(4		)
Proceeds from the exercise of stock options	184			—			—
Net proceeds from issuance of common stock	431,921			—			—
Dividends paid to common stockholders	(35,298		)	—			—
Net cash used in financing activities of continuing operations	(16,647		)	(23,966		)	(1,976		)
Cash flows of discontinued operations (revised—see note 1(r)):
Operating cash flows	(740		)	(3,031		)	(134		)
Investing cash flows	—			—			23,495
Net increase (decrease) in cash	1,488			(2,008		)	209
Cash, beginning of year	3,595			5,603			5,394
Cash, end of year	$	5,083		$	3,595		$	5,603
Supplemental disclosures of cash flow information:
Interest paid	$	58,494		$	80,736		$	77,351
Income taxes paid, net of refunds	$	946		$	1,055		$	701
Supplemental disclosures of noncash financing activities:
Redeemable preferred stock dividends paid in-kind	$	—		$	—		$	8,163
Gain on repurchase of redemmable preferred stock	$	—		$	—		$	2,905
Accretion of redeemable preferred stock	$	—		$	—		$	729
Long-term debt issued in connection with Carrier Services’ Tranche B interest payment	$	—		$	115		$	1,548

See accompanying notes to consolidated financial statements.

62

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(1)   Organization and Summary of Significant Accounting Policies

(a) Organization

FairPoint Communications, Inc. (FairPoint) provides management services to its wholly owned subsidiaries: ST Enterprises, Ltd. (STE); MJD Ventures, Inc. (Ventures); MJD Services Corp. (Services); FairPoint Carrier Services, Inc. (Carrier Services) (formerly known as FairPoint Communications Solutions Corp.); FairPoint Broadband, Inc. (Broadband); and MJD Capital Corp. STE, Ventures, and Services also provide management services to their wholly owned subsidiaries.

Collectively, the wholly owned subsidiaries of STE, Ventures, and Services primarily provide telephone local exchange services in various states. Operations also include resale of long distance services, internet services, cable services, equipment sales, and installation and repair services. MJD Capital Corp. leases equipment to other subsidiaries of FairPoint. Carrier Services provides wholesale long distance services. Broadband provides wireless broadband services and wholesale data products.

STE’s wholly owned subsidiaries include Sunflower Telephone Company, Inc. (Sunflower); Northland Telephone Company of Maine, Inc. and STE/NE Acquisition Corp. (d.b.a. Northland Telephone Co. of Vermont), (collectively, the Northland Companies); and ST Long Distance, Inc. (ST Long Distance). Ventures’ wholly owned subsidiaries include Bentleyville Communications Corporation (Bentleyville), Berkshire Telephone Corporation (Berkshire), Sidney Telephone Company (Sidney); C-R Communications, Inc. (C-R); Taconic Telephone Corp. (Taconic); Ellensburg Telephone Company (Ellensburg); Chouteau Telephone Company (Chouteau); Utilities, Inc. (Utilities); Chautauqua and Erie Telephone Corporation (C&E); The Columbus Grove Telephone Company (Columbus Grove); The Orwell Telephone Company (Orwell); GTC Communications, Inc. (GT Com); Peoples Mutual Telephone Company (Peoples); Fremont Telcom Co. (Fremont); Fretel Communications, LLC (Fretel); Comerco, Inc. (Comerco); Marianna and Scenery Hill Telephone Company (Marianna); Community Service Telephone Co. (CST); and Commtel Communications Inc. (Commtel). Services’ wholly owned subsidiaries include Bluestem Telephone Company (Bluestem); Big Sandy Telecom, Inc. (Big Sandy); Columbine Telecom Company (Columbine); Odin Telephone Exchange, Inc. (Odin); Ravenswood Communications, Inc. (Ravenswood); and Yates City Telephone Company (Yates).

(b) Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of FairPoint and its subsidiaries (the Company). All intercompany transactions and accounts have been eliminated in consolidation.

The Company’s telephone subsidiaries follow the accounting for regulated enterprises prescribed by Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation. This accounting recognizes the economic effects of rate regulation by recording costs and a return on investment; as such, amounts are recovered through rates authorized by regulatory authorities. Accordingly, SFAS No. 71 requires the Company’s telephone subsidiaries to depreciate telephone plant over useful lives that would otherwise be determined by management. SFAS No. 71 also requires deferral of certain costs and obligations based upon approvals received from regulators to permit recovery of such amounts in future years. Criteria that would give rise to the discontinuance of SFAS No. 71 include (1) increasing competition restricting the wireline subsidiaries’ ability to establish prices to recover specific costs and (2) significant changes in the manner in which rates are set by regulators from cost-based regulation to another form of regulation. The Company’s telephone subsidiaries periodically review the

63

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

applicability of SFAS No. 71 based on the developments in their current regulatory and competitive environments.

(c) Use of Estimates

The Company’s management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the reported amounts of revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates.

(d) Revenue Recognition

Revenues are recognized as services are rendered and are primarily derived from the usage of the Company’s networks and facilities or under revenue-sharing arrangements with other communications carriers. Revenues are primarily derived from: access, pooling, local calling services, Universal Service Fund receipts, long distance services, Internet and data services, and other miscellaneous services. Local access charges are billed to local end users under tariffs approved by each state’s public utilities commission. Access revenues are derived for the intrastate jurisdiction by billing access charges to interexchange carriers and to regional Bell operating companies. These charges are billed based on toll or access tariffs approved by the local state’s public utilities commission. Access charges for the interstate jurisdiction are billed in accordance with tariffs filed by the National Exchange Carrier Association (NECA) or by the individual company and approved by the Federal Communications Commission.

Revenues are determined on a bill-and-keep basis or a pooling basis. If on a bill-and-keep basis, the Company bills the charges to either the access provider or the end user and keeps the revenue. If the Company participates in a pooling environment (interstate or intrastate), the toll or access billed is contributed to a revenue pool. The revenue is then distributed to individual companies based on their company-specific revenue requirement. This distribution is based on individual state public utilities commissions (intrastate) or the Federal Communication Commission’s (interstate) approved separation rules and rates of return. Distribution from these pools can change relative to changes made to expenses, plant investment, or rate of return. Some companies participate in federal and certain state universal service programs that are pooling in nature but are regulated by rules separate from those described above. These rules vary by state. Revenues earned through the various pooling arrangements are initially recorded based on the Company’s estimates.

Long distance retail and wholesale services are usage sensitive and are billed in arrears and recognized when earned. Internet and data services revenues are substantially all recurring revenues and are billed one month in advance and deferred until earned. The majority of the Company’s miscellaneous revenue is provided from billing and collection and directory services. The Company earns revenue from billing and collecting charges for toll calls on behalf of interexchange carriers. The interexchange carrier pays a certain rate per each message billed by the Company. The Company recognizes revenue from billing and collection services when the services are provided. The Company recognizes directory services revenue over the subscription period of the corresponding directory. Billing and collection is normally billed under contract or tariff supervision. Directory services are normally billed under contract.

64

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

(e) Accounts Receivable

Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. Receivable balances are reviewed on an aged basis and account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

The following is activity in the Company’s allowance for doubtful accounts receivable for the years ended December 31 (in thousands):

	2005			2004			2003
Balance, beginning of period	$	1,255		$	1,028		$	1,235
Acquisition adjustments	28			(143		)	202
Provision charged to expense	3,245			1,718			1,028
Amounts written off, net of recoveries	(2,407		)	(1,348		)	(1,437		)
Balance, end of period	$	2,121		$	1,255		$	1,028

(f) Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and trade receivables. The Company places its cash with high-quality financial institutions. Concentrations of credit risk with respect to trade receivables are principally related to receivables from other interexchange carriers and are otherwise limited to the Company’s large number of customers in several states.

(g) Investments

Investments consist of stock in CoBank, ACB (CoBank), Rural Telephone Bank (RTB), the Rural Telephone Finance Cooperative (RTFC), various cellular companies and partnerships and other minority equity investments, and Non-Qualified Deferred Compensation Plan assets. The stock in CoBank, RTB, and the RTFC is nonmarketable and stated at cost. For investments in partnerships, the equity method of accounting is used.

Non-Qualified Deferred Compensation Plan assets are classified as trading. The Company uses fair value reporting for marketable investments in debt and equity securities classified as either available-for-sale or trading. For available-for-sale securities, the unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are reported as a separate component of comprehensive income until realized or at such time as the Company determines a decline in value has occurred that is deemed to be other-than-temporary. Unrealized holding gains and losses on trading securities are included in other income.

To determine if an impairment of an investment exists, the Company monitors and evaluates the financial performance of the business in which it invests and compares the carrying value of the investee to quoted market prices (if available), or the fair values of similar investments, which in certain instances, is based on traditional valuation models utilizing multiples of cash flows. When circumstances indicate that a decline in the fair value of the investment has occurred and the decline is other than temporary, the

65

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

Company records the decline in value as a realized impairment loss and a reduction in the cost of the investment.

The Company currently receives patronage dividends from its investments in businesses organized as cooperatives for Federal income tax purposes (CoBank and RTFC stock). Patronage dividends represent cash distributions of the cooperative’s earnings and notices of allocations of earnings to the Company. Deferred and uncollected patronage dividends are included as part of the basis of the investment until collected. The RTB investment pays dividends annually at the discretion of its board of directors.

(h) Property, Plant, and Equipment

Property, plant, and equipment is carried at cost. Repairs and maintenance are charged to expense as incurred and major renewals and improvements are capitalized. For traditional telephone companies, the original cost of depreciable property retired, together with removal cost, less any salvage realized, is charged to accumulated depreciation. For all other companies, the original cost and accumulated depreciation are removed from the accounts and any gain or loss is included in the results of operations. Depreciation is determined using the straight-line method for financial reporting purposes.

In 2004 and 2005, the Company developed and implemented, with CSG Systems, Inc., an integrated end-user billing system. The costs to develop such system were accounted for in accordance with Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Aggregate capitalized costs (before accumulated amortization) totaled $8.6 million (of which, $5.1 million was capitalized in 2004) as of December 31, 2005, of which the majority represents payments for license fees and third-party consultants. As a result of the Company’s decision to convert to a new end-user billing system in November 2005, the capitalized costs associated with the CSG Systems, Inc. billing system will be amortized over its remaining useful life which was estimated to be 8 months (reduced from 5 years). The Company will capitalize certain costs associated with its new (MACC) billing system and these capitalized billing system costs will be amortized over its estimated useful life.

Also in November 2005, we reached an agreement with CSG Systems, Inc. in which we will receive total compensation from CSG Systems, Inc. of $5.1 million in order to relieve it from its responsibilities under the original service bureau contract. The Company recorded the $5.1 million as a deferred credit which will be amortized over the remaining life of the CSG contract (8 months). When amortized, a portion of the credit will offset depreciation expenses and a portion will offset billing expenses. Of this deferred credit, $1.3 million was recognized in 2005 and therefore, the balance of the deferred credit at December 31, 2005 was $3.8 million.

(i) Debt Issue and Offering Costs

Debt issue costs are being amortized over the life of the related debt, ranging from 3 to 10 years. During 2003, $5.0 million in net book value of debt issue costs were written off in association with refinancing activity classified as other nonoperating expense in the statements of operations. During 2004, the Company wrote-off debt issuance and offering costs of $6.0 million associated with an abandoned offering of Income Deposit Securities (IDSs), classified as other nonoperating expense in the statements of operations. The offering of IDSs was abandoned in December of 2004 in favor of the transactions described in note 2. As of December 31, 2005, debt issue and offering costs of $1.0 million remained capitalized after the write-off that are a direct and incremental benefit to the transactions described in note 2. In 2005, the Company entered into a new senior secured credit facility consisting of a revolving

66

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

facility in an aggregate principal amount of up to $100.0 million and a term facility in an aggregate principal amount of $588.5 million. Including the $1.0 million incurred during 2004, the Company incurred a total of $10.4 million of debt issuance costs associated with entering into the credit facility and subsequent amendments thereto.

Accumulated amortization of loan origination costs from continuing operations was $1.4 million, $14.9 million and $10.3 million at December 31, 2005, 2004 and 2003, respectively.

(j) Goodwill and Other Intangible Assets

Goodwill consists of the difference between the purchase price incurred in acquisitions using the purchase method of accounting and the fair value of net assets acquired. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, which the Company adopted effective January 1, 2002, goodwill is no longer amortized, but instead is assessed for impairment at least annually. During this assessment, management relies on a number of factors, including operating results, business plans, and anticipated future cash flows.

Other intangible assets recorded by the Company consist of acquired customer relationships. These intangible assets are amortized over their estimated useful lives which the Company determined to be 15 years.

(k)Impairment of Long-lived Assets

Long-lived assets, such as property, plant, and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell and depreciation ceases.

(l) Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

FairPoint files a consolidated income tax return with its subsidiaries. FairPoint has a tax-sharing agreement in which all subsidiaries are participants. All intercompany tax transactions and accounts have been eliminated in consolidation.

As part of the income tax provision process of preparing the Company’s consolidated financial statements, the Company is required to estimate its income taxes. This process involves estimating current tax expenses together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. In assessing the

67

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment, as well as all positive and negative evidence that would affect the recoverability of deferred tax assets. As a result of the offering, the Company has reduced its aggregate long term debt and expects a significant reduction in its annual interest expense. When considered together with the Company’s history of producing positive operating results and other evidence affecting the recoverability of deferred tax assets, the Company expects that future taxable income will more likely than not be sufficient to recover net deferred tax assets.

(m) Interest Rate Swap Agreements

The Company assesses interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company maintains risk management control systems to monitor interest rate cash flow risk attributable to both the Company’s outstanding and forecasted debt obligations. The risk management control systems involve the use of analytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates on the Company’s future cash flows.

The Company uses variable and fixed-rate debt to finance its operations, capital expenditures, and acquisitions. The variable-rate debt obligations expose the Company to variability in interest payments due to changes in interest rates. The Company believes it is prudent to limit the variability of a portion of its interest payments. To meet this objective, the Company enters into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. These swaps change the variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of the interest rate swaps, the Company pays a variable interest rate plus an additional payment if the variable rate payment is below a contractual rate, or it receives a payment if the variable rate payment is above the contractual rate. As of December 31, 2005, the Company had five interest rate swap agreements with a combined notional amount of $490.0 million that expire in 2007 to 2012. These interest rate swap agreements qualify as accounting hedges under SFAS No. 133. As of December 31, 2003, the Company had two interest rate swap agreements with a combined notional amount of $50.0 million that expired in May 2004. These interest rate swap agreements did not qualify as accounting hedges under SFAS No. 133.

On February 8, 2005, the Company entered into three interest rate swap agreements, with notional amounts of $130 million each, to effectively convert a portion of its variable rate interest exposure to fixed rates ranging from 3.76% to 4.11%, plus a 2.0% margin. These swap agreements expire beginning December 31, 2007 through December 31, 2009. On April 7, 2005, the Company entered into two additional interest rate swap agreements, one with the notional amount of $50.0 million to effectively convert a portion of its variable rate interest exposure to a fixed rate of 4.69%, plus a 2.0% margin, beginning on April 29, 2005 and ending on March 31, 2011, and one with the notional amount of $50.0 million to effectively convert a portion of its variable rate interest exposure to a fixed rate of 4.72%, plus a 2.0% margin, beginning on June 30, 2005 and ending on March 31, 2012. As a result of these swap agreements, as of December 31, 2005, approximately 82% of the Company’s indebtedness bore interest at fixed rates rather than variable rates. Effective on September 30, 2005, the Company amended the terms of its credit facility. This amendment reduced the effective interest rate margins applicable to the Company’s interest rate swap agreements by 0.25% to 1.75%.

68

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

These interest rate swaps qualify as cash flow hedges for accounting purposes. The effect of hedge ineffectiveness on net earnings was insignificant for the twelve months ended December 31, 2005. At December 31, 2005, the fair market value of these swaps was approximately $8.8 million and has been recorded, net of tax of $3.3 million, as a decrease in comprehensive income. Of the $8.8 million, $3.1 million has been included in other current assets and $5.7 million has been included in other long-term assets.

In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Certain Hedging Activities. In June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment to SFAS No. 133. SFAS No. 133 and SFAS No. 138 require that all derivative instruments be recorded on the balance sheet at their respective fair values. The Company adopted SFAS No. 133 and SFAS No. 138 on January 1, 2001. In accordance with the transition provisions of SFAS No. 133, the Company recorded a cumulative-effect-type loss adjustment (the transition adjustment) of $(4.7) million in other comprehensive income (loss) to recognize at fair value all interest rate swap agreements. As of December 31, 2004, the Company has reclassified to nonoperating income (expense) the entire transition adjustment that was recorded in other comprehensive income (loss). The fair value of the Company’s interest rate swap agreements is determined from valuations received from financial institutions. The fair value indicates an estimated amount the Company would pay if the contracts were canceled or transferred to other parties.

Amounts receivable or payable under interest rate swap agreements are accrued at each balance sheet date and gains and losses related to effective hedges are reported, net of tax effect, as a separate component of comprehensive income. Changes associated with swap agreements that did not qualify as accounting hedges are included as adjustments to realized and unrealized gains (losses) on interest rate swaps.

The following is a summary of amounts included in realized and unrealized gains (losses) on interest rate swaps for the twelve months ended December 31, 2004 and 2003 (in thousands):

	2004			2003
Change in fair value of interest rate swaps	$	874		$	7,693
Reclassification of transition adjustment included in other comprehensive income (loss)	(103		)	(1,029		)
Realized losses	(883		)	(8,051		)
Total	$	(112	)	$	(1,387	)

(n) Stock Option Plans

At December 31, 2005, the Company had four stock-based employee compensation plans. The Company accounts for its stock option plans using the intrinsic-value-based method prescribed by Accounting Principles Board 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 exceeds the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation, permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. SFAS No. 123 allows entities to continue to apply the provisions of APB No. 25 and provide pro forma net income disclosures as if the fair-value method defined in SFAS

69

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

No. 123 had been applied. The Company has elected to continue to apply the intrinsic-value-based method of accounting under APB No. 25 and has adopted the disclosure requirements of SFAS No. 123.

The Company calculates stock-based compensation pursuant to the disclosure provisions of SFAS No. 123 using the straight-line method over the vesting period of the option. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company’s net pro forma income (loss) would have been (in thousands, except per share data):

	2005			2004			2003
Net income (loss), as reported	$	28,930		$	(23,682	)	$	1,671
Stock-based compensation expense included in reported net income (loss), net of related tax effect in 2005 of $0.9 million(1)	1,466			49			15
Stock-based compensation determined under fair value based method, net of related tax effect in 2005 of $0.9 million(1)	(1,447		)	(656		)	(658		)
Pro forma net income (loss)	$	28,949		$	(24,289	)	$	1,028
Basic and diluted earnings per common share, as reported:	$	0.91		$	(2.50	)	$	(0.46	)
Basic and diluted earnings per common share, proforma:	$	0.91		$	(2.57	)	$	(0.52	)

(1)Amounts shown for 2004 and 2003 are not net of tax effect due to the recognition of a valuation allowance associated with net operating losses.

(o) Certain Financial Instruments with Characteristics of Liabilities and Equity

The Company prospectively adopted SFAS No. 150 effective July 1, 2003. The SFAS No. 150 adoption had no impact on net income (loss) attributed to common shareholders for any of the periods presented. SFAS No. 150 requires the Company to classify as a long-term liability its Series A preferred stock and to reclassify dividends and accretion from the Series A preferred stock as interest expense. Such stock is described as “preferred shares subject to mandatory redemption” in the consolidated balance sheets as of December 31, 2004 and dividends and accretion on these shares are included in pretax income prior to the repurchase of these shares whereas previously they were presented as a reduction to equity (a dividend) and, therefore, a reduction of net income available to common shareholders.

(p) Business Segments

Under the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company’s only separately reportable business segment is its traditional telephone operations. The Company’s traditional telephone operations are conducted in rural, suburban, and small urban communities in various states. The operating income of this segment is reviewed by the chief operating decision maker to assess performance and make business decisions. Due to the sale of the Company’s competitive communications operations, such operations (which were previously reported as a separate segment) are classified as discontinued operations.

70

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

(q) Earnings Per Share

Earnings per share has been computed in accordance with SFAS No. 128, Earnings Per Share. Basic earnings per share is computed by dividing net income (loss) less dividends accrued on Series A preferred shares subject to mandatory redemption and plus discounts on the redemption of such shares by the weighted average number of common shares outstanding for the period. Except when the effect would be anti-dilutive, the diluted earnings per share calculation includes the impact of restricted units, restricted stock and shares that could be issued under outstanding stock options.

The number of potential common shares excluded from the calculation of diluted net loss per share, prior to the application of the treasury stock method, is as follows (in thousands):

	Year ended December 31
	2005	2004	2003
Contingent stock options	833	833	833
Shares excluded as effect would be anti-dilutive:
Stock options	241	356	416
Restricted stock	471	—	—
Restricted units	34	26	27
	1,579	1,215	1,276

(r) Discontinued Operations

In 2005, the Company has separately disclosed the operating, investing and financing portions of the cash flows attributable to its discontinued operations, which in prior periods were reported on a combined basis as a single amount.

(s) New Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123(R). This new standard requires companies to adopt the fair value methodology of valuing stock-based compensation and recognize that valuation in the financial statements from the date of grant. The adoption of SFAS No. 123(R)’s fair value method is not expected to have an adverse impact on our income from operations. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as disclosed above. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. We expect to adopt the provisions of SFAS No. 123(R) using the prospective application method, for awards granted prior to becoming a public company and valued using the minimum value method, and using the modified prospective application method for awards granted subsequent to becoming a public company. The Company will adopt SFAS No. 123(R) effective January 1, 2006, with no restatement of any prior periods.

In March 2005, the FASB issued FIN 47, “Accounting for Conditional Asset Retirement Obligations,” an interpretation of FASB No. 143. FIN  47 clarifies that the term conditional asset retirement obligation as used in FASB No. 143 refers to a legal obligation to perform an asset retirement activity in which the timing or method of settlement are conditional on a future  event that may or may not be within the control of the entity. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective for the year ended

71

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

December 31, 2005 and was adopted by the Company in the fourth quarter of 2005. The Company accounts for its wireline operations under SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation”. Therefore, in accordance with federal and state regulations, the Company is following the FCC’s Part 32 accounting. As a result of the Company’s accounting under SFAS No. 71, the adoption of FIN 47 had no impact on the Company. The Company evaluated the impact of FIN 47 on its non-regulated assets and determined that the impact was immaterial.

(2)Initial Pubic Offering and Other Transactions

(a) General

On February 8, 2005, the Company consummated an initial public offering, or the offering, of 25,000,000 shares of its common stock, par value $0.01 per share, or common stock, at a price to the public of $18.50 per share.

In connection with the offering, the Company entered into a new senior secured credit facility, or the credit facility, with a syndicate of financial institutions, including Deutsche Bank Trust Company Americas, as administrative agent. The credit facility is comprised of a revolving facility in an aggregate principal amount of $100 million (less amounts reserved for letters of credit) and a term facility in an aggregate principal amount of $588.5 million (including a $22.5 million delayed draw facility). The revolving facility has a six year maturity and the term facility has a seven year maturity. The offering, the credit facility and the transactions described below are referred to herein collectively as the transactions.

The Company received gross proceeds of $462.5 million from the offering which, net of costs incurred of $30.6 million related to the offering, was allocated to paid-in capital. The Company used the gross proceeds of $462.5 million from the offering together with borrowings of $566.0 million under the term facility of the credit facility as follows:

·$176.7 million to repay in full all outstanding loans under the Company’s old credit facility (including accrued interest);

·$122.1 million to repurchase $115.0 million aggregate principal amount of the Company’s 9 1¤2% senior subordinated notes due 2008, or the 9 1¤2% notes, pursuant to the tender offer and consent solicitation for such notes (including accrued interest, tender premiums and consent payments);

·$51.8 million to repurchase $50.8 million aggregate principal amount of the Company’s floating rate callable securities due 2008, or the floating rate notes, pursuant to the tender offer and consent solicitation for such notes (including accrued interest, tender premiums and consent payments);

·$193.4 million to repurchase $173.1 million aggregate principal amount of the Company’s 12 1¤2% senior subordinated notes due 2010, or the 12 1¤2% notes, pursuant to the tender offer and consent solicitation for such notes (including accrued interest, tender premiums and consent payments);

·$274.9 million to repurchase $223.0 million aggregate principal amount of the Company’s 11 7¤8% senior notes due 2010, or the 11 7¤8% notes, pursuant to the tender offer and consent solicitation for such notes (including accrued interest, tender premiums and consent payments);

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FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

·$129.2 million to repurchase all of the Company’s series A preferred stock subject to mandatory redemption, or the series A preferred stock, from the holders thereof (together with accrued and unpaid dividends thereon);

·$10.6 million to repay a substantial portion of the Company’s subsidiaries’ outstanding long-term debt (including accrued interest);

·$7.0 million to repay in full a promissory note issued by the Company in connection with a past acquisition;

·$18.4 million to invest in temporary investments pending the redemption of the 9 1¤2% notes and the floating rate notes not tendered in the tender offers for such notes; and

·$44.4 million to pay fees and expenses, including underwriting discounts of $27.8 million, $8.2 million of debt issuance costs associated with the credit facility and a transaction fee of approximately $8.4 million paid to Kelso & Company, one of the Company’s investors.

On March 10, 2005, the Company used $18.4 million which it had invested in temporary investments, together with $6.6 million of cash on hand, to redeem the $0.2 million aggregate principal amount of the 9 1¤2% notes (including accrued interest and redemption premiums) that were not tendered in the tender offer for such notes and the $24.2 million aggregate principal amount of the floating rate notes (including accrued interest) that were not tendered in the tender offer for such notes.

On May 2, 2005, the Company used $22.4 million of borrowings under the delayed draw facility of the credit facility to redeem the $19.9 million aggregate principal amount of the 12 1¤2% notes (including accrued interest and redemption premiums) that were not tendered in the tender offer for such notes. In connection with such redemption, a premium of $1.2 million was recorded and an additional $0.4 million of existing debt issuance costs has been subsequently charged off, resulting in the recognition of a loss of $1.6 million for retirement of debt in the second quarter of 2005.

The Company reported other expense in the amount of $87.7 million, comprised of a $77.8 million loss on early retirement of debt and a $9.9 million loss on redemption of series A preferred stock. With respect to the $77.8 million loss on early retirement of debt, $16.8 million was recorded for the write-off of existing debt issuance costs and the remaining $61.0 million was fees and penalties.

(b) Dividends

The Company has adopted a dividend policy under which a substantial portion of the cash generated by the Company’s business in excess of operating needs, interest and principal payments on indebtedness, dividends on future senior classes of capital stock, if any, capital expenditures, taxes and future reserves, if any, would in general be distributed as regular quarterly dividend payments to the holders of its common stock, rather than retained and used for other purposes.

On December 14, 2005, the Company declared a dividend of $0.39781 per share of common stock, which was paid on January 18, 2006 to holders of record as of December 30, 2005. In 2005, the Company has paid dividends totaling $35.3 million, or $1.41886 per share of common stock.

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FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

(3)Acquisitions

On December 1, 2003, the Company acquired 100% of the capital stock of CST and Commtel. The purchase price for this acquisition was $32.6 million. The Company believes the entire amount of goodwill will be deductible for income tax purposes. Acquisition costs were $0.3 million in 2003. This acquisition has been accounted for using the purchase method and, accordingly, the results of operations have been included in the Company’s consolidated financial statements from the date of acquisition. The excess of the purchase price and acquisition costs over the fair value of the net identifiable assets acquired was $25.1 million and has been recognized as goodwill.

On May 2, 2005, the Company completed the acquisition of Berkshire Telephone Corporation, or Berkshire. The purchase price was approximately $20.3 million (or $16.4 million net of cash acquired). Goodwill on this transaction will not be deductible for income tax purposes. The Company incurred acquisition costs of $0.6 million. Berkshire is an independent local exchange carrier that provides voice communication, cable and internet services. Berkshire’s communities of service are adjacent to those of Taconic Telephone Corp., one of the Company’s subsidiaries. The acquisition is referred to herein as the Berkshire acquisition.

The Berkshire acquisition has been accounted for using the purchase method of accounting for business combinations and, accordingly, the acquired assets and liabilities have been recorded at their estimated fair values as of the date of acquisition, and its results of operations have been included in the Company’s consolidated financial statements from the date of acquisition. Based upon the Company’s preliminary purchase price allocation, subject to final settlement of an escrow, the excess of the purchase price and acquisition costs over the fair value of the net identifiable assets acquired was approximately $11.0 million. The Company recorded an intangible asset related to the acquired company’s customer relationships of $2.4 million and the remaining $8.6 million has been recognized as goodwill. The estimated useful life of the $2.4 million intangible asset is 15 years.

On September 1, 2005, the Company completed the acquisition of Bentleyville Communications Corporation, or Bentleyville. The purchase price was approximately $11.0 million (or $9.3 million net of cash acquired). Goodwill on this transaction will not be deductible for income tax purposes. The Company incurred acquisition costs of $0.4 million. Bentleyville provides telecommunications, cable and internet services to rural areas of Southwestern Pennsylvania which are adjacent to the Company’s existing operations in Pennsylvania. The acquisition is referred to herein as the Bentleyville acquisition.

The Bentleyville acquisition has been accounted for using the purchase method of accounting for business combinations and, accordingly, the acquired assets and liabilities have been recorded at their estimated fair values as of the date of acquisition, and its results of operations have been included in the Company’s consolidated financial statements from the date of acquisition. Based upon the Company’s preliminary purchase price allocation, subject to final settlement of escrow, the excess of the purchase price and acquisition costs over the fair value of the net identifiable assets acquired was approximately $4.6 million. The Company recorded an intangible asset related to the acquired company’s customer relationships of $1.4 million and the remaining $3.2 million has been recognized as goodwill. The estimated useful life of the $1.4 million intangible asset is 15 years.

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FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

The allocation of the total net purchase price of the Berkshire and Bentleyville acquisitions is shown in the table below (in thousands):

Current assets	$	8,067
Property, plant, and equipment	14,585
Investments	2,770
Excess cost over fair value of net assets acquired	12,835
Other assets	25
Intangible assets	3,800
Current liabilities	(2,317		)
Long term debt	(2,690		)
Other liabilities	(4,703		)
Total net purchase price	$	32,372

The following unaudited pro forma information presents the combined results of operations of the Company as though the Berkshire acquisition and the Bentleyville acquisition each had been consummated on January 1, 2004. These results include certain adjustments, mainly associated with increased interest expense on debt and amortization of intangible assets related to the acquisitions and the related income tax effects. The pro forma financial information does not necessarily reflect the results of operations as if the Berkshire acquisition and the Bentleyville acquisition each had been consummated at the beginning of the period or which may be attained in the future (in thousands, except per share data).

	Pro forma year
	ended December 31,
	2005		2004
Revenues	$	267,303	$	262,562
Income (loss) from continuing operations	27,962		(25,401		)
Net income (loss)	28,342		(24,730		)
Earnings (loss) per common share from continuing operations:
Basic	$	0.88	$	(2.68	)
Diluted	0.87		(2.68		)
Earnings (loss) per common share:
Basic	$	0.89	$	(2.61	)
Diluted	0.89		(2.61		)

(4)Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill were as follows (in thousands):

Balance, December 31, 2003	$	468,845
Acquisition adjustments of CST and Commtel	(337		)
Balance, December 31, 2004	468,508
Acquisition of Berkshire and Bentleyville	12,835
Balance, December 31, 2005	$	481,343

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FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

As required under SFAS No. 142, the Company updated its annual impairment testing of goodwill as of December 31, 2005, 2004, and 2003, and determined that no impairment loss was required to be recognized.

In 2005, as part of the Berkshire and Bentleyville acquisitions, the Company has recorded intangible assets related to the acquired companies’ customer relationships of $2.4 million and $1.4 million, respectively. These intangible assets will be amortized over 15 years using the straight-line method. As of December 31, 2005, accumulated amortization related to the customer relationship intangibles was $0.1 million. The intangible assets are included in Intangible Assets, net on the Consolidated Balance Sheet. Amortization expense related to these customer relationship intangibles is expected to be approximately $0.3 million per year over the next five years.

(5)Property, Plant, and Equipment

A summary of property, plant, and equipment from continuing operations is shown below (in thousands):

	Estimated
	life (in years)		2005			2004
Land		—	$	4,096		$	3,851
Buildings and leasehold improvements		2-40	39,889			36,339
Telephone equipment		3-50	649,465			615,976
Cable equipment		3-20	10,287			3,143
Furniture and equipment		3-34	19,219			17,098
Vehicles and equipment		3-20	25,105			22,011
Computer software		3-5	11,861			4,577
Total property, plant, and equipment			759,922			702,995
Accumulated depreciation			(517,305		)	(450,733		)
Net property, plant, and equipment			$	242,617		$	252,262

The telephone company composite depreciation rate for property and equipment was 7.38%, 7.32%, and 7.46% in 2005, 2004, and 2003, respectively. Depreciation expense from continuing operations, excluding amortization of intangible assets and previously disclosed deferred billing system credits, for the years ended December 31, 2005, 2004, and 2003 was $53.5 million, $50.3 million, and $47.1 million, respectively.

(6)Investments

(a) Marketable Equity Securities

As of December 31, 2005, the Company no longer holds any marketable equity investments classified as available-for-sale. Following an August 2, 2004 announcement by Choice One of a financial restructuring under Chapter 11 of the United States Bankruptcy Code, the quoted market value of the Company’s investment in Choice One Communications Inc.’s common stock declined to $33,000. The Company determined that the decline in fair value was other-than-temporary and recorded an impairment loss of $0.5 million in the third quarter of 2004, of which $0.4 million was recorded as an expense in the consolidated statement of operations and $0.1 million was recorded as a reduction in accumulated other comprehensive income. On November 8, 2004, Choice One exited Chapter 11 and, in accordance with its

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FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

plan of reorganization, Choice One’s preferred stockholders and common stockholders did not receive any recovery and all of the preferred stock and common stock has now been cancelled.

Proceeds from sales of available-for-sale securities were $0.3 million and $0.3 million in 2004 and 2003, respectively. Gross gains of $0.1 million and $0.1 million were realized on those sales in 2004 and 2003, respectively.

The Company’s noncurrent investments at December 31, 2005 and 2004 consist of the following:

	2005			2004
	(in thousands)
Equity method investments in cellular companies and partnerships:
Orange County—Poughkeepsie Limited Partnership		$	4,138	$	3,590
Chouteau Cellular Telephone Company		46		72
Illinois Valley Cellular RSA 2, Inc.		1,409		2,037
Other equity method investments		1,104		1,132
Investments in securities carried at cost:
RTB stock		22,796		20,125
CoBank stock and unpaid deferred CoBank patronage		4,664		5,221
RTFC secured certificates and unpaid deferred RTFC patronage		480		419
Southern Illinois Cellular Corp.		4,552		4,552
Other nonmarketable minority equity investments		55		33
Nonqualified deferred compensation plan assets		564		568
Total investments		$	39,808	$	37,749

(b) Equity Method Investments

The Company records its share of the earnings or losses of the investments accounted for under the equity method on a three-month lag. The investments accounted for under the equity method and the Company’s ownership percentage as of December 31, 2005 and 2004 are summarized below:

	2005		2004
Chouteau Cellular Telephone Company	33.7	%	33.7	%
ILLINET Communications, LLC	9.1	%	9.1	%
Orange County—Poughkeepsie Limited Partnership	7.5	%	7.5	%
ILLINET Communications of Central IL LLC	5.2	%	5.2	%
Syringa Networks, LLC	13.9	%	13.9	%
Illinois Valley Cellular RSA 2, Inc.	25.0	%	25.0	%

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FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

Earnings in equity investments for the years ended December 31, 2005, 2004, and 2003 consisted of the following (in thousands):

	2005		2004		2003
Orange County—Poughkeepsie Limited Partnership	$	10,523	$	10,249	$	8,939
Illinois Valley Cellular RSA 2, Inc.	477		372		543
Illinois Valley Cellular RSA 2-I, RSA 2- II, and RSA 2-III Partnerships	—		—		35
Chouteau Cellular Telephone Company	—		2		471
Other, net	302		276		104
Total	$	11,302	$	10,899	$	10,092

Distributions from investments during the years ended December 31, 2005, 2004, and 2003 consisted of the following (in thousands):

	2005		2004		2003
Orange County—Poughkeepsie Limited Partnership	$	9,975	$	11,775	$	10,125
Illinois Valley Cellular RSA 2, Inc.	—		375		325
Illinois Valley Cellular RSA 2-I, RSA 2- II, and RSA 2-III Partnerships	—		—		147
Chouteau Cellular Telephone Company	40		2,524		—
CoBank, ACB	634		—		—
Distributions from other equity investments	210		343		178
Total	$	10,859	$	15,017	$	10,775

Chouteau Cellular Telephone Company (a limited partnership in which the Company holds a 1.0% general partner interest and a 32.67% limited partner interest) (Chouteau) is an investment vehicle that holds a 25% member interest in Independent Cellular Telephone, LLC (ICT). ICT, in turn, is an investment vehicle that holds a 44.45% member interest in United States Cellular Telephone of Greater Tulsa, LLC (Tulsa, LLC).

In January 2004, ICT sold its membership interest in Tulsa, LLC and, as a result, Chouteau Cellular Telephone Company made a $2.5 million distribution to the Company. Subsequent to the sale, the Company continues to have an investment in Chouteau Cellular Telephone Company, but the partnership assets are minimal and do not include any interests in the cellular telephone business of Chouteau.

During 2003, the Company sold its ownership percentages of Illinois Valley Cellular RSA 2-I Partnership, Illinois Valley Cellular RSA 2-II Partnership, and Illinois Valley Cellular RSA 2-III Partnership. Proceeds from the sales of these investments were $1.8 million and gross gains of approximately $0.4 million were realized on these sales.

During 2005, the Company determined that the carrying amount of its investment in Illinois Valley Cellular RSA No. 2, which is accounted for under the equity method, exceeded the estimated fair value and such decline was “other-than-temporary.”  As a result, the Company recorded a non-cash impairment charge of $1.2 million. This charge is classified as impairment on investments in the consolidated statements of operations.

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FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

(c) Investments in Equity Securities Carried at Cost

The aggregate cost of the Company’s cost method investments totaled $33.1 million at December 31, 2005. These investments were not evaluated for impairment because (a) the Company did not estimate the fair value of those investments in accordance with paragraphs 14 and 15 of SFAS No. 107 Disclosures About Fair Value of Financial Instruments, and (b) the Company did not identify any events or circumstances that may have had a significant adverse effect on the fair value of those investments.

(7)   Long-term Debt

Long-term debt at December 31, 2005 and 2004 is shown below (in thousands):

	2005			2004
2005 Senior secured notes, variable rates ranging from 5.82% to 7.97% (weighted average rate of 5.85%) at December 31, 2005, due 2011 to 2012	$	602,275		$	—
1998 Senior secured notes, variable rates ranging from 6.44% to 8.75% at December 31, 2004	—			182,357
Senior subordinated notes due 2008:
Fixed rate notes, 9.50%	—			115,207
Variable rate notes, 6.4875% at December 31, 2004	—			75,000
Senior subordinated notes, 12.50%, due 2010	—			193,000
Senior notes, 11.875%, due 2010	2,050			225,000
Senior notes to RTFC:
Fixed rate, ranging from 8.2% to 9.20%, due 2009 to 2014	3,100			2,278
Variable rate, 6.15% at December 31, 2004, due 2009	—			3,415
Subordinated promissory notes, 7.00%, due 2005	—			7,000
First mortgage notes to Rural Utilities Service, fixed rates ranging from 4.96% to 10.78%, due 2005 to 2016	—			6,034
Senior notes to RTB, fixed rates ranging from 7.50% to 8.00%, due 2008 to 2014	—			1,141
Total outstanding long-term debt	607,425			810,432
Less current portion	(677		)	(524		)
Total long-term debt, net of current portion	$	606,748		$	809,908

The approximate aggregate maturities of long-term debt for each of the five years subsequent to December 31, 2005 are as follows (in thousands):

Fiscal year:
2006	$	677
2007	714
2008	753
2009	149
2010	2,210
Thereafter	602,922
	$	607,425

79

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

(a) 2005 Senior Secured Notes

On February 8, 2005, the Company entered into a credit facility consisting of a revolving facility in an aggregate principal amount of up to $100.0 million and a term facility in an aggregate principal amount of $588.5 million. On the closing date of the Company’s initial public offering, the Company drew $566.0 million against the term facility. In addition, on May 2, 2005, the Company drew $22.5 million of borrowings under the delayed draw term facility of the credit facility. The Company incurred approximately $10.4 million of debt issuance costs associated with entering into the credit facility and subsequent amendments thereto.

The term facility matures in February 2012 and the revolving facility matures in February 2011. Borrowings bear interest, at the Company’s option, for the revolving facility and for the term facility at either (a) the Eurodollar rate (as defined in the credit facility) plus an applicable margin or (b) the Base rate (as defined in the credit facility) plus an applicable margin. The Eurodollar rate applicable margin and the Base rate applicable margin for loans under the credit facility are 2.0% and 1.0%, respectively. Effective on September 30, 2005, the Company amended its credit facility to reduce the effective interest rate margins on the $588.5 million term facility by 0.25% to 1.75% on Eurodollar loans and to 0.75% for Base rate loans. Interest with respect to Base rate loans is payable quarterly in arrears and interest with respect to Eurodollar loans is payable at the end of the applicable interest period and every three months in the case of interest periods in excess of three months.

The credit facility provides for payment to the lenders of a commitment fee on any unused commitments equal to 0.5% per annum, payable quarterly in arrears, as well as other fees.

The credit facility requires certain mandatory prepayments, including first to prepay outstanding term loans under the credit facility and, thereafter, to repay loans under the revolving facility and/or to reduce revolving facility commitments with, subject to certain conditions and exceptions, 100% of the net cash proceeds the Company receives from any sale, transfer or other disposition of any assets, 100% of net casualty insurance proceeds and 100% of the net cash proceeds the Company receives from the issuance of permitted securities and, at certain times if the Company is not permitted to pay dividends, with 50% of the increase in the Company’s Cumulative Distributable Cash (as defined in the credit facility) during the prior fiscal quarter. Reductions to the revolving commitments under the credit facility from the foregoing recapture events will not reduce the revolving commitments under the credit facility below $50.0 million.

The credit facility provides for voluntary prepayments of the revolving facility and the term facility and voluntary commitment reductions of the revolving facility, subject to giving proper notice and compensating the lenders for standard Eurodollar breakage costs, if applicable.

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FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

The credit facility requires that the Company maintain certain financial covenants. The credit facility contains customary affirmative covenants, including, without limitation, the following tests:  a minimum interest coverage ratio equal to or greater than 3.0:1 and a maximum leverage ratio equal to or less than 5.25:1. The credit facility also contains negative covenants and restrictions, including, among others, with respect to redeeming and repurchasing other indebtedness, loans and investments, additional indebtedness, liens, capital expenditures, changes in the nature of the Company’s business, mergers, acquisitions, asset sales and transactions with the Company’s affiliates. The credit facility restricts the Company’s ability to declare and pay dividends on its common stock as follows:

·The Company may use all of its available cash accumulated after April 1, 2005 plus certain incremental funds to pay dividends, but may not in general pay dividends in excess of such amount. “Available cash” is defined in the credit facility as Adjusted EBITDA (a) minus (i) interest expense, (ii) repayments of indebtedness other than repayments of the revolving facility (unless funded by debt or equity), (iii) capital expenditures (unless funded by long-term debt, equity or the proceeds from asset sales or insurance recovery events), (iv) cash taxes, (v) cash consideration paid for acquisitions (unless funded by debt or equity), (vi) cash paid to make certain investments, and (vii) certain non-cash items excluded from Adjusted EBITDA and paid in cash and (b) plus (i) the cash amount of extraordinary gains and gains on sales of assets and (ii) certain non-cash items excluded from Adjusted EBITDA and received in cash. “Adjusted EBITDA” is defined in the credit facility as Consolidated Net Income (which is defined in the credit facility and includes distributions from investments) (a) plus the following to the extent deducted from Consolidated Net Income: provision for income taxes, interest expense, depreciation, amortization, losses on sales of assets and other extraordinary losses, and certain other non-cash items, and (b) minus, to the extent included in Consolidated Net Income, gains on sales of assets and other extraordinary gains and all non-cash items.

·The Company may not pay dividends if a default or event of default under the credit facility has occurred and is continuing or would exist after giving effect to such payment, if the Company’s leverage ratio is above 5.00 to 1.00 or if the Company does not have at least $10 million of cash on hand (including unutilized commitments under the credit facility’s revolving facility).

The credit facility also permits the Company to use available cash to repurchase shares of its capital stock, subject to the same conditions.

The Company may obtain letters of credit under the revolving facility to support obligations of the Company and/or obligations of its subsidiaries incurred in the ordinary course of business in an aggregate principal amount not to exceed $10.0 million and subject to limitations on the aggregate amount outstanding under the revolving facility. As of December 31, 2005, a letter of credit had been issued for $1.2 million.

The credit facility is guaranteed, jointly and severally, subject to certain exceptions, by all first tier subsidiaries of the Company. The Company has provided to Deutsche Bank Trust Company Americas, as collateral agent for the benefit of the lenders under the credit facility and certain hedging creditors under permitted hedging agreements, collateral consisting of (subject to certain exceptions) 100% of the Company’s equity interests in the subsidiary guarantors and certain other intermediate holding company subsidiaries. Newly acquired or formed direct or indirect subsidiaries of the Company which own equity

81

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

interests of any subsidiary that is an operating company will be required to provide the collateral described above.

The credit facility contains customary events of default, including but not limited to, failure to pay principal, interest or other amounts when due, breach of covenants or representations, cross-defaults to certain other indebtedness in excess of specified amounts, judgment defaults in excess of specified amounts, certain ERISA defaults, the failure of any guaranty or security document supporting the credit facility and certain events of bankruptcy and insolvency.

(b) 1998 Senior Secured Notes

On March 30, 1998, the Company closed a $315 million senior secured credit facility (the Credit Facility) which committed $75 million of term debt (tranche C) amortized over 9 years, $155 million of term debt (tranche B) amortized over 8 years, and $85 million of reducing revolving credit facility debt with a term of 6.5 years. On March 14, 2000, an additional $165 million reducing revolving credit facility with a term of 4.5 years was committed and made available to the Company under the Credit Facility. The Credit Facility required that the Company maintain certain financial covenants.

The credit facility was amended and restated as part of a refinancing completed on March 6, 2003. The amended and restated credit facility provides for, among other things, rescheduled amortization and an excess cash flow sweep with respect to the tranche C term facility. The amended and restated credit facility consisted of term loan facilities (consisting of tranche A loans and tranche C loans) in an aggregate principal amount of $156.4 million and a revolving credit facility in an aggregate principal amount of $70.0 million. All of the Company’s obligations under the credit facility were unconditionally and irrevocably guaranteed jointly and severally by four of its mid-tier subsidiaries. Outstanding debt under the amended and restated credit facility was secured by a first priority perfected security interest in all of the capital stock of certain of the Company’s subsidiaries.

On January 30, 2004, the Company amended its amended and restated credit facility to increase its revolving loan facility from $70.0 million to $85.0 million and its tranche A term loan facility from $30.0 million to $40.0 million. The Company used all of the additional borrowing under the tranche A term loan facility and a portion of the borrowings under the revolving loan facility to repay in full all of the indebtedness under the Carrier Services’ senior secured notes. There was no gain or loss on the extinguishment of this indebtedness.

The 1998 Senior Secured Notes were repaid in full in 2005 using proceeds from the Company’s initial public offering and borrowings under the 2005 Senior Secured Notes.

82

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

(c) Fixed Rate and Floating Rate Senior Subordinated Notes Issued in 1998

FairPoint issued $125.0 million aggregate principal amount of senior subordinated notes (the 1998 Fixed-Rate Notes) and $75.0 million of floating-rate notes (the 1998 Floating-Rate Notes) in 1998. The 1998 Fixed-Rate Notes bore interest at the rate of 9.5% per annum and the 1998 Floating Rate Notes bore interest at a rate per annum equal to LIBOR plus 418.75 basis points, in each case payable semiannually in arrears. The LIBOR rate on the 1998 Floating-Rate Notes was determined semiannually.

At December 31, 2004 the Company’s restricted covenants on its fixed-rate and floating-rate senior subordinated notes issued in 1998, its senior subordinated notes issued in 2000, and its senior notes issued in 2003 did not allow the Company to make any dividend payments.

The 1998 Fixed Rate Notes and the 1998 Floating-Rate Notes were repaid in full in 2005 using proceeds from the Company’s initial public offering and borrowings under the 2005 Senior Secured Notes.

(d) Senior Subordinated Notes Issued in 2000

FairPoint issued $200.0 million aggregate principal amount of senior subordinated notes (the 2000 Notes) in 2000. The 2000 Notes bore interest at the rate of 12.5% per annum, payable semiannually in arrears.

The 2000 Notes were repaid in full in 2005 using proceeds from the Company’s initial public offering and borrowings under the 2005 Senior Secured Notes.

(e) Senior Notes Issued in 2003

FairPoint issued $225.0 million aggregate principal amount of senior notes in 2003 (the 2003 Notes). The 2003 Notes bear interest at the rate of 11 7/8% per annum, payable semiannually in arrears.

The 2003 Notes mature on March 1, 2010. FairPoint may redeem the 2003 Notes at any time on or after March 1, 2007 at the redemption prices stated in the indenture under which the 2003 Notes were issued, together with accrued and unpaid interest, if any, to the redemption date. In the event of a change of control, FairPoint must offer to repurchase the outstanding 2003 Notes for cash at a purchase price of 101% of the principal amount of such notes, together with all accrued and unpaid interest, if any, to the date of repurchase.

The 2003 Notes are general unsecured obligations of FairPoint, ranking pari passu in right of payment with all existing and future senior debt of FairPoint, including all obligations under the Company’s amended and restated credit facility, and senior in right of payment to all existing and future subordinated indebtedness of FairPoint.

The indenture governing the 2003 Notes contains certain customary covenants and events of default.

As a result of the issuance of the 2003 Notes, the Company recorded $2.8 million and $0.7 million of nonoperating gains on the extinguishment of the 1998 Fixed Rate Notes and 2000 Notes and the Carrier Services debt, respectively. The Company also repurchased some Series A preferred stock at a discount of $2.9 million. Additionally, the Company recorded a nonoperating loss of $5.0 million for the write-off of debt issue costs related to this extinguishment of debt in 2003.

Of the 2003 Notes, $223.0 million were repaid in 2005 using proceeds from the Company’s initial public offering and borrowings under the 2005 Senior Secured Notes.

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FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

(f) Other

In conjunction with the senior notes payable to the RTFC and the RTB and the first mortgage notes payable to the Rural Utilities Service, certain of the Company’s subsidiaries are subject to restrictive covenants limiting the amounts of dividends that may be paid. A portion of the RTFC notes, the full amount of the RTB notes and notes payable to the Rural Utilities Service were repaid in 2005 using proceeds from the Company’s initial public offering and borrowings under the 2005 Senior Secured Notes. The Company was in compliance with all of these covenants as of December 31, 2005.

The Company also has $0.4 million unsecured demand notes payable to various individuals and entities with interest payable at 5.25% at December 31, 2005 and 2004.

(8)   Redeemable preferred stock

The Series A preferred stock was issued to the lenders in connection with the Carrier Services debt restructuring. The Series A preferred stock is nonvoting and is not convertible into common stock of the Company. The Series A preferred stock provides for the payment of dividends at a rate equal to 17.428% per annum. Dividends on the Series A preferred stock are payable, at the option of the Company, either in cash or in additional shares of Series A preferred stock. The Company has the option to redeem any outstanding Series A preferred stock at any time. The redemption price for such shares is payable in cash in an amount equal to $1,000 per share plus any accrued but unpaid dividends thereon (the Preference Amount). Under certain circumstances, the Company would be required to pay a premium of up to 6% of the Preference Amount in connection with the redemption of the Series A preferred stock. In addition, upon the occurrence of certain events such as (i) a merger, consolidation, sale, transfer, or disposition of at least 50% of the assets or business of the Company and its subsidiaries; (ii) a public offering of the Company’s common stock which yields in the aggregate at least $175.0 million; or (iii) the first anniversary of the maturity of the Company’s senior subordinated notes (which first anniversary will occur in May 2011), the Company would be required to redeem all outstanding shares of the Series A preferred stock at a price per share equal to the Preference Amount, unless prohibited by the Company’s credit facility or by the indentures governing its senior subordinated notes. In connection with the March refinancing, certain holders of the Series A preferred stock agreed to reduce the dividend rate payable on the shares they hold from 17.428% to 15% for the period from March 6, 2003 to March 6, 2005.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 applies specifically to financial instruments that companies have historically presented within their financial statements either as equity or between the liabilities section and the equity section, rather than as liabilities. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of a nonpublic entity, in which this statement shall be effective for fiscal periods beginning after December 15, 2003. For purposes of adoption of SFAS No. 150, the Company met the definition of a nonpublic entity. The Company prospectively adopted SFAS No. 150 effective July 1, 2003. The SFAS No. 150 adoption had no impact on net income (loss) attributed to common shareholders for any of the periods presented.

SFAS No. 150 requires the Company to classify as a long-term liability its Series A preferred stock and to classify dividends and accretion from the Series A preferred stock as interest expense. Such stock is

84

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

described as “Preferred Shares Subject to Mandatory Redemption” in the Balance Sheet as of December 31, 2004 and dividends and accretion on these shares are included in pretax income beginning July 1, 2003, whereas previously they were presented as a reduction to equity (a dividend) and, therefore, a reduction of net income available to common shareholders.

The initial carrying amount of the Series A preferred stock has been recorded at its fair value at the date of issuance ($78.4 million). The carrying amount is being increased by periodic accretions, using the interest method, so that the carrying amount will equal the mandatory redemption amount ($82.3 million) at the mandatory redemption date (May 2011). On March 6, 2003, in connection with the Company’s issuance of the 2003 Notes, the Company used a portion of these proceeds to repurchase $13.3 million aggregate liquidation preference of its Series A preferred stock at a 35% discount (together with accrued and unpaid dividends thereon). For the years ended December 31, 2005, 2004 and 2003, the Series A preferred stock has been increased by $0.2 million, $1.4 million and $1.4 million, respectively, to reflect the periodic accretions. The carrying amount of the Series A preferred stock has been further increased by $2.2 million, $18.8 million and $16.5 million in connection with dividends paid in kind on the outstanding shares of the Series A preferred stock for the years ended December 31, 2005, 2004 and 2003, respectively. Prior to the adoption of SFAS No. 150, additional paid-in capital has been decreased $8.9 million for the increases in the carrying balance of the Series A preferred stock for the period ended June 30, 2003. Upon the adoption of SFAS No. 150, pretax income has been decreased $2.4 million, $20.2 million and $9.0 million for the increases in the carrying balance of the Series A preferred stock for the years ended December 31, 2005 and 2004 and the period July 1, 2003 through December 31, 2003, respectively.

In February 2005, the Company repurchased all of the Company’s outstanding Series A preferred stock for $129.2 million. The Company recorded a loss of $9.9 million on the redemption.

(9)   Employee Benefit Plans

The Company sponsors a voluntary 401(k) savings plan (the 401(k) Plan) that covers substantially all eligible employees. Each 401(k) Plan year, the Company contributes to the 401(k) Plan an amount of matching contributions determined by the Company at its discretion. For the 401(k) Plan years ended December 31, 2005, 2004, and 2003, the Company matched 100% of each employee’s contribution up to 3% of compensation and 50% of additional contributions up to 6%. The 401(k) Plan also allows for a profit sharing contribution that is made based upon management discretion. Total Company contributions to the 401(k) Plan were $1.3 million, $2.4 million, and $2.7 million for the years ended December 31, 2005, 2004, and 2003, respectively.

In 1999, the Company began a Non-Qualified Deferred Compensation Plan (the NQDC Plan) that covers certain employees. The NQDC Plan allows highly compensated individuals to defer additional compensation beyond the limitations of the 401(k) Plan. Company matching contributions are subject to the same percentage as the 401(k) Plan. Total Company contributions to the NQDC Plan were approximately $26,000, $7,000, and $7,000 for the years ended December 31, 2005, 2004, and 2003, respectively. At December 31, 2005 and 2004, the NQDC Plan assets were $0.6 million and $0.6 million, respectively. The related deferred compensation obligation is included in other liabilities in the accompanying consolidated balance sheets.

C&E, Taconic, and GT Com also sponsor defined contribution 401(k) retirement savings plans for union employees. C&E, Taconic, and GT Com match contributions to these plans based upon a percentage of pay of all qualified personnel and make certain profit sharing contributions. Contributions to

85

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

these plans were $0.3 million, $0.2 million, and $0.2 million for the years ended December 31, 2005, 2004, and 2003, respectively.

(10)   Income Taxes

Income tax benefit (expense) from continuing operations for the years ended December 31, 2005, 2004, and 2003 consists of the following components (in thousands):

	2005			2004			2003
Current:
Federal	$	—		$	—		$	—
State	(1,128		)	(543		)	199
Total current income tax benefit (expense) from continuing operations	(1,128		)	(543		)	199
Investment tax credits	16			27			37
Deferred:
Federal	78,385			—			—
State	5,823			—			—
Total deferred income tax benefit (expense) from continuing operations	84,208			—			—
Total income tax benefit (expense) from continuing operations	$	83,096		$	(516	)	$	236

Income tax expense of $0.2 million has also been recognized associated with income from discontinued operations.

Total income tax benefit (expense) from continuing operations was different than that computed by applying U.S. Federal income tax rates to losses from continuing operations before income taxes for the years ended December 31, 2005, 2004, and 2003. The reasons for the differences are presented below (in thousands):

	2005			2004			2003
Computed “expected” Federal tax benefit (expense) from continuing operations	$	19,090		$	8,104		$	2,880
State income tax benefit (expense), net of
Federal income tax expense	167			(358		)	131
Dividends and loss on redemption on preferred stock	(4,291		)	(6,862		)	(3,077		)
Dividends received deduction	153			103			94
Rate change	1,585			—			—
Change in valuation allowance (Federal and state)	66,011			(1,858		)	—
Other	381			355			208
Total income tax benefit (expense) from continuing operations	$	83,096		$	(516	)	$	236

86

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2005 and 2004 are presented below (in thousands):

	2005		2004
Deferred tax assets:
Federal and state tax loss carryforwards	$	109,569	$	91,929
Employee benefits	1,865		1,620
Self insurance reserves	1,389		968
Restructure charges and exit liabilities	493		458
Allowance for doubtful accounts	800		—
Alternative minimum tax and other state credits	1,857		2,218
Total gross deferred tax assets	115,973		97,193
Valuation allowance	—		(66,011		)
Net deferred tax assets	115,973		31,182
Deferred tax liabilities:
Property, plant, and equipment, principally due to depreciation differences	11,996		11,527
Goodwill and other intangible assets	17,883		13,496
Change in fair market value of swaps	3,301
Basis in investments	6,443		6,159
Total gross deferred tax liabilities	39,623		31,182
Net deferred tax assets	$	76,350	$	—

The valuation allowance for deferred tax assets as of December 31, 2004 was $66.0 million. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment, as well as all positive and negative evidence that would affect the recoverability of deferred tax assets. As a result of the offering, the Company has reduced its aggregate long term debt and expects a significant reduction in its annual interest expense. When considered together with the Company’s history of producing positive operating results and other evidence affecting the recoverability of deferred tax assets, the Company expects that future taxable income will more likely than not be sufficient to recover net deferred tax assets. Therefore, the valuation allowance was reversed in the first quarter of 2005, subsequent to the offering.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In order to fully realize the deferred tax asset, the Company will need to generate future taxable income of $219.2 million prior to the expiration of the net operating loss carryforwards in 2025. Taxable losses for the years ended December 31, 2005 and 2004 were $(41.0) million and $(10.9) million, respectively. Based upon the level of projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences based on facts and circumstances known as of December 31, 2005.

87

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

At December 31, 2005, the Company had federal and state net operating loss carryforwards of $291.9 million that will expire in 2019 to 2025. At December 31, 2005, the Company has alternative minimum tax credits of $1.4 million that may be carried forward indefinitely. The Company completed an initial public offering on February 8, 2005, which resulted in an “ownership change” within the meaning of the U.S. Federal income tax laws addressing net operating loss carryforwards, alternative minimum tax credits, and other similar tax attributes. As a result of such ownership change, there are specific limitations on the Company’s ability to use its net operating loss carryfowards and other tax attributes however, it is the Company’s belief that it can use the net operating losses even with these restrictions in place because of net unrealized built in gains.

(11)   Stockholders’ Equity

On February 8, 2005, the Company consummated its initial public offering of 25,000,000 shares of common stock, par value $.01 per share. At December 31, 2005, there were 35,021,335 shares of common stock outstanding and 200,000,000 shares of common stock were authorized.

On January 28, 2005, the board of directors approved a 5.2773714 for 1 reverse stock split of the Company’s common stock, which has been given retroactive effect in the accompanying financial statements. In connection with the Company’s initial public offering in February 2005, the Company reclassified all of its class A common stock and class C common stock on a one-for-one basis into a single class of common stock of which 200 million shares are authorized. After the stock split but prior to the issuance of any new shares in the offering, 9,451,719 shares of common stock were outstanding. All common stock issued and outstanding has a $0.01 par value.

At December 31, 2004, there were 8,643,000 shares of Class A voting stock outstanding. The Class A voting stock had a par value of $0.01 per shares and 44,757,000 shares were authorized. In addition, at December 31, 2004, there were 809,000 shares of Class C nonvoting, convertible stock outstanding. The Class C nonvoting, convertible stock had a par value of $0.01 per share and 2,615,000 shares were authorized.

(12)   Stock Option Plans

(a) Compensation Expense

For the twelve months ended December 31, 2005, 2004 and 2003, the Company, in total, has recorded stock-based compensation expense of $2.4 million, $49,000 and $15,000, respectively.

On October 1, 2004, the Company extended the exercise period on 18,013 options under the FairPoint Communications, Inc. (formerly MJD Communications, Inc.) 1995 Stock Option Plan (the 1995 Plan). The Company recognized a compensation charge of $0.3 million related to the modification of these options during 2004.

Certain principal shareholders of the Company granted stock appreciation rights to certain members of management. In connection with the stock appreciation rights, the Company recognized a benefit of $0.4 million in 2004 as the value associated with the stock appreciation rights declined. No additional charges were recognized in the year ended December 31, 2005 associated with stockholder appreciation rights. There were no adjustments to the stock appreciation rights in the year ended December 31, 2003, as the fair market value per share of the Company’s common stock remained flat during the year. All outstanding stock appreciation rights were settled by the Company in 2005.

88

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

(b) 1995 Stock Option Plan

In February 1995, the Company adopted the 1995 Plan. The 1995 Plan covers officers, directors, and employees of the Company. The Company was allowed to issue qualified or nonqualified stock options to purchase up to 215,410 shares of the Company’s Class A common stock to employees that would vest equally over 5 years from the date of employment of the recipient and are exercisable during years 5 through 10. In 1995, the Company granted options to purchase 161,596 shares at $1.32 per share. No options have been granted since 1995. Effective in February 2005, the Company may no longer grant awards under the 1995 Plan.

The per share weighted average fair value of stock options granted during 1995 was $0.69 on the date of grant using the Black-Scholes option-pricing model. Input variables used in the model included no expected dividend yields, a risk-free interest rate of 6.41%, and an estimated option life of five years. Because the Company was nonpublic on the date of the grant, no assumption as to the volatility of the stock price was made.

Stock option activity under the 1995 Plan is summarized as follows:

	2005		2004	2003
Outstanding at January 1:	112,265		112,265	112,265
Granted	—		—	—
Exercised	(94,252	)	—	—
Forfeited	—		—	—
Outstanding at December 31	18,013		112,265	112,265
Exercisable at December 31, 2005	18,013
Stock options available to grant at
December 31, 2005	—

(c) MJD Communications, Inc. Stock Incentive Plan

In August 1998, the Company adopted FairPoint Communications, Inc. (formerly MJD Communications, Inc.) Stock Incentive Plan (the “1998 Plan”). The 1998 Plan provided for grants of up to 1,317,425 of nonqualified stock options to executives and members of management, at the discretion of the compensation committee of the board of directors. Options vest in 25% increments on the second, third, fourth, and fifth anniversaries of an individual grant. In the event of a change in control, outstanding options will vest immediately. Effective in February 2005, the Company may no longer grant awards under the 1998 Plan.

Pursuant to the terms of the grant, options granted in 1998 and 1999 become exercisable only in the event that the Company is sold, an initial public offering of the Company’s common stock results in the principal shareholders holding less than 10% of their original ownership, or other changes in control, as defined, occur. The number of options that may become ultimately exercisable also depends upon the extent to which the price per share obtained in the sale of the Company would exceed a minimum selling price of $22.59 per share. All options have a term of 10 years from date of grant. For those options granted in 1998 and 1999, the Company will record compensation expense for the excess of the estimated market value of its common stock over the exercise price of the options when and if a sale of the Company, at the prices necessary to result in exercisable options under the grant, becomes imminent or likely. The initial

89

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

public offering of the Company’s common stock that occurred on February 8, 2005, as described in note 2, did not trigger exercisability of these options.

Pursuant to the terms of the grant, options granted in 2000 become exercisable immediately upon vesting. The per share weighted average fair value of stock options granted under the 1998 Plan during 2000 was $58.95 on the date of grant using the Black-Scholes option-pricing model. Input variables used in the model included no expected dividend yields, a risk-free interest rate of 6.52%, and an estimated option life of 10 years. Because the Company was nonpublic on the date of the grant, no assumption as to the volatility of the stock price was made.

Stock option activity under the 1998 Plan is summarized as follows:

				Weighted
				average
	Options			exercise
	outstanding			price
Outstanding at December 31, 2002		839,672			$	10.87
Granted		—			—
Exercised		—			—
Forfeited		(3,316	)		9.02
Outstanding at December 31, 2003 and 2004		836,356			10.87
Granted		—			—
Exercised		(3,468	)		17.31
Forfeited		—			—
Outstanding at December 31, 2005		832,888			$	10.80
Stock options available to grant at December 31, 2005		—

			Options outstanding				Options exercisable
			Number				Number		Weighted
			outstanding at		Remaining		exercisable at		average
Exercise			December 31,		contractual		December 31,		exercise
price			2005		life (years)		2005		price
	$	9.02		756,332		2.60		—		$	—
	14.46			29,183		3.50		—		—
	36.94			47,373		6.00		—		—
				832,888				—		$	—

The weighted average remaining contractual life for the options outstanding at December 31, 2005 is 2.8 years.

(d) FairPoint Communications, Inc. 2000 Employee Stock Incentive Plan

In May 2000, the Company adopted the FairPoint Communications, Inc. 2000 Employee Stock Incentive Plan (the 2000 Plan). The 2000 Plan provided for grants to members of management of up to 1,898,521 options to purchase Class A common stock, at the discretion of the compensation committee. During 2002, the Company amended the 2000 Plan to limit the number of shares available for grant to 448,236. In December 2003, the Company amended the 2000 Plan to allow for the grant to members of management of up to 1,898,521 shares of restricted stock in addition to shares available for stock options. Options granted under the 2000 Plan may be of two types: (i) incentive stock options and (ii) nonstatutory

90

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

stock options. Unless the compensation committee shall otherwise specify at the time of grant, any option granted under the 2000 Plan shall be a nonstatutory stock option. Effective in February 2005, the Company may no longer grant awards under the 2000 Plan.

Under the 2000 Plan, unless otherwise determined by the compensation committee at the time of grant, participating employees are granted options to purchase Class A common stock at exercise prices not less than the market value of the Company’s Class A common stock at the date of grant. Options have a term of 10 years from date of grant. Options vest in increments of 10% on the first anniversary, 15% on the second anniversary, and 25% on the third, fourth, and fifth anniversaries of an individual grant. Subject to certain provisions, in the event of a change of control, the Company will cancel each option in exchange for a payment in cash of an amount equal to the excess, if any, of the highest price per share of Class A common stock offered in conjunction with any transaction resulting in a change of control over the exercise price for such option.

Restricted units vest in increments of 33% on each of the third, fourth, and fifth anniversaries of the award. In December 2003, 27,382 units were awarded with an aggregate value of $890,000. At December 31, 2004, 26,442 units remain outstanding as 940 units were forfeited in 2004. The Company recognized compensation expense of $178,000, $177,000 and $15,000 during 2005, 2004 and 2003, respectively, related to these awards and will recognize the balance of compensation expense over the remaining vesting period.

Stock option activity under the 2000 Plan is summarized as follows:

				Weighted
				average
	Options			exercise
	outstanding			price
Outstanding at December 31, 2002		231,331			$	36.94
Granted		90,580			36.94
Exercised		—			—
Canceled or forfeited		(21,177	)		36.94
Outstanding at December 31, 2003		300,734			36.94
Granted		—			—
Exercised		—			—
Canceled or forfeited		(60,096	)		36.94
Outstanding at December 31, 2004		240,638			36.94
Granted		—			—
Exercised		—			—
Canceled or forfeited		—			—
Outstanding at December 31, 2005		240,638			$	36.94
Stock options available to grant at December 31, 2005		—

91

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

The remaining contractual life for the options outstanding at December 31, 2005 was 6.9 years, and 191,104 options were exercisable.

The per share weighted average fair value of stock options granted under the 2000 Plan during 2003, was $8.39 on the date of grant using the Black Scholes option-pricing model. Input variables used in the model included no expected dividend yields, a weighted average risk free interest rate of 4.26% in 2003 and an estimated option life of 10 years. Because the Company was nonpublic on the date of grant, no assumption as to the volatility of the stock price was made. No stock options were granted under the 2000 Plan during 2004 or 2005.

(e) 2005 Stock Incentive Plan

In February 2005, the Company adopted the 2005 Stock Incentive Plan. The 2005 Plan provided for the grant of up to 947,441 shares of restricted stock, restricted units and stock options to members of the Company’s board of directors and certain key members of the Company’s management. At December 31, 2005, 467,654 shares of common stock may be issued in the future pursuant to awards authorized under the 2005 Stock Incentive Plan.

As of December 31, 2005, the Company has granted 523,716 shares of restricted stock issued under the Company’s 2005 Stock Incentive Plan to certain employees. These shares vest over periods ranging from three to four years and certain of these shares pay current dividends. In connection with these grants, the Company recorded unearned compensation of $9.5 million, which has been reduced to $6.5 million as of December 31, 2005. During 2005, 53,687 shares of restricted stock were forfeited bringing the total number of restricted shares outstanding under the 2005 Stock Incentive Plan to 470,029 shares.

In the second quarter of 2005, the Company’s board of directors approved an annual award to each of the Company’s non-employee directors of approximately $30,000 in the form of restricted stock or restricted units, at the recipient’s option, issued under the Company’s 2005 Stock Incentive Plan. The restricted stock and restricted units will vest in four equal quarterly installments on the first day of each of the first four calendar quarters following the grant date, commencing on July 1, 2005, and the holders thereof will be entitled to receive dividends from the date of grant, whether or not vested. In the second quarter of 2005, the Company granted 1,870 shares of restricted stock with a total value at the grant date of approximately $30,000 and 7,480 restricted units with a total value at the grant date of approximately $120,000 to the Company’s non-employee directors. An additional 408 restricted units were granted in the third and fourth quarters of 2005 in lieu of dividends on the restricted units.

(13)Discontinued Operations and Restructure Charges

(a) Competitive Communications Business Operations

In November 2001, in connection with the sale of certain of certain assets of its competitive communications operations, the Company announced its plan to discontinue the competitive communications business operations of its wholly owned subsidiary, Carrier Services. As a result of the adoption of the plan to discontinue the competitive communications operations, these results are presented as discontinued operations. The Company recognized a total charge of $95.3 million on the disposal of its competitive communications operations, including the $31.1 million loss on the sale of assets; $36.1 million for the write-off of the remaining operating assets, including property, plant, and equipment; and $28.1 million for expenses the Company estimated it would incur during the phase-out period, net of estimated revenue to be received from customers until they were transitioned to other

92

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

carriers. Estimated expense for the phase-out period included interest expense. Interest expense was allocated to discontinued operations based on the interest incurred by the Company under the Carrier Services’ credit facility and the two interest rate swaps related to this facility.

On May 2002, Carrier Services entered into an amended and restated credit facility with its lenders to restructure the obligations under its credit facility. In the restructuring, (i) Carrier Services paid certain of its lenders $5.0 million to satisfy $7.0 million of obligations under the credit facility, (ii) the lenders converted approximately $93.9 million of the loans under the credit facility into shares of FairPoint’s Series A preferred stock having a liquidation preference equal to the amount of such loans, and (iii) the remaining loans under the credit facility and certain swap obligations were converted into $27.9 million of new term loans.

As a result of this restructuring in 2002, the Company recorded a gain in discontinued operations of $17.5 million for the extinguishment of debt and settlement of its interest rate swap agreements. The gain represents the difference between the May 10, 2002 carrying value of $128.8 million of retired debt ($125.8 million) and related swap obligations ($3.0 million) and the sum of the aggregate value of the cash paid ($5.0 million) plus principal amount of new term loans ($27.9 million) plus the estimated fair value of the Company’s Series A preferred stock issued ($78.4 million).

During 2004 and 2003, the Company revised its assumptions on certain lease obligations related to the restructuring accrual and as a result, increased the obligation by $0.1 million in 2004 and reduced the obligation by $0.2 million in 2003. Also during 2004, accrued liabilities associated with the discontinued operations were re-evaluated, or settled for less than original estimates and as a result, these obligations were adjusted by $0.6 million.

In January 2006, the Company reached a settlement on certain lease obligations which reduced the remaining obligations related to discontinued operations. As a result, the Company reduced the obligation by $0.6 million to properly reflect the on-going obligations of the Company.

Assets and liabilities of discontinued operations of Carrier Services as of December 31, 2005 and 2004 follows (in thousands):

	2005			2004
Accounts receivable	$	90		$	102
Current assets of discontinued operations	$	90		$	102
Accrued liabilities	$	(1,133	)	$	(1,141	)
Restructuring accrual	(1,312		)	(1,071		)
Accrued property taxes	(50		)	(50		)
Current liabilities of discontinued operations	$	(2,495	)	$	(2,262	)
Restructuring accrual	$	—		$	(1,580	)
Long-term liabilities of discontinued operations	$	—		$	(1,580	)

93

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

Selected information relating to the restructuring charge follows (in thousands):

	Equipment,
	occupancy,
	and other
	lease
	terminations
Restructuring accrual as of December 31, 2002		$	7,182
Adjustments from initial estimated charges		(246		)
Cash payments		(1,683		)
Restructuring accrual as of December 31, 2003		5,253
Adjustments from initial estimated charges		80
Cash payments		(2,682		)
Restructuring accrual as of December 31, 2004		2,651
Adjustments from initial estimated charges		(600		)
Cash payments		(739		)
Restructuring accrual as of December 31, 2005		$	1,312

(b) Rural Local Exchange Carrier Operations

On September 30, 2003, the Company completed the sale of all of the capital stock owned by Services of Union Telephone Company of Hartford, Armour Independent Telephone Co., WMW Cable TV Co., and Kadoka Telephone Co. to Golden West Telephone Properties, Inc. (Golden West). The sale was completed in accordance with the terms of the purchase agreement, dated as of May 9, 2003, with Golden West. The Company received $24.2 million in sales proceeds. The South Dakota properties were geographically isolated from other Company properties making it increasingly difficult to realize additional operating efficiencies. These properties were adjacent to Golden West’s operations and offered Golden West numerous operational synergies. The proceeds from this divestiture were used to fund acquisitions completed in 2003. The operations of these companies are presented as discontinued operations.

Income from the South Dakota divestiture operations consists of the following (in thousands):

	Nine months
	ended
	September 30,
	2003
Revenue		$	4,028
Income from discontinued operations		1,929

The Company recorded a gain on disposal of the South Dakota companies of $7.7 million.

(14)   Related Party Transactions

The Company had entered into financial advisory agreements with certain equity investors, pursuant to which the equity investors provided certain consulting and advisory services related, but not limited to, equity financings and strategic planning. In 2005, the Company paid approximately $0.1 million related to these agreements. These agreements were cancelled on February 8, 2005. The Company paid $1.0 million for each of the years ended December 31, 2004 and 2003 in such fees to the equity investors and this expense was classified within operating expenses. The agreements also provided that the Company reimburse the equity investors for travel relating to the Company’s board of directors meetings. The

94

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

Company reimbursed the equity investors $123,000 and $21,000 for the years ended December 31, 2004 and 2003, respectively, for travel and related expenses. In connection with our initial public offering, we terminated these agreements and paid a transaction fee of $8.4 million to one of these equity advisors.

In 2004, a law firm in which a partner of such law firm was a director of the Company through February 8, 2005. In 2005, no fees were paid by the Company to this law firm prior to February 8, 2005. Total fees paid to this law firm in 2005 were $1.4 million. In 2004, the law firm was paid $3.5 million, of which $0.1 million was for general counsel services and $3.4 million was for services related to financing and equity offering costs. In 2003, this same law firm was paid $1.3 million, of which $0.4 million was for general counsel services and $0.9 million was for services related to financings.

A law firm, in which a partner of such law firm is the husband of an executive officer, was paid $303,000, $4,000 and $127,000 for the years ended December 31, 2005, 2004, and 2003, respectively, for legal services and expenses.

All payments made by the Company for general services and unsuccessful acquisition bids are classified within operating expenses on the consolidated statements of operations. All payments made for services related to financings have been recorded as debt or equity issue costs. All payments made for services related to successful acquisition bids have been capitalized as direct costs of the acquisitions. All services related to the restructure and discontinuance of the competitive communications operations have been classified in discontinued operations.

On July 31, 2003, the Company loaned $1.0 million to two employees that are the former owners of Fremont. These loans were settled on January 2, 2005.

(15)Quarterly Financial Information (Unaudited)

	First			Second		Third		Fourth
	quarter			quarter		quarter		quarter
	(in thousands, except per share data)
2005:
Revenue	$	61,665		65,206		66,038		69,934
Income from continuing operations	11,042			5,603		4,189		7,716
Net income	11,042			5,603		4,189		8,096
Basic and diluted earnings per share from continuing operations	0.46			0.16		0.12		0.22
Basic and diluted earnings per share	0.46			0.16		0.12		0.23
2004:
Revenue	$	60,985		62,416		65,437		63,807
Loss from continuing operations	(4,608		)	(4,765	)	(4,225	)	(10,755	)
Net loss	(4,608		)	(4,094	)	(4,225	)	(10,755	)
Basic and diluted loss from continuing operations per share	(0.49		)	(0.50	)	(0.45	)	(1.13	)
Basic and diluted loss per share	(0.49		)	(0.43	)	(0.45	)	(1.13	)

95

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

In connection with the Company’s initial public offering in February 2005, the Company recognized, in the first quarter of 2005, non-operating losses of $86.2 million related to fees and penalties paid on the redemption of its Series A preferred stock and the write-off of unamortized debt issuance costs. Also in connection with the offering, the Company repaid portions of its previously outstanding debt and therefore, interest expense was significantly reduced in the first quarter of 2005. In addition, the Company recorded an income tax benefit of $66.0 million in the first quarter of 2005 due to the reversal of its valuation allowance.

In the fourth quarter of 2004, the Company recognized a $6.0 million nonoperating loss related to the write-off of debt issuance and offering costs associated with an abandoned offering of income deposit securities.

(16)Disclosures About the Fair Value of Financial Instruments

(a) Cash, Accounts Receivable, Accounts Payable, and Demand Notes Payable

The carrying amount approximates fair value because of the short maturity of these instruments.

(b) Investments

Investments classified as trading securities are carried at their fair value, which was approximately $0.6 million at December 31, 2005 and 2004, respectively. (see note 6 and note 9)

At December 31, 2005, the Company had cost method investments with a carrying value of $33.1 million. The Company did not estimate the fair value of these investments as to do so would involve significant judgment and a value could not be determined with any degree of accuracy.

(c) Long-term Debt

The fair value of the Company’s publicly registered long-term debt is stated at quoted market prices. The fair value of the Company’s remaining long-term debt is estimated by discounting the future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities. At December 31, 2005 and 2004, the Company had long-term debt with a carrying value of $607.4 million and $810.4 million, respectively, and estimated fair values of $608.3 million and $865.2 million, respectively.

(d) Redeemable preferred stock

The fair value of the Company’s redeemable preferred stock is estimated utilizing a cash flow analysis at a discount rate equal to rates available for debt with terms similar to the preferred stock. At December 31, 2004 the Company’s carrying value of its redeemable preferred stock was $116.9 million and estimated fair value was $126.8 million.

(e) Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

96

FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

(17)Revenue Concentrations

Revenues for interstate access services are based on reimbursement of costs and an allowed rate of return. A substantial portion of revenues of this nature are received from NECA in the form of monthly settlements. Such revenues amounted to 26.7%, 25.7%, and 26.3% of the Company’s total revenues from continuing operations for the years ended December 31, 2005, 2004, and 2003, respectively.

(18)Revenue Settlements

Certain of the Company’s telephone subsidiaries participate in revenue-sharing arrangements with other telephone companies for interstate revenue-sharing arrangements and for certain intrastate revenue. Such sharing arrangements are funded by toll revenue and/or access charges within state jurisdiction and by access charges in the interstate market. Revenues earned through the various sharing arrangements are initially recorded based on the Company’s estimates. The Company recognized $3.3 million, $3.1 million, and $3.0 million of revenue for settlements and adjustments related to prior years during 2005, 2004, and 2003, respectively.

(19)Commitments and Contingencies

(a) Operating Leases

Future minimum lease payments under noncancelable operating leases as of December 31, 2005 are as follows (in thousands):

	Continuing			Discontinued
	operations			operations
Year ending December 31:
2006		$	1,143		$	1,196
2007		1,076			—
2008		1,029			—
2009		887			—
2010		444			—
Thereafter		2,313			—
Total minimum lease payments		$	6,892		1,196
Less estimated rentals to be received under subleases					—
Estimated minimum lease payments included in liabilities of discontinued operations					$	1,196

In January 2006, the Company reached an agreement to amend the remaining lease related to its discontinued operations; therefore, as of January 2006, there are no longer any sublease arrangements in place. Total rent expense from continuing operations was $3.5 million, $3.2 million, and $3.1 million in 2005, 2004, and 2003, respectively.

The Company does not have any leases with contingent rental payments or any leases with contingency renewal, purchase options, or escalation clauses.

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FairPoint Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

(b) Legal Proceedings

On June 6, 2005, a purported class action complaint was filed in the General Court of Justice, Superior Court Division, of the State of North Carolina by Robert Lowinger on behalf of himself and all other similarly situated persons against the Company, the Company’s Chairman and Chief Executive Officer, certain of the Company’s current and former directors and certain of the Company’s stockholders. The complaint alleges violations of Sections 11 and 12(a)(2) and liability under Section 15 of the Securities Act, and alleges that the Company’s registration statement on Form S-1 (which was declared effective by the SEC on February 3, 2005) and the related prospectus dated February 3, 2005, each relating to the Company’s initial public offering of common stock, contained certain material misstatements and omitted certain material information necessary to be included relating to the Company’s broadband products and access line trends. The plaintiff, who has been a plaintiff in several prior securities cases, seeks rescission rights and unspecified damages on behalf of a purported class of purchasers of the common stock “issued pursuant and/or traceable to the Company’s IPO during the period from February 3, 2005 through March 21, 2005”. The Company removed the action to Federal Court. The plaintiff filed a motion to remand the action to the North Carolina State Court, which was denied by the Federal Magistrate. The plaintiff has objected to and appealed the Magistrate’s decision to the District Court Judge. The Company has contested the appeal and filed a Motion to Dismiss the action. The Magistrate, on February 9, 2006, issued a Memorandum and a Recommendation to the District Court Judge that the Motion to Dismiss be granted and that the complaint be dismissed with prejudice. The plaintiff has filed a Notice of Objection to the Magistrate’s Recommendation. Both the appeal of denial of the Motion to Remand and the Motion to Dismiss are pending before the District Court Judge. The Company believes that this action is without merit and intends to continue to defend the litigation vigorously.

From time to time, the Company is involved in litigation and regulatory proceedings arising out of its operations. The Company is not currently a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, that management believes would have a material adverse effect on the Company’s financial position or results of operations.

98

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A.CONTROLS AND PROCEDURES

As of the end of the period covered by this Annual Report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Exchange Act). Disclosure controls and procedures are controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.

Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed as of the period covered by this Annual Report has been timely recorded, processed, summarized and reported within the time periods specified in the rules of the SEC.

There have been no changes in our “internal controls over financial reporting” (as defined in Rule 3a-15(f) of the Exchange Act) during the fiscal quarter ended December 31, 2005 that have materially affected, or that are reasonably likely to materially affect, our internal controls over financial reporting. In response to the Sarbanes-Oxley Act, we are continuing a comprehensive review of our disclosure controls and procedures and will improve such controls and procedures as necessary to assure their effectiveness.

ITEM 9B.OTHER INFORMATION

Not applicable.

99

PART III

ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Items 401 and 405 of Regulation S-K is incorporated herein by reference to the Company’s definitive proxy statement to be filed not later than April 30, 2005 with the SEC pursuant to Regulation 14A under the Exchange Act.

ITEM 11.EXECUTIVE COMPENSATION

The information required by Item 402 of Regulation S-K is incorporated herein by reference to the Company’s definitive proxy statement to be filed not later than April 30, 2005 with the SEC pursuant to Regulation 14A under the Exchange Act.

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Items 201(a) and 403 of Regulation S-K is incorporated herein by reference to the Company’s definitive proxy statement to be filed not later than April 30, 2005 with the SEC pursuant to Regulation 14A under the Exchange Act.

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 404 of Regulation S-K is incorporated herein by reference to the Company’s definitive proxy statement to be filed not later than April 30, 2005 with the SEC pursuant to Regulation 14A under the Exchange Act.

ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by Item 9(e) of Schedule 14A is incorporated herein by reference to the Company’s definitive proxy statement to be filed not later than April 30, 2005 with the SEC pursuant to Regulation 14A under the Exchange Act.

PART IV

ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)Financial Statements

The financial statements filed as part of this Annual Report are listed in the index to the financial statements under “Item 8. Independent Auditors’ Reports and Consolidated Financial Statements,” which index to the financial statements is incorporated herein by reference. In addition, certain financial statements of equity method investments owned by the Company are included as exhibit 99.1 to this Annual Report.

(b)Exhibits

The exhibits filed as part of this Annual Report are listed in the index to exhibits immediately preceding such exhibits, which index to exhibits is incorporated herein by reference.

100

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	FAIRPOINT COMMUNICATIONS, INC.
Date: March 13, 2006	By:	/s/ EUGENE B. JOHNSON
		Name:	Eugene B. Johnson
		Title:	Chairman of the Board of Directors and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

	Signatures		Title		Date
/s/ EUGENE B. JOHNSON		Chairman of the Board of Directors and		March 13, 2006
Eugene B. Johnson		Chief Executive Officer (Principal Executive
		Officer)
/s/ JOHN P. CROWLEY		Executive Vice President and Chief		March 13, 2006
John P. Crowley		Financial Officer (Principal Financial Officer)
/s/ LISA R. HOOD		Senior Vice President and Controller		March 13, 2006
Lisa R. Hood		(Principal Accounting Officer)
/s/ FRANK K. BYNUM, JR.		Director		March 13, 2006
Frank K. Bynum, Jr.
/s/ PATRICIA GARRISON-CORBIN		Director		March 13, 2006
Patricia Garrison-Corbin
/s/ DAVID L. HAUSER		Director		March 13, 2006
David L. Hauser
/s/ ROBERT S. LILIEN		Director		March 13, 2006
Robert S. Lilien
/s/ CLAUDE C. LILLY		Director		March 13, 2006
Claude C. Lilly
/s/ KENT R. WELDON		Director		March 13, 2006
Kent R. Weldon

101

Exhibit Index

Exhibit No.		Description
	2.1	Agreement and Plan of Merger, dated as of June 18, 2003, by and among FairPoint, MJD Ventures, Inc., FairPoint Berkshire Corporation and Berkshire Telephone Corporation.(1)
	2.2	Agreement and Plan of Merger, dated as of April 22, 2005, by and among FairPoint, MJD Ventures, Inc., FairPoint Bentleyville Corporation and Bentleyville Communications Corporation.(2)
	2.3	Asset Purchase Agreement, dated as of December 14, 2005, by and among FairPoint, Local Exchange Company LLC, Cass County Telephone Company Limited Partnership and LEC Long Distance, Inc.*
	2.4	Stock Purchase Agreement, dated February 17, 2006, by and among Southern Illinois Cellular Corp. and Crosslink Wireless, Inc., Egyptian Communication Services, Inc., Hamilton County Communications, Inc., HTC Holding Co., MJD Services Corp., Shawnee Communications, Inc. and Wabash Independent Networks, Inc. and Alltel Communications, Inc.*
	3.1	Eighth Amended and Restated Certificate of Incorporation of FairPoint.(3)
	3.2	Amended and Restated By Laws of FairPoint.(3)
	4.1	Indenture, dated as of March 6, 2003, by and between FairPoint and The Bank of New York, relating to FairPoint’s $225,000,000 11 7¤8% Senior Notes due 2010.(4)
	4.2	Supplemental Indenture, dated as of January 20, 2005, by and between FairPoint and The Bank of New York, amending the Indenture dated as of March 6, 2003 between FairPoint and The Bank of New York.(3)
	4.3	Form of Initial Senior Note due 2010.(4)
	4.4	Form of Exchange Senior Note due 2010.(4)
	10.1	Credit Agreement, dated as of February 8, 2005, by and among FairPoint, various lending institutions, Bank of America, N.A., CoBank ACB, General Electric Capital Corporation and Deutsche Bank Trust Company Americas.(3)
	10.2	First Amendment to Credit Agreement, dated as of March 11, 2005, among FairPoint, various lending institutions, Bank of America, N.A., CoBank ACB, General Electric Capital Corporation and Deutsche Bank Trust Company Americas.(3)
	10.3	Second Amendment and Consent to Credit Agreement, dated as of April 29, 2005, among FairPoint, various lending institutions, Bank of America, N.A., CoBank ACB, General Electric Capital Corporation and Deutsche Bank Trust Company Americas.(5)
	10.4	Third Amendment to Credit Agreement, dated as of September 14, 2005, among FairPoint, various lending institutions, Bank of America, N.A., CoBank ACB, General Electric Capital Corporation and Deutsche Bank Trust Company Americas.(6)
	10.5	Pledge Agreement, dated as of February 8, 2005, by FairPoint, ST Enterprises, Ltd., FairPoint Broadband, Inc., MJD Services Corp., MJD Ventures, Inc., C-R Communications, Inc., Comerco, Inc., GTC Communications, Inc., Ravenswood Communications, Inc., Utilities, Inc., FairPoint Carrier Services, Inc. and St. Joe Communications, Inc.(3)

102

10.6	Subsidiary Guaranty, dated as of February 8, 2005, by FairPoint Broadband, Inc., MJD Ventures, Inc., MJD Services Corp., ST Enterprises, Ltd. and FairPoint Carrier Services, Inc.(2)
10.7	Form of Swingline Note.(3)
10.8	Form of RF Note.(3)
10.9	Form of B Term Note.(3)
10.10	Amended and Restated Tax Sharing Agreement, dated as of November 9, 2000, by and among FairPoint and its Subsidiaries.(7)
10.11	Nominating Agreement, dated as of February 8, 2005.(3)
10.12	Affiliate Registration Rights Agreement, dated as of February 8, 2005.(3)
10.13	Employment Agreement, dated as of December 31, 2002, by and between FairPoint and Eugene B. Johnson.(4)
10.14	Letter Agreement, dated as of October 1, 2004, by and between FairPoint and Eugene B. Johnson.(8)
10.15	Employment Agreement, dated as of January 20, 2000, by and between FairPoint and Walter E. Leach, Jr.(9)
10.16	Letter Agreement, dated as of December 15, 2003, by and between FairPoint and Walter E. Leach, Jr.(10)
10.17	Letter Agreement, dated as of November 11, 2002, by and between FairPoint and Peter G. Nixon.(4)
10.18	Letter Agreement, dated as of November 13, 2002, by and between FairPoint and Shirley J. Linn.(4)
10.19	Letter Agreement, dated as of May 16, 2005, by and between FairPoint and John P. Crowley.(12)
10.20	FairPoint 1995 Stock Option Plan.(13)
10.21	FairPoint Amended and Restated 1998 Stock Incentive Plan.(13)
10.22	FairPoint Amended and Restated 2000 Employee Stock Incentive Plan.(10)
10.23	FairPoint 2005 Stock Incentive Plan.(3)
10.24	FairPoint Annual Incentive Plan.(3)
10.25	Form of Restricted Stock Agreement.(8)
10.26	Form of Director Restricted Stock Agreement.(14)
10.27	Restricted Stock Agreement, dated as of September 21, 2005, by and between FairPoint and John P. Crowley.(15)
10.28	Form of Director Restricted Unit Agreement.(14)
14.1	FairPoint Code of Business Conduct and Ethics.*
14.2	FairPoint Code of Ethics for Financial Professionals.(11)

103

21	Subsidiaries of FairPoint.*
23.1	Consent of KPMG LLP.*
23.2	Consent of Deloitte & Touche LLP.*
31.1	Certification as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certification as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1	Certification required by 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*†
32.2	Certification required by 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*†
99.1	Audited financial statements for the Orange County-Poughkeepsie Limited Partnership for the years ended December 31, 2005, 2004 and 2003.*

*Filed herewith.

†Pursuant to Securities and Exchange Commission Release No. 33-8238, this certification will be treated as “accompanying” this Quarterly Report on Form 10-Q and not “filed” as part of such report for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of Section 18 of the Securities Exchange Act of 1934 and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the registrant specifically incorporates it by reference.

(1)Incorporated by reference to the Registration Statement on Form S-4 of FairPoint, declared effective as of July 22, 2003.

(2)Incorporated by reference to the Quarterly Report on Form 10-Q of FairPoint for the quarter ended March 31, 2005.

(3)Incorporated by reference to the Annual Report on Form 10-K of FairPoint for the year ended December 31, 2004.

(4)Incorporated by reference to the Annual Report on Form 10-K of FairPoint for the year ended December 31, 2002.

(5)Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on May 4, 2005.

(6)Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on October 3, 2005.

(7)Incorporated by reference to the Quarterly Report on Form 10-Q of FairPoint for the period ended September 30, 2000.

(8)Incorporated by reference to the Registration Statement on Form S-1 of FairPoint, declared effective as of February 3, 2005.

(9)Incorporated by reference to the Annual Report on Form 10-K of FairPoint for the year ended December 31, 1999.

(10)Incorporated by reference to the Annual Report on Form 10-K of FairPoint for the year ended December 31, 2003.

104

(11)Incorporated by reference to the Annual Report on Form 10-K of FairPoint for the year ended December 31, 2004.

(12)Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on May 24, 2005.

(13)Incorporated by reference to the Registration Statement on Form S-4 of FairPoint, declared effective as of August 9, 2000.

(14)Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on June 20, 2005.

(15)Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on September 23, 2005.

105

EX-2.3

Exhibit 2.3

ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT (the “Agreement”) is entered into as of December 14, 2005, by and among FAIRPOINT COMMUNICATIONS, INC., a corporation organized under the laws of the State of Delaware (or any subsidiary or affiliate as permitted under Section 8.7 hereof, the “Buyer”), LOCAL EXCHANGE COMPANY LLC, a limited liability company organized under the laws of the State of Maryland (“LEC”), CASS COUNTY TELEPHONE COMPANY LIMITED PARTNERSHIP, a limited partnership organized under the laws of the State of Maryland (“CassTel”) and LEC LONG DISTANCE, INC. a corporation organized under the laws of the State of Missouri (“CassTel LD” and, together with LEC and CassTel, the “Sellers”).

WITNESSETH:

WHEREAS, Sellers are engaged in the business of providing telecommunications and related services including but not limited to wireline services to approximately 8,083 access lines, CLASS services, voice-mail services, Internet services, long distance services, 911 services, switching and transport services, billing and collection services and directory services in and around the geographical territory of Cass County, Missouri and Miami County, Kansas (the “Business”); and

WHEREAS, Sellers wish to sell all of the Purchased Assets (as defined herein) of the Business to Buyer, and Buyer wishes to purchase the Purchased Assets from Sellers; and

WHEREAS, the members of LEC, the partners of CassTel and the Board of Directors and sole shareholder of CassTel LD have, subject to the terms and conditions of this Agreement, determined that the sale of the Purchased Assets contemplated by this Agreement is in the best interests of the Sellers and have approved this Agreement and the transactions contemplated hereby pursuant to and in accordance with the provisions of the law applicable to each Seller and have provided evidence of the same to Buyer; and

WHEREAS, in order to induce the Buyer to enter into this Agreement, and in order to receive the benefits that will accrue to Sellers if the Buyer purchases the Purchased Assets, the Sellers have agreed to make certain representations, warranties and covenants as set forth herein.

NOW, THEREFORE, in order to consummate said purchase and sale and in consideration of the mutual agreements set forth herein and other valuable consideration, the receipt and legal adequacy whereof are hereby acknowledged, the parties hereto agree as follows:

ARTICLE I

PURCHASE OF ASSETS; ASSUMPTION OF LIABILITIES; CLOSING

1.1Purchased Assets. Except for the Excluded Assets, at the Closing, Sellers shall sell to the Buyer, and the Buyer shall purchase from Sellers, all of the tangible and intangible

assets of Sellers relating to and necessary for the operation of the Business as of the Closing Date (collectively, the “Purchased Assets”), including, but not limited to, the following (to the extent relating to the Business), free and clear of all Liens except Permitted Liens:

(a)all cash, bank accounts and accounts receivable of CassTel and CassTel LD;

(b)all inventory, materials, customer premise equipment and supplies including but not limited to the items listed on Schedule 1.1(b);

(c)to the extent assignable, any and all permits, consents and licenses relating to the Business, including licenses issued by the Federal Communications Commission (“FCC”) or the Missouri Public Service Commission (“MPSC”) or the Kansas Corporation Commission (“KCC”) which are necessary to engage in the Business;

(d)all furniture, fixtures, machinery, vehicles, plant, systems, optical fiber, computers, switches, twisted copper, pay phones, test equipment, structures, construction, telephone line facilities, tools, implements, conduits, stations, substations and equipment of any kind, character or nature including but not limited to the items listed on Schedule 1.1(d);

(e)the Assumed Contracts as listed on Schedule 1.1(e);

(f)all real estate interests, including without limitation all leases, licenses, easements, rights of ways and the like, and all real property with all privileges appurtenant thereto owned by Sellers, as listed on Schedule 2.13;

(g)all of the Sellers’ interests in all real property improvements;

(h)all prepaid expenses, including amounts paid in advance on account of rent, property taxes, utility charges, fees and deposits;

(i)originals (if available) or copies (at the option of Buyer) of (i) all books, records, manuals, files, customer lists and records, accounts and billing records, plans, blueprints, specifications, drawings, surveys, engineering reports, personnel and employee benefit plan records and operating data whether in electronic format or otherwise, and (ii) the Assumed Contracts related to the Business;

(j)all rights of the Sellers in and to all databases, software, software programs, object codes, source codes, systems documentation and user manuals used in connection with the Business as listed on Schedule 1.1(j);

(k)all Intellectual Property Rights, including all rights to all of the corporate, domain, trade names and trademarks of CassTel and CassTel LD and the brand names, trademarks and trade names of the Business as listed on Schedule 1.1(k);

(l)all claims, causes of action and rights of recovery relating to the Business, whether asserted or commenced on or before the Closing Date other than accounts receivable owed by T-Mobile that arose prior to the Closing Date;

2

(m)the right to receive and retain mail, accounts receivable payments and other communications relating to the Business, except as provided in Section 1.1(l) above;

(n)the right to bill and receive payments for products shipped or delivered and services performed but unbilled or unpaid as of the Closing related to the Business;

(o)to the extent transferable, all telephone numbers (e.g., toll free numbers), facsimile numbers, Internet addresses, websites and similar numbers or addresses assigned to or used by CassTel or CassTel LD or their respective customers; and

(p)all rights of the Sellers with respect to each of its customers related to the Business;

(q)all other business, property, assets and rights or benefits of Sellers on the Closing Date not described above, relating to the Business including, but not limited to, the Sellers’ interest in Missouri Network Alliance, L.L.C.;

1.2Excluded Assets. Notwithstanding anything to the contrary contained herein or otherwise, the Purchased Assets do not include the following assets of Sellers (collectively, the “Excluded Assets”):

(a)all federal, state and local income tax, franchise tax or other tax credits and tax refund claims arising out of the operations of the Business prior to Closing;

(b)the minute books, equity record books and tax returns of Sellers;

(c)except as provided in Section 1.5, any insurance policies (other than insurance policies constituting Assumed Contracts), insurance proceeds, insurance refunds and prepaid expenses relating to the period prior to the Closing (other than proceeds, refunds or prepaid expenses relating to Assumed Contracts);

(d)all contracts other than the Assumed Contracts;

(e)any and all equity interests in the Sellers, and any and all investments of LEC other than in Missouri Network Alliance, L.L.C.;

(f)all rights to the names, trade names and trademarks of LEC not listed on Schedule 1.1(k);

(g)any recovery by the Sellers from T-Mobile for accounts receivable arising prior to the Closing Date;

(h)any interest or investment in the stock of CoBank, ACB; and

(i)any and all intercompany accounts receivable owed by any Seller to any one or more of the Sellers.

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1.3Limited Assumption of Liabilities. Buyer hereby agrees to assume, as of the Closing Date, and agrees to pay, perform and discharge when due, only the following liabilities, responsibilities and obligations of Sellers relating to the Business and the Purchased Assets, thereafter arising (collectively, the “Assumed Liabilities”):

(a)All liabilities, responsibilities and obligations of the Sellers arising out of or relating to the Assumed Contracts, but only to the extent same arise, accrue or become performable after the Closing Date; and

(b)All liabilities, responsibilities and obligations relating to security or other deposits made by customers of CassTel or CassTel LD to the extent these liabilities are considered Current Liabilities in Section 1.10

(c)All accounts payable and accrued expenses related to the Purchased Assets (but excluding any intercompany payables) to the extent these payables and expenses are considered Current Liabilities in Section 1.10.

Notwithstanding anything in this Section 1.3 to the contrary, “Assumed Liabilities” shall not include any liabilities, responsibilities or obligations expressly identified as an Excluded Liability pursuant to Section 1.4.

1.4Excluded Liabilities. Except as set forth in Section 1.3, the Buyer shall not assume or be responsible for any of the liabilities or obligations of the Sellers (collectively, the “Excluded Liabilities”), including without limitation:

(a)any and all liabilities or obligations associated with or relating to any Excluded Assets, any long term indebtedness and any intercompany payables or receivables of the Sellers owed to any one or more of Sellers or Sellers’ Affiliates; members, managers or partners;

(b)any liability, complaint, claim or obligation of any kind, character or nature arising out of (i) the conduct of the Sellers whether or not in connection with the operations of the Business (except as expressly provided for in Section 1.3), or (ii) the employment by the Sellers of any employees of the Business or the provision of any employee benefit to such employees pursuant to any plan, program or arrangement maintained by any Seller (whether or not subject to ERISA and whether or not written), whether such claim arises before or after the Closing Date and whether or not such employees become Buyer’s employees;

(c)any liability or obligation of the Sellers owing to any equity holder or Affiliate thereof including, without limitation, any obligations arising out of or related to the transactions contemplated hereby;

(d)any liabilities related to (i) income taxes of the Sellers, (ii) all other taxes attributable to the Sellers or to Sellers’ operation of the Business including, but not limited to, sales and use taxes, and (iii) taxes of any other person or third party (except Buyer) pursuant to an agreement or otherwise;

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(e)any liabilities, responsibilities and obligations relating to the operation of the Business or the actions of the Sellers prior to the Closing Date under any rule, regulation, law, mandate, decision or order of the MPSC, KCC, FCC, National Exchange Carriers Association (“NECA”), Universal Service Administration Company (“USAC”) or any other Governmental Entity (as defined in Section 8.9(d)), whether enacted or promulgated before, on or after the Closing Date;

(f)any liabilities existing or arising under Environmental Laws attributable to or incurred as a result of any acts, omissions or conditions first occurring or in existence as of or prior to the Closing Date, including, but not limited to, liabilities for the release, threatened release, handling, discharge, treatment, storage, disposal, transport, presence, or migration of Regulated Materials (as defined in Section 2.12(d));

(g)any obligation or requirement imposed by any Governmental Entity, including any Environmental Authority (as hereinafter defined) arising and required to be performed prior to the Closing Date; and

(h)Sellers’ contract with GVNW Consulting, Inc.

1.5Insurance Proceeds. If prior to the Closing, any Purchased Assets shall have suffered, sustained or incurred any material loss, damage or destruction and the Sellers shall not have completed the repair or replacement of such Purchased Assets as of the Closing Date to the reasonable satisfaction of Buyer, then at Buyer’s option, the Sellers shall, at the Closing, assign and transfer to Buyer, and Buyer shall be entitled to receive from the Sellers, all insurance proceeds collected by reason of such loss, damage or destruction which have not been expended on such repair or replacement, together with any rights to receive any uncollected insurance proceeds relating to such loss, damage or destruction which is payable to the Sellers. This Section shall not limit Buyer’s other rights hereunder.

1.6Purchase Price; Tax Allocation. The purchase price for the Purchased Assets shall be an aggregate amount of Thirty Three Million Dollars ($33,000,000) (the “Purchase Price”). The Purchase Price shall be subject to adjustment in accordance with Section 1.10. The Purchase Price shall be allocated for tax purposes in accordance with Schedule 1.6 attached hereto. Each of Buyer and Sellers shall file its respective federal income tax returns consistent with such allocation for the tax year in which this Agreement is executed, and each of Sellers and Buyer shall report all tax consequences of the transactions contemplated by this Agreement, in a manner consistent with such allocation, and not take any position inconsistent therewith upon examination of any tax return, in any refund claim, in any litigation or investigation or otherwise.

1.7Closing. The closing of the purchase of the Purchased Assets under this Agreement shall take place at the offices of Buyer located at 521 East Morehead Street, Suite 250, Charlotte, North Carolina 28202 at 9:00 a.m. local time, on the closing date (the “Closing” or the “Closing Date”), which shall be on the first day of the month which is at least ten (10) days after the fulfillment or waiver of each of the conditions set forth in Article V hereof or at such other place, or on such earlier or later date and time as may be mutually agreed in writing by Buyer and Sellers, with the parties executing documents and exchanging signed documents. All proceedings to be taken and all documents to be executed and delivered by all parties at the

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Closing shall be deemed to have been taken and executed simultaneously, and no proceedings shall be deemed to have been taken nor any documents executed or delivered until all have been taken, executed and delivered. At Closing, (i) the Sellers shall deliver to Buyer all executed documents contemplated hereby including, without limitation, bills of sale and quitclaim deeds with covenant, necessary to transfer all of Sellers’ right, title and interest in and to the Purchased Assets, subject only to Permitted Liens, to Buyer as provided herein, (ii) the Buyer shall deliver to the Sellers all executed documents contemplated hereby, including without limitation instruments of assumption with respect to the Assumed Liabilities, and (iii) Buyer shall hand deliver or wire transfer the Purchase Price to or at the written direction of the Sellers on the terms set forth herein.

1.8Further Assurances. Each of the Sellers shall from time to time after the Closing, at the reasonable request of the Buyer and without further consideration, execute and deliver further documents, instruments of transfer, conveyance, endorsement, direction, authorization or assignment and take such other action as the Buyer may reasonably require to more effectively transfer and assign to, and vest in, the Buyer the Purchased Assets and all of Sellers’ rights thereto (as provided herein), and to fully implement the provisions of this Agreement.

1.9Transfer Taxes(a). All sales, income, recording, stamp, conveyance, value added, use, or similar asset transfer taxes, fees and duties or charges under applicable law incurred in connection with the sale and transfer of the Purchased Assets under this Agreement will be borne and paid by the Sellers.

1.10Purchase Price Adjustment.

(a)As used herein, for the purposes of this Section, (i) “Net Working Capital” shall mean Current Assets minus Current Liabilities; (ii) “Current Assets” shall mean the following current assets of the Sellers, combined, calculated in accordance with generally accepted accounting principles consistently applied (“GAAP”) to the extent included as Purchased Assets: (A) cash, cash equivalents of CassTel and CassTel LD; and (B) accounts receivable (net of reserves for doubtful accounts and excluding intercompany accounts receivable and pre-Closing accounts receivable from T-Mobile) as represented on Schedule 1.10; and (iii) “Current Liabilities” shall mean the following current liabilities of Sellers, combined, calculated in accordance with GAAP; (A) accounts payable and accrued expenses related to the Purchased Assets but excluding any intercompany payables; (B) taxes, to the extent payable by the Buyer; (C) customer deposits; (D) accrued compensation; and (E) any other Assumed Liability that would be classified as a current liability in accordance with GAAP.

(b)The “Purchase Price Adjustment” is an adjustment to the Purchase Price representing the obligation of the Sellers to have not less than zero dollars in Net Working Capital at the close of business on the day before the Closing Date. If, as of the close of business as of the day before the Closing Date, Net Working Capital (as estimated in good faith by the Sellers in consultation with and as agreed to by the Buyer) exceeds $0, then the Purchase Price Adjustment shall credit Sellers (and increase the Purchase Price at Closing) for the amount by which Net Working Capital exceeds $0. If as of the close of business as of the day before the Closing Date, Net Working Capital (as estimated in good faith by the Sellers in consultation with the Buyer) is less than $0, then at Closing, the Purchase Price Adjustment shall credit the Buyer

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(and decrease the Purchase Price at Closing) for the amount by which Net Working Capital is less than $0. For illustration purposes only, the Purchase Price Adjustment shall be determined as represented on Schedule 1.10 annexed hereto.

(c)The Sellers shall prepare and submit to the Buyer for Buyer’s approval and consent, not later than five (5) business days prior to the expected or agreed upon Closing Date, a written good faith estimate of the amount of the Net Working Capital as of the close of business as of the day before the Closing Date (the “Purchase Price Adjustment Estimate”), which amount shall be used to adjust the Purchase Price at Closing.

(d)Within thirty (30) days following the Closing Date, the Sellers will prepare and submit to the Buyer financial statements (balance sheets, income and cash flow statements) for the period from the execution of this Agreement through the Closing Date (the “Closing Financials”). Within thirty (30) days after receiving the Closing Financials, Buyer shall prepare and deliver to Sellers for review and comment a closing statement (the “Closing Statement”) reasonably detailing as of the close of the business day prior to the Closing the Buyer’s determination of the amount of the final Net Working Capital of Sellers as of the business day prior to the Closing Date. If Sellers object to any amounts reflected on the Closing Statement, then Sellers must, within ten (10) days after their receipt of the Closing Statement, give written notice (the “Notice”) to Buyer specifying in reasonable detail any objections, or Buyer’s determination of the final Net Working Capital and the final Purchase Price Adjustment shall be final, binding and conclusive on the parties on such tenth (10^th) day. With respect to any disputed amounts, the parties shall meet in person and negotiate in good faith during the ten (10) day business day period (the “Resolution Period”) after the date of Buyer’s receipt of the Notice to resolve any such disputes. If the parties are unable to resolve all such disputes within the Resolution Period, then within five (5) business days after the expiration of the Resolution Period, all disputes shall be submitted to arbitration. The determination of the final Purchase Price Adjustment by arbitration shall be final, binding and conclusive on the parties hereto. From and after the Closing Date, each of the parties shall provide the other access to their books, records and personnel as such requesting party reasonably determines is necessary to prepare, review or dispute the Closing Statement.

(e)If the final Purchase Price Adjustment (as finally determined in accordance with the provisions set forth above) differs from the Purchase Price Adjustment Estimate, then within five (5) business days after such final determination, Buyer will pay the Sellers, or the Buyers will be entitled to recover from the Escrow Account, the difference in immediately available funds, in accordance with the provisions above, or as otherwise directed by such arbitration decision.

ARTICLE II

REPRESENTATIONS AND WARRANTIES OF THE SELLERS

The Sellers hereby represent and warrant, jointly and severally, to the Buyer that:

2.1Organization and Existence. LEC is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Maryland and is qualified to

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do business as a foreign limited liability company and is in good standing in each jurisdiction in which such qualification is required, including but not limited to, Missouri and Kansas. CassTel is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Maryland and is qualified to do business as a foreign limited partnership and is in good standing in each jurisdiction in which such qualification is required, including but not limited to Missouri and Kansas. CassTel LD is a corporation duly organized, validly existing and in good standing under the laws of the State of Missouri and is qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which such qualification is required including but not limited to Kansas. Each of LEC, CassTel and CassTel LD has all requisite power and authority to own its properties and to carry on its business as it is now being conducted or contemplated. The Sellers have heretofore made available to Buyer complete and correct copies of the Partnership Agreement of CassTel, the Articles of Organization and Operating Agreement of LEC and the Articles of Incorporation and By-Laws of CassTel LD. None of the Sellers is in violation of any term of its respective organizational, operating or governing documents or any judgment, decree, order, law, statute, ordinance, rule or government regulation applicable to it.

2.2Authority Relative to this Agreement. Each of the Sellers has the requisite power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement and the consummation by each of the Sellers of the transactions contemplated hereby have been duly and validly authorized by each of the Sellers and no other authorizations or proceedings on the part of any of the Sellers is necessary to authorize this Agreement or to consummate the transactions contemplated hereby. The Sellers have each provided evidence of its authority to enter into the Agreement and consummate the transactions contemplated hereby to the Buyer. This Agreement has been duly and validly executed and delivered by each Seller and this Agreement constitutes the valid and binding agreement of each, enforceable against each Seller in accordance with its terms, except that such enforceability may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors’ rights generally, and (ii) general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law).

2.3Consents and Approvals; No Violation. Neither the execution and delivery of this Agreement nor the consummation by any of the Sellers of the transactions contemplated hereby will:

(a)conflict with or result in any breach of any provision of the respective operating or governing documents of or laws applicable to any of the Sellers;

(b)except as set forth on Schedule 2.3(b), require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Entity or other third party;

(c)except as set forth in Schedule 2.3(c), violate or result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration or lien or other charge or encumbrance) under any of the terms, conditions or provisions of any contract, indenture,

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obligation, commitment, note, license, agreement or other instrument or obligation to which the Sellers are parties, or by which any of their respective assets may be bound, except for such violations, breaches and defaults (or rights of termination, cancellation or acceleration or lien or other charge or encumbrance) as to which requisite waivers or consents have been obtained;

(d)assuming the consents, approvals, authorizations or permits and filings or notifications referred to in this Section 2.3 (including Schedule 2.3(b) and Schedule 2.3(c)) are duly and timely obtained or made, violate or constitute a default under any judgment, order, restriction, writ, injunction, decree, law, statute, ordinance, rule or regulation applicable to any of the Sellers or to any of their respective assets; or

(e)create (directly or indirectly with or without notice of or lapse of time or both) any Lien on any of the Purchased Assets except pursuant to this Agreement and the agreements contemplated hereby.

2.4Financial Statements. The Sellers have delivered to the Buyer the consolidated balance sheets and the related consolidated statements of income and cash flows (including the related notes thereto, if any) of each of the Sellers as of and for the years ended December 31, 2004 (audited and regulatory versions), December 31, 2003 (audited and regulatory versions) and December 31, 2002 (audited and regulatory versions) and the monthly unaudited balance sheets and related statements of income and cash flows to date of each of the Sellers for the year 2005 (the “Financial Statements”). Except as set forth on Schedule 2.4, all of the Financial Statements, as of their respective dates, were prepared in accordance with (i) to the extent required, with respect to the regulatory versions of the Financial Statements the rules and regulations of the MPSC, KCC and FCC, and (ii) with respect to all other Financial Statements, GAAP applied on a basis consistent with prior periods (except as otherwise noted therein). Except as set forth on Schedule 2.4, all of the Financial Statements, were true and correct on their respective dates, and presented fairly on their respective dates, in all material respects, the consolidated financial position and results of operation and cash flows of each of the Sellers on a consolidated and consolidating basis as of and for the years ended December 31, 2004 (the “Balance Sheet Date”), December 31, 2003 and December 31, 2002 and monthly to date for 2005 subject, in the case of the unaudited financial statements, to normal year-end audit adjustments and the absence of footnote disclosures. Except as set forth in the December 31, 2004 balance sheets that are part of the Financial Statements (the “Latest Balance Sheet”) or in Schedule 2.4, and except for Excluded Liabilities, none of the Sellers has any material obligations, liabilities or material forward or long term commitments (including contingent liabilities). Except as provided on Schedule 2.4 with respect to the Purchased Assets, nothing has come to Sellers’ attention that would indicate that the Financial Statements were not true and correct in all material respects as of their respective dates or for the periods covered thereby.

2.5Contracts. Sellers have delivered to Buyer complete and accurate copies of each of the Assumed Contracts as in effect as set forth on Schedule 1.1(e). Each Assumed Contract is in full force and effect and is valid and enforceable against the applicable Seller in accordance with its terms. Neither the applicable Seller, nor any other party thereto, to such Sellers’ knowledge, is in breach or default of any material terms or conditions thereunder. Between the date hereof and the Closing, no Seller shall agree to any termination or modification of any of the Assumed Contracts without the prior written consent of Buyer.

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2.6Operations Since Balance Sheet Date.

(a)Since the Balance Sheet Date, except as set forth in Schedule 2.6, there has been no damage, destruction or loss, whether or not covered by insurance, or condemnation or other taking adversely affecting in any material respect any of the Purchased Assets or the Business.

(b)Except as set forth in Schedule 2.6 and except with respect to the actions of the Sellers resulting in this Agreement, since the Balance Sheet Date, each Seller has conducted the Business only in conformity with all rules and regulations of any Governmental Entity. Without limiting the generality of the foregoing, since the Balance Sheet Date, except as set forth in such Schedule, none of the Sellers has:

(i)made or permitted any amendment, cancellation or termination of any of the Assumed Contracts;

(ii)with respect to the Purchased Assets, cancelled or waived any debts owed to or claims held by any of Sellers (including the settlement of any claims or litigation) other than debts owed among the Sellers to each other or a Seller Affiliate;

(iii)created, incurred or assumed, guaranteed or agreed to create, incur, assume or guarantee, any indebtedness for borrowed money resulting in the imposition of a Lien on any of the Purchased Assets (other than a Permitted Lien or a Lien which Sellers are obligated to discharge at or prior to the Closing) or entered into, as lessee, any capitalized lease obligations (as defined in Statement of Financial Accounting Standards No. 13);

(iv)revalued any assets or properties, or accelerated or delayed collection of or (except as contemplated by subparagraph (ii) above) written off notes or accounts receivable in advance of or beyond their regular due dates or the dates when the same would have been collected in the ordinary course of its business consistent with past practice, or increased or changed any assumptions underlying bad debt calculations or contingency or other reserves;

(v)suffered, made (or committed to make) any sale, transfer, lease, license, encumbrance, loss, disposition, destruction or damage of any asset or property that, if it were held by a Seller on the Closing Date, would be part of the Purchased Assets (except as permitted under Section 4.2 hereof);

(vi)acquired or disposed of assets (or entered into any agreement to do so) or entered into or become committed to enter into any other material transaction (except as permitted under Section 4.2 hereof);

(vii)instituted any increase or decrease in any compensation payable to any employee of Sellers or adopted or made any change or amendment in any profit-sharing, bonus, incentive, deferred compensation, retention, severance, golden parachute, insurance, pension, retirement, medical, hospital, disability,

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welfare or other benefits made available to employees of Sellers, except in each case as required by any Company Plan (as herein defined), written employment agreement, collective bargaining agreement or multi-employer health and welfare or pension plan and except as permitted under Section 4.2 hereof;

(viii)made any change in the accounting methods, principles and practices used by Sellers from those applied in the preparation of the Latest Balance Sheet and the related statements of income, stockholders’, partners’ or members’ equity and cash flow as of and for the twelve months ended December 31, 2004; or

(ix)experienced any strike, work stoppage, slow down, union organizing or recognition efforts, claims of unfair labor practices, grievances, labor arbitrations, or any similar significant labor difficulty of any kind, character or nature or any hiring or termination of employees or independent contractors of the Business, or any change in any employment or consulting agreements.

2.7Absence of Certain Changes or Events. Except as set forth in the schedules to this Agreement, since the Balance Sheet Date, none of the Sellers has suffered any material adverse change in the properties, financial statements, business prospects, condition (financial or otherwise) or results of operation of the Business.

2.8Absence of Undisclosed Liabilities. Except as set forth on Schedule 2.8 or on the Latest Balance Sheet, none of the Sellers has any absolute, accrued or contingent indebtedness, liability or liabilities arising out of any transaction or state of facts, whether accrued, to become due, contingent, or otherwise.

2.9Litigation. Except as disclosed on Schedule 2.9, there are no investigations, complaints, charges, grievances, actions, claims, suits, proceedings at law or in equity or by any governmental or administrative instrumentality or agency (including without limitation, the MPSC, KCC, FCC, NECA and USAC) (“Proceedings”) pending or, to the knowledge of Sellers, threatened against any Seller (or any of their respective managers, members, partners, directors, officers or employees) which relate to the Business or the Purchased Assets. No investigation, complaint, action, suit or proceeding is pending at law or in equity or by or before any governmental instrumentality or other agency against any Seller, or any partner, director, officer or key employee of any Seller that has a reasonable possibility of calling into question the validity, or hindering the enforceability or performance, of this Agreement or any action taken or to be taken pursuant hereto or any of the other agreements and transactions contemplated hereby, nor, to the Sellers’ knowledge, has there occurred any event or does there exist any condition on the basis of which any such litigation, proceeding or investigation might properly be instituted. Except as disclosed on Schedule 2.9, there is no outstanding judgment, injunction, decree or order issued by any governmental instrumentality or other agency (including, without limitation, the MPSC, the KCC, FCC, NECA and USAC) against any Seller.

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2.10Taxes.

(a)Tax Returns. Each Seller has timely and properly filed all federal, state, local and foreign tax returns (including but not limited to income, franchise, sales, payroll, employee withholding and social security and unemployment) (“Tax Returns”) that it was required to file since January 1, 1998. All such Tax Returns are correct and true in all material respects. Except as disclosed on Schedule 2.10, all taxes (including interest and penalties) due and owing by Seller, or to which any of them may be liable under Treasury Regulations §1.1502-6 (or analogous state or foreign provisions) by virtue of having been a member of any affiliated group (as defined in Section 1504(a) of the Internal Revenue Code, as amended to date (the “Code”)) (or other group filing on a combined or unitary basis), have been paid. Seller was not (at any time after January 1, 1998) and is not now a party to any tax sharing agreement, nor currently is the beneficiary of any extension of time within which to file any report or return. No claim has been made since January 1, 1998 by a taxing authority in a jurisdiction where Seller does not file reports and returns that it is or may be subject to taxation by that jurisdiction. Any liability of the Sellers for taxes not yet due and payable, or which are being contested in good faith, has been provided for on the Financial Statements in accordance with GAAP or are described on Schedule 2.10.

(b)Each Seller (or any officer or employee responsible for tax matters) has no actual knowledge or reason to believe that any taxing authority will assess any additional taxes against it for any period for which returns have been filed. Except as disclosed in Schedule 2.10, there is no dispute or claim concerning any tax liability of any Seller either (i) claimed or raised by any Governmental Entity or taxing authority in writing, or (ii) as to which such Seller has knowledge. Schedule 2.10 lists all tax returns filed with respect to Sellers for taxable periods beginning January 1, 1998 to and including the date of this Agreement, and indicates those returns that have been audited or currently are the subject of an audit. Sellers have made available to Buyer true, correct and complete copies of all federal, state and local income Tax Returns, examination reports and statements of deficiencies assessed against or agreed to by CassTel or CassTel LD for the period beginning January 1, 1998 to present.

(c)None of the Sellers is a “foreign person” within the meaning of Section 1445 of the Code. None of the Sellers is a party to any agreement, whether written or unwritten, providing for the payment of taxes, payment for tax losses, entitlements to refunds or similar tax matters. None of the Sellers has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.

(d)No property of Sellers is “tax-exempt use property” within the meaning of Section 168(h) of the Code or property that the Sellers will be required to treat as being owned by another person pursuant to Section 168(f)(8) of the Internal Revenue Code of 1954, as amended, in effect immediately before the enactment of the Tax Reform Act of 1986.

(e)None of the Sellers has consented to any extension of the statute of limitations with respect to any open federal, state or local tax returns. None of the Sellers has, since January 1, 1998, entered into a closing agreement pursuant to Section 7121 of the Code.

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(f)There are no tax liens upon any property or assets of Sellers, including but not limited to the Purchased Assets, except for liens for current taxes not yet due and payable.

(g)Each Seller and each payor of benefit payments under any Company Plan, has withheld and timely paid all taxes (including, without limitation, federal, state, local, or foreign income, franchise, payroll, employee withholding and social security and unemployment taxes) required to have been withheld and paid in connection with amounts paid or owing to any employee, creditor, independent contractor, stockholder or other third party since January 1, 1998. All Forms W-2 and 1099-series forms required to be filed with respect thereto have been timely and properly filed.

2.11Employee Benefit Plans; Labor and Employment Matters.

(a)Set forth in Schedule 2.11 is a true, correct and complete list of each of the following employee benefit plans, labor and employee matters maintained, sponsored or contributed to by the Sellers or any ERISA Affiliate at any time since January 1, 2000, or with respect to which the Sellers or any ERISA Affiliate could reasonably have any liabilities, or which provides or will provide benefits to present or former members, managers, partners, employees, officers or directors of the Sellers or any ERISA Affiliate, or their dependents, survivors or beneficiaries (the “Company Plans”):  (i) each “employee pension benefit plan” (as such term is defined in Section 3(2) of ERISA) (“Pension Plan”), (ii) each “employee welfare benefit plan” (as such term is defined in Section 3(1) of ERISA), and (iii) each employee benefit plan, program or arrangement that is not subject to ERISA, including without limitation any retirement, pension, savings, profit sharing, money purchase pension, defined benefit, deferred compensation, severance, retention, golden parachute, stock ownership, stock purchase, stock option, phantom stock, equity, performance, bonus, incentive, vacation or holiday pay, educational assistance or tuition remission or reimbursement, cafeteria, dependent care, transportation, hospitalization or other medical, disability, death benefit plan (whether provided through insurance, on a funded or unfunded basis, or otherwise), or other welfare, benefit or fringe benefit plan, policy, trust, understanding or arrangement of any kind, whether written or oral. None of the Sellers nor any ERISA Affiliate currently sponsors, maintains or is required to contribute to or make any payments in respect of, or has at any time sponsored, maintained or been required to contribute to or make any payments in respect of, (i) any Pension Plan subject to Title IV or Section 302 of ERISA or Section 412 of the Code or (ii) any “multiemployer plan” (as such term is defined in Section 3(37) of ERISA) (“Multiemployer Plan”).

With respect to each Company Plan, Sellers have provided to Buyer a true, correct and complete copy of each of the following that is applicable to such Company Plan:  the current plan document with all amendments thereto; any related trust or custodial agreements, insurance or annuity contracts currently in effect; the current summary plan description and any subsequent summary of material modifications; the Sellers’ current employee handbooks, personnel policies and procedures, individual employment contracts, independent contractor agreements and collective bargaining agreements, the most recent favorable IRS determination or opinion letter received; Form 5500s for the plan year ended December 31, 2004 and any Form 5330s filed with the Internal Revenue Service.

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(b)With respect to the Company Plans, except as set forth in Schedule 2.11: (i) each Company Plan intended to be qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended (the “Code”) has received a favorable determination letter or prototype approval letter from the Internal Revenue Service (the “IRS”) that it is so qualified and since the date of such letter there are no circumstances that are reasonably likely to affect the qualified status of such Company Plan, (ii) each Company Plan has been operated in accordance with its terms and the requirements of any applicable laws, regulations or administrative rulings, (iii) none of the Sellers nor any ERISA Affiliate has incurred or has any reason to believe that it will incur any direct or indirect liability under, arising out of or by operation of Title IV of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and no fact or event exists that is reasonably likely to give rise to any such liability, (iv) there is no pending or, to the knowledge of the Sellers, threatened claim, suit or grievance in respect of any of the Company Plans or, to the knowledge of Sellers, any basis for any such claim, suit or grievance, other than claims for benefits in the ordinary course of business, and (v) all required contributions, reserves or premium payments for the Company Plans have been made.

(c)None of the Sellers, to the knowledge of the Sellers, any other “disqualified person” (within the meaning of Section 4975 of the Code) or “party in interest” (within the meaning of Section 3(14) of ERISA) has taken any action with respect to any Company Plan that could subject any such plan (or its related trust), the Sellers or any member, manager, partner, officer, director or employee of any of the foregoing to a material penalty or tax under Section 502(i) or Section 502(l) of ERISA or Section 4975 of the Code.

(d)Except as set forth in Schedule 2.11, none of the Sellers maintains or contributes to any employee welfare benefit plan which provides benefits to employees after termination of employment other than as required by Part 6 of Title I of ERISA. Any employee welfare benefit plan set forth in Schedule 2.11 as described in the previous sentence can be amended or terminated at any time in the future.

(e)Except as set forth in Schedule 2.11, (i) Sellers have complied with all applicable laws, rules and regulations which relate to wages, hours, discrimination in employment and collective bargaining and are not liable for any arrears of wages or any taxes or penalties for failure to comply with any of the foregoing and (ii) there is no pending or, to the knowledge of the Sellers, threatened claim, suit, arbitration, grievance or investigation regarding employment matters against the Sellers. Except as set forth in Schedule 2.11, (x) there is no unsatisfied award, judgment or other final resolution of a dispute regarding employment matters against the Sellers that requires continuing compliance therewith or that individually or in the aggregate constitutes a material liability and (y) none of the Sellers is a party to any collective bargaining or other labor union contracts. There is no pending or, to the knowledge of the Sellers, threatened labor dispute, strike or work stoppage against the Sellers which would interfere with the respective business activities of the Sellers and, to the knowledge of the Sellers, there are no pending or threatened union organizing or election activities involving any non-union employees of the Sellers.

(f)As used herein, “ERISA Affiliate” shall mean (i) any corporation which at any time on or before the Closing Date is or was a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) with Sellers, (ii) any

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partnership, trade or business (whether or not incorporated) which at any time on or before the Closing Date is or was under common control (within the meaning of Section 414(c) of the Code) with Sellers, (iii) any entity which at any time on or before the Closing Date is or was a member of the same affiliated service group (within the meaning of Section 414(m) of the Code) with Sellers or any corporation described in clause (i) of this paragraph or any partnership, trade or business described in clause (ii) of this paragraph, and (iv) any entity which at any time on or before the Closing Date was required to be aggregated with Sellers under Code Section 414(o).

(g)Schedule 2.11 contains a true and complete list of names and current hourly wage, monthly salary or other compensation of all directors, officers, managers, employees, consultants, independent contractors or managers of the Business, with a summary of existing bonuses, additional compensation and other benefits (whether current or deferred), if any, paid or payable to each such person for services rendered in the fiscal year ended December 31, 2004. Schedule 2.11 contains a true and complete listing and summary description of all employment, compensation, non competition, confidentiality, consulting and independent contractor agreements and any other similar agreements between either Seller and their respective members, managers, partners, directors, officers, employees, independent contractors and consultants.

(h)Except as listed on Schedule 2.11, none of the Sellers is a party to any contract with any labor organization, nor have they agreed to, been required to or been asked to recognize or negotiate any union or other collective bargaining unit, nor has any union or other collective bargaining unit been certified as representing any of their respective employees. None of the Sellers has knowledge of any organization currently being made, pursued or threatened by or on behalf of any labor union with respect to their respective employees. Except as listed on Schedule 2.11, the Business has not, within the last three years, experienced any strike, work stoppage, slow down, lockout, grievance proceeding, claim of unfair labor practices or other significant labor difficulty of any nature, nor are any claims pending or, to the best knowledge of Sellers, threatened between any of the Sellers and their respective employees.

(i)None of the Sellers has received notification as of the date of this Agreement that any of its current significant employees (or one or more employees who, when taken together, would be significant to the Sellers) presently plan to terminate or otherwise resign from employment, whether by reason of the transactions contemplated hereby or otherwise. Except as listed on Schedule 2.11, the employment of all nonunion employees presently employed or retained in the Business is terminable at will, and the Buyer will not be, pursuant to any current contract, arrangement or understanding (including collective bargaining agreements), applicable law, or otherwise, obligated to pay any severance pay or other benefit by reason of the voluntary or involuntary termination of employment of any present or former employee (including managers), consultant, independent contractor or agent of any of the Sellers prior to, on or after the Closing.

2.12Environmental Laws and Regulations. When used in this Section 2.12:

(a)“Environmental Laws” shall mean any and all federal, state or local laws, rules, orders, regulations, statutes, common law, ordinances, codes, decrees or requirements of any Environmental Authority or any other Governmental Entity regulating, relating to or

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imposing liability or standards of conduct concerning any Regulated Materials, environmental protection, or human health protection involving Regulated Materials or worker health and safety as currently in effect or as in effect at any time in the past;

(b)“Environmental Authority” shall mean any Governmental Entity (as such term is defined in Section 8.9(c) below) responsible for the due administration and/or enforcement of any Environmental Law.

(c)“Environmental Permits” shall mean all governmental approvals, authorizations, registrations, permits and licenses, including those related to environmental quality and the emission, discharge, storage, handling, treatment, use, generation or transportation of Regulated Materials required by Environmental Laws or otherwise required for the Sellers to conduct the Business.

(d)“Regulated Materials” shall mean any pollutant, contaminant, hazardous material, hazardous waste, infectious medical waste, hazardous or toxic substance (and all constituents and degradation products thereof) defined or regulated as such in or under any Environmental Law, including, without limitation, petroleum, crude oil or fractions thereof, petroleum products, waste or used oil, natural or synthetic gas, asbestos or asbestos-containing materials and polychlorinated biphenyls, materials exhibiting the characteristics of ignitability, corrosivity, reactivity or extraction procedure toxicity, as such terms are defined in connection with hazardous materials or hazardous wastes or hazardous or toxic substances in any Environmental Law; and

(e)“Release” shall have the same meaning as provided in the Comprehensive Environmental Response, Compensation, and Liability Act, as amended, Section 101(22), 42 U.S.C. Section 9601(22).

(i)Except as set forth in Schedule 2.12, the Sellers are in compliance in all material respects with all Environmental Laws and the conduct of the Business by the Sellers does not violate or conflict with and has not in the past violated or conflicted with any Environmental Laws in any material respect. None of the Sellers has handled any Regulated Materials on any real property used in connection with the Business that is now or previously owned or leased by any of the Sellers. To the Sellers’ knowledge, there is no asbestos located in or on any of the real property used in connection with the Business that is now owned or leased by any of the Sellers. To the Sellers’ knowledge, none of the real property used in connection with the Business that is now or previously owned or leased by any of the Sellers has been contaminated with creosote nor, to the Sellers’ knowledge, has any creosote been allowed to accumulate in the soil or ground water of any real property used in connection with the Business that is now or previously owned or leased by the Sellers.

(ii)Except as set forth in Schedule 2.12, the Sellers have obtained all necessary Environmental Permits. The Sellers’ Environmental Permits are in full force and effect, and the Sellers are in compliance therewith in all material respects.

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(iii)Except as set forth in Schedule 2.12, (A) None of the Sellers have received any complaint or notice from any Environmental Authority or any other person alleging any past or present violation of any Environmental Law in connection with the operation of the Business, (B) to the Sellers’ knowledge, there is no investigative proceeding against the Sellers by any Environmental Authority in connection with the past or present operation of the Business or ownership or operation of any of the real properties identified on Schedule 2.13, or any other real property used in connection with the Business that is leased or licensed by any of the Sellers, and (C) there are no pending claims under any Environmental Law against any of the Sellers.

(iv)Except as set forth in Schedule 2.12, none of the Sellers have been subject to any administrative or judicial enforcement action or proceeding of any kind pursuant to any Environmental Law in connection with the Business.

(v)Except as set forth in Schedule 2.12, none of the Sellers are subject to any remedial obligation or other response action (including without limitation, any assessment, containment or removal action) under any administrative order, decree, or agreement pursuant to any Environmental Law.

(vi)Except as set forth in Schedule 2.12, (A) no real property currently or formerly owned, leased, operated or used by any of the Sellers in connection with the Business (including any real property used for off-site disposal, deposit or storage of any Regulated Material) is listed or, to the knowledge of Sellers, has been proposed for listing on any federal list of Superfund or National Priorities List, including any analogous state lists, sites or similar governmental lists, (B) to the Sellers’ knowledge, there exist no circumstances that could result in any such property being listed on any federal list of Superfund or National Priorities List sites or similar governmental lists, including any analogous state lists, regarding waste sites at which there has been a Release or threatened Release of Regulated Materials, and (C) to the Sellers’ knowledge, none of the Sellers’ real property has been used at any time by any person as a hazardous waste treatment, hazardous storage or hazardous disposal site.

(vii)Except as set forth in Schedule 2.12, there are no (A) underground storage tanks (as defined under the Resource Conservation and Recovery Act or any other applicable Environmental Law), or (B) capacitors, transformers or other equipment or fixtures containing polychlorinated biphenyls (“PCBs”) (other than light fixtures which contain PCBs) located in, at, under or on the real property owned or leased by any of the Sellers.

(viii)Except as set forth in Schedule 2.12, to the Sellers’ knowledge, there are no facts, actions, activities, circumstances, conditions, occurrences, events, liabilities, or incidents, including any Release, threatened Release, generation, use, treatment, storage, disposal, arranging for disposal, transportation, or the presence of Regulated Materials, that are likely to (A) result in any environmental liability of Sellers, (B) prevent or interfere with the

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operation of the Sellers’ Business as it is currently being conducted, in compliance with all applicable Environmental Laws, (C) adversely affect the assets, Business or financial condition of the Sellers, or (D) adversely impact or affect the use of any real property owned, operated, or leased by the Sellers in connection with the Business.

(ix)The Sellers have provided to Buyer all environmental reports, documents and other written materials relating to environmental conditions and compliance with Environmental Laws which are within Sellers’ custody, possession and control.

(x)Neither this transaction or any element of this transaction requires any disclosures or notifications to any Environmental Authority or other Government Entity pursuant to any transaction-triggered Environmental Law.

2.13Real Property.

(a)All owned or leased real property of the Business (the “Properties”) is described on Schedule 2.13. Except for (i) Permitted Liens and (ii) Liens as set forth on Schedule 2.13 which are to be discharged at or prior to Closing, Sellers have good, valid and marketable title to all of their real property (other than properties which are leased), free and clear of all Liens, mortgages, restrictions and other encumbrances and defects of title of any nature whatsoever. A true copy of each lease has been delivered by Sellers to Buyer, and each such lease is listed on Schedule 2.13, is in full force and effect and affords such company peaceful and undisturbed possession of the subject matter of such lease subject to the terms and conditions of the Permitted Liens, and subject to applicable law. Each of the Sellers has performed all obligations required to be performed by it under each of the leases to which it is a party, no amount due under any such leases remains unpaid, and to the Sellers’ knowledge, no contingency, claim, dispute or other disagreement exists between the parties to any such lease. No default or event of default on the part of any of the Sellers or, to the knowledge of Sellers, on the part of the lessor, exists under any such lease, and none of the Sellers has received any notice of default under any such lease or any indication that the owner of the leased property intends to terminate such lease, and to the Sellers’ knowledge, no event has occurred which with notice or the lapse of time, or both, would constitute a default under any such lease. Except as specifically disclosed on Schedule 2.13, the Sellers hold all easements, rights-of-way and other rights necessary to own, operate and maintain the physical plant of the Sellers (including all telephone and cable lines) to operate the business and to provide services to existing customers and none of the Sellers is in breach of, or default under, any such easement, right-of-way or other right and there are not any burdensome limitations or obligations under any such easement, right-of-way or other right. All easements and rights of way have been properly recorded or registered, if needed, and are valid and enforceable. A true copy of all easements, rights of way and all other rights necessary to own, operate and maintain the physical plant of the Sellers (including all telephone lines and cable lines) (collectively the “Easements”) and all deeds for real property owned have been delivered by Sellers to Buyer, and each such deed and Easement is listed on Schedule 2.13.

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(b)Except as set forth on Schedule 2.13, none of the Sellers is in violation of any zoning, land use, building or safety law, ordinance, regulation or requirement or other law or regulation applicable to the operation of its owned or leased properties (“Zoning Requirements”), nor has it received any notice of violation with which it has not complied, in any case in which the consequences of such violation if asserted by the applicable Governmental Entity would be adverse with respect to such company or would materially impair the ability of such company to use the affected parcel of owned or leased property in the manner and scope in which it is now being used and/or necessary for the operation of the Business. Except as set forth on Schedule 2.13, (i) there are no operations on the Properties which constitute nonconforming uses under any Zoning Requirement, and (ii) none of the Sellers has any knowledge of, nor received any notice (other than published notice not actually received) of, any pending or contemplated rezoning proceeding affecting the Properties.

(c)Except as set forth on Schedule 2.13, (i) to the Sellers’ knowledge, no person or entity has any right or option to purchase, lease, sublease or license the real property used in the Business or any portion thereof, and (ii) the use of the real property of the Business is permitted under applicable laws, ordinances, rules, or regulations and is in conformity with the same.

2.14Tangible Personal Property; Intangible Property.

(a)The Purchased Assets include any and all personal property used in and/or necessary for the operation of the Business. Except for (i) Permitted Liens and (ii) Liens to be discharged at the Closing that are set forth in Schedule 2.14, none of the Purchased Assets is subject to any Lien and each Seller has good, valid, and marketable title, free and clear of all title defects, objections and Liens, to the tangible and intangible personal property included in the Purchased Assets. Except as set forth in Schedule 2.14, each Seller holds good and transferable leaseholds in all of the personal property leased by it, in each case under valid and enforceable leases. None of the Sellers is in default with respect to any item of personal property purported to be leased by it, and no event has occurred that constitutes or with due notice or lapse of time or both would constitute a default under any lease thereof.

(b)The Purchased Assets include all items of intangible property which are material to the Business as currently conducted, including, without limitation, trade names, trademarks and service marks, brand names, patents and copyrights.

2.15Insurance. Schedule 2.15 sets forth a list of all insurance policies and all material fidelity bonds or other insurance service contracts (the “Insurance Policies”) providing coverage for the properties or operations of the Business, the type and amount of coverage, and the expiration dates of the Insurance Policies. There is no claim pending under any of the Insurance Policies as to which coverage has been questioned, denied or disputed by the underwriters of such policies. All premiums payable under all Insurance Policies have been paid, and Sellers have otherwise complied in all material respects with the terms and conditions of all of the Insurance Policies. To Sellers’ knowledge, the Insurance Policies are valid and enforceable in accordance with their terms, are issued by insurers that are financially sound and reputable, are in full force and effect and insure against risk and liabilities customary in the industry and as required by law or any material contract to which either Seller is a party. Since January 1, 2002,

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except as set forth on Schedule 2.15, Sellers have not received notice from any of their current insurance carriers:  (i) threatening a suspension, revocation, modification or cancellation of any Insurance Policy or a material increase in any premium in connection therewith, or (ii) informing such company that any coverage listed on Schedule 2.15 will or may not be available in the future on substantially the same terms as now in effect.

2.16Compliance with Laws and Orders. Except as set forth in Schedule 2.16, each Seller has been and is in compliance with all applicable statutes, laws, ordinances, regulations, franchises, licenses, permits, administrative permissions or approvals, rules, governmental policies or orders of any Governmental Entity (including, without limitation, the MPSC, KCC and FCC), and any judgment, ruling, decree or order of any court, administrative agency or tribunal or any arbitrator or arbitral panel or tribunal applicable to its business or operations; and the conduct of the Business has been and is in compliance with all federal, state and local energy, public utility, health, wage and hour (including but not limited to the Fair Labor Standards Act), employment, workplace or worker safety and health, including but not limited to OSHA, and all other requirements of any Governmental Entity (including, without limitation, requirements of the MPSC, KCC and FCC). Each Seller has all permits, licenses, registrations, franchises and other authorizations from, and has made all necessary filings with, all Governmental Entities, including the MPSC, KCC and FCC, required to conduct the Business as now being conducted. No investigation or review by any Governmental Entity with respect to the Business is pending or, to the knowledge of Sellers, has been threatened. Since the Balance Sheet Date, except as set forth on Schedule 2.16, none of the Sellers has received any notice or other communication (whether oral or written) from any Governmental Entity or any other person regarding (i) any actual, alleged, possible, or potential violation of or failure to comply with, any applicable law, or (ii) any actual, alleged, possible, or potential obligation on the part of either Seller to undertake, or to bear all or any portion of the cost of, any remedial action of any nature.

2.17Permits.

(a)Each Seller owns, holds or possesses all licenses, franchises, permits, privileges, immunities, approvals and other authorizations from Governmental Entities which are necessary to entitle it to own or lease, operate and use its assets and to carry on and conduct the Business substantially as currently conducted (herein collectively called “Governmental Permits”). Complete and correct copies of all of the Governmental Permits have heretofore been delivered or made available to Buyer and are listed on Schedule 2.17.

(b)Except as set forth in Schedule 2.17, each of such Governmental Permits is in full force and effect, and each Seller has fulfilled and performed its obligations under each of the Governmental Permits. No proceedings to revoke, refuse, renew, modify or restrict the Governmental Permits are pending or, to Sellers’ knowledge, threatened, and no event has occurred or condition or state of facts exists which constitutes or, after notice or lapse of time or both, would constitute a breach or default under any such Governmental Permit or which permits or, after notice or lapse of time or both, would permit restriction, modification, revocation or termination of any such Governmental Permit, or which would adversely affect the rights of Sellers under any such Governmental Permit, (ii) no notice of cancellation, of default or of any dispute concerning any Governmental Permit, or of any event, condition or state of facts described in the preceding clause, has been received by, or is known to Sellers and (iii) all filings

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and reports required by Governmental Entities have been timely and properly made. The transactions contemplated by this Agreement shall not cause the study area of the Business to change.

2.18Intellectual Property. The Purchased Assets include all rights in all patents, patent rights, trademarks, trade names, trade dress, logos, service marks, copyrights, know how and other proprietary intellectual property rights and computer programs necessary to carry out the Business (“Intellectual Property Rights”), all of which are listed on Schedule 2.18. The Purchased Assets do not include the trade names of LEC which are not necessary to carry out the Business. Except as set forth on Schedule 2.18, to Sellers’ knowledge, the Intellectual Property Rights do not infringe on any proprietary right of any person and no claims challenging the validity, effectiveness or ownership by any Seller of any of the Intellectual Property Rights, or to the effect that the Intellectual Property Rights infringe or will infringe any intellectual property or other proprietary right of any person have been asserted or, to the Sellers’ knowledge, are threatened by any person nor to Sellers’ knowledge are there any valid grounds for any bona fide claim of any such kind. To the best of the Sellers’ knowledge, there is no material unauthorized use, infringement or misappropriation of any of the Intellectual Property Rights by any third party.

2.19Certain Agreements.

(a)Except as set forth in Schedule 2.19, there are no amounts payable by Sellers to any partner, manager, officers or employees of Sellers (in their capacity as partner, manager, officers or employees), and there is no vesting or acceleration of rights or the lapse of restrictions, as a result of the transactions contemplated by this Agreement and/or any subsequent employment termination.

(b)Except as set forth on Schedule 2.19, there are no contracts, understandings, arrangements or commitments (whether written or oral) between any of the Sellers, on the one hand, and another Seller or any stockholder, member, manager, partner, officer, director or employee of a Seller or any of an Affiliate of Sellers, on the other hand.

2.20Brokers and Finders. None of the Sellers has employed any investment banker, broker, finder, consultant or intermediary in connection with the transactions contemplated by this Agreement which would be entitled to any investment banking, brokerage, finder’s or similar fee or commission in connection with this Agreement or the transactions contemplated hereby.

2.21Adequacy of Purchased Assets. The Purchased Assets include all assets necessary for the operation of the Business in the ordinary course and in the manner in which the Business is currently operated.

2.22Accounts Receivable. The accounts receivable of CassTel and CassTel LD that are included in the Purchased Assets represent valid obligations owed to CassTel and CassTel LD. To the best of Sellers’ knowledge, such accounts receivable are collectible in the ordinary course of business, subject to a reasonable reserve for doubtful accounts. Neither this Section 2.22

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nor any other provision of this Agreement shall be construed as a guarantee by Sellers that Buyer will collect all of the accounts receivable that are included in the Purchased Assets.

2.23CALEA Compliance. Sellers are in compliance with the Federal Bureau of Investigation’s current CALEA requirements and are not in violation of any statute, regulation or rule or requirement associated with CALEA.

2.24Disclosure. Neither this Agreement, nor any of the attachments, Schedules, Exhibits, written Statements, documents, certificates or other items prepared for or supplied to Buyer by or on behalf of Sellers with respect to the transactions contemplated hereby contains or will contain any untrue statement of a material fact or omits or will omit any material fact necessary to make each statement contained herein or therein not misleading. No Seller has knowledge of any fact relating to the Business that has not been disclosed to Buyer which materially adversely affects the Business or which would prevent Sellers from completing the transactions contemplated by this Agreement.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF BUYER

Buyer represents and warrants to the Sellers that:

3.1Corporate Organization and Qualification. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and is qualified to do business as a foreign corporation in each jurisdiction and is in good standing in each jurisdiction where the properties owned, leased or operated, or the business conducted, by it require such qualification. Buyer has all requisite power and authority (corporate or otherwise) to own its properties and to carry on its business as it is now being conducted or contemplated.

3.2Authority Relative to This Agreement. Buyer has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement and the consummation by Buyer of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of Buyer, and no other corporate proceedings on the part of Buyer are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. The Buyer has provided evidence of its authority to enter into the Agreement and consummate the transactions contemplated hereby to Sellers. This Agreement has been duly and validly executed and delivered by Buyer and constitutes the valid and binding agreement of Buyer, enforceable against Buyer in accordance with its terms, except that such enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors’ rights generally, and (b) general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity).

3.3Consents and Approvals; No Violation. Neither the execution and delivery of this Agreement by Buyer nor the consummation by Buyer of the transactions contemplated hereby will:

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(a)conflict with or result in any breach of any provision of the Articles of Incorporation or the By-Laws of Buyer;

(b)require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Entity, except (i) such filings and consents as may be required by the FCC or the FCC Rules, or by the MPSC or the MPSC Rules or by the KCC or the KCC Rules (ii) as may be required by any applicable state securities or “blue sky” laws or state takeover laws or (iii) such filings and consents as may be required under any local government environmental, health or safety law or regulation pertaining to any notification, disclosure or required approval triggered by the transactions contemplated by this Agreement;

(c)except as set forth in Schedule 3.3(c), violate or result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration or lien or other charge or encumbrance) under any of the terms, conditions or provisions of any contract, indenture, obligation, commitment, note, license, agreement or other instrument or obligation to which Buyer or any of its Subsidiaries is a party or by which any of their respective assets may be bound; or

(d)assuming the consents, approvals, authorizations, permits, filings and notifications referred to in this Section 3.3 (including Schedule 3.3(c)) are duly and timely obtained or made, violate or constitute a default under any judgment, order, restriction, writ, injunction, decree, law, statute, ordinance, rule or regulation applicable to Buyer or any of its Subsidiaries or to any of their respective assets.

3.4Brokers and Finders. Buyer has not employed any investment banker, broker, finder, consultant or intermediary in connection with the transactions contemplated by this Agreement which would be entitled to any investment banking, brokerage, finder’s or similar fee or commission in connection with this Agreement or the transactions contemplated hereby.

ARTICLE IV

ADDITIONAL COVENANTS AND AGREEMENTS

4.1Regulatory Matters. The parties shall, promptly after the date hereof, cooperatively commence efforts to obtain all Governmental Entity approvals, including but not limited to, MPSC, KCC and FCC approvals of the transactions contemplated hereby and the authorizations listed in Schedule 2.3(b). The parties shall diligently pursue and use their best efforts to obtain such authorizations and approvals as promptly as practicable following the execution of this Agreement.

4.2Conduct of Business. Each Seller agrees that during the period from the date of this Agreement to the Closing Date (unless the Buyer shall otherwise agree in writing and except as otherwise contemplated by this Agreement), each Seller will: conduct its operations according to all applicable laws and regulations with no less diligence and effort than would be applied in absence of this Agreement; with respect to the Business preserve and maintain its physical plant; make capital expenditures with respect to the Business each year in the ordinary course,

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consistent with the needs of the Business; and preserve its relationships with customers, suppliers and others having business dealings with it to the end that goodwill and ongoing businesses shall not be impaired in any material respect on the Closing Date. Without limiting the generality of the foregoing, and except as otherwise permitted in this Agreement or as set forth in Schedule 4.2, prior to the Closing Date, none of the Sellers will, without the prior written consent of Buyer (which consent shall not be unreasonably withheld):

(a)sell, pledge, lease, license or otherwise encumber or transfer any of the Purchased Assets or adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of any of Sellers except for the sales of obsolete or worn-out assets or assets being replaced prior to the Closing Date

(b)modify or adopt any amendments to its organizing or governing documents or alter through merger, liquidation, reorganization, restructuring or in any other fashion its corporate structure or ownership;

(c)grant any material increases in (or make amendments to) the compensation of any of its employees listed on Schedule 4.8;

(d)except as set forth on Schedule 4.2, pay or agree to pay any pension, retirement allowance or other employee benefit not required or contemplated by any of the existing benefit, severance, termination, pension or employment plans, agreements or arrangements as in effect on the date hereof to any such member, partner, manager, employee, director or officer, whether past or present;

(e)except as set forth on Schedule 4.2, enter into any new, or materially amend any existing, bonus, profit sharing, retention, golden parachute, employment, severance, termination or similar agreement with any member, manager, partner, director, officer or employee;

(f)except as set forth on Schedule 4.2 or as may be required to comply with applicable law or as may be required by those items listed on Schedule 4.2, adopt or become obligated under any plan, program or arrangement which, if existing on the date hereof, would be a Company Plan in accordance with Section 2.11 or amend any Company Plan if such amendment would have the effect of enhancing any benefits thereunder;

(g)except as set forth on Schedule 4.2, take any position with respect to or settle or compromise any material tax claim, file any material amended tax return or claim for refund, or file any tax return incorporating a material position, election or method of accounting inconsistent with a position, election or method incorporated in past tax returns, except as required by law, or take any action or position that would increase the tax liability of any of the Sellers so as to have a material adverse effect;

(h)subject any of the Purchased Assets, or any part thereof, to any Lien or suffer such to be imposed other than such Liens as may arise in the ordinary course of business or by operation of law;

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(i)fail to keep in full force and effect insurance comparable in amount and scope to coverage maintained by it (or on behalf of it) with respect to the Business or the Purchased Assets on the date hereof;

(j)take or permit to occur any other action or omission that would cause any of the representations and warranties made by it in this Agreement not to remain true and correct in all material respects;

(k)make any change in any method of accounting or accounting principle, method, estimate or practice except for any such change required by reason of a concurrent change in GAAP or write down the value of any inventory or write-off as uncollectible any accounts receivable except in the ordinary course of business consistent with past practices or unless required to do so by a Governmental Entity;

(l)except for matters involving a Governmental Entity, settle, release or forgive (or commence) any material claim, litigation or adversarial proceeding or waive any material right; or

(m)authorize, recommend, propose or announce an intention to do any of the foregoing, or enter into any contract, agreement, commitment or arrangement to do any of the foregoing.

4.3No Solicitation of Transactions. Except as contemplated or as otherwise permitted by this Agreement, none of the Sellers shall authorize or permit any member, manager, officer, director, partner or employee of, or investment banker, attorney or other advisor or representative of any of the Sellers to (i) solicit or initiate, encourage, or facilitate, directly or indirectly, any inquiries relating to, or the submission of, any proposal or offer, whether in writing or otherwise, from any person other than Buyer or any Affiliates thereof (a “Third Party”) to acquire beneficial ownership of any of the Purchased Assets, or any beneficial ownership of any of the Sellers pursuant to a merger, consolidation or other business combination, sale of equity interest, sale of assets, tender offer, exchange offer or other transaction (a “Competing Transaction”), (ii) participate in any discussions or negotiations regarding, or furnish to any person any information or data with respect to or access to the properties of, or take any other action to knowingly facilitate the making of any proposal that constitutes, or may reasonably be expected to lead to, any Competing Transaction, or (iii) enter into any agreement with respect to any Competing Transaction, approve or recommend or resolve to approve or recommend any Competing Transaction or enter into any agreement requiring it to abandon, terminate or fail to consummate the transactions contemplated by this Agreement.

4.4Reasonable Efforts. Subject to the terms and conditions herein provided, each of the parties hereto shall use all reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including using its reasonable efforts to obtain all necessary or appropriate waivers, consents and approvals, to effect all necessary registrations, filings and submissions (including, but not limited to any submissions requested by the MPSC, KCC or FCC) and to lift any injunction or other

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legal bar to the consummation of the transactions contemplated by this Agreement (and, in such case, to proceed with such transactions as expeditiously as possible).

4.5Access to Information. Following execution of this Agreement, upon reasonable notice, each of the Sellers shall afford to officers, employees, counsel, accountants, engineers, consultants, prospective financing sources, and other authorized representatives of Buyer (“Representatives”), full, open, continuing and reasonable access, throughout the period prior to the Closing Date, to its (i) equipment, personal and intangible properties, facilities and real properties, (ii) accounting files, financial and operating data, budgets, projections and plans, (iii) regulatory and other government filings, (iv) employment records, policies and files, and records and documents pertaining to Company Plans, (v) contracts, agreements and undertakings, (vi) environmental filings and tax returns, (vii) organizational, governing, corporate and ownership records and legal files, (viii) reports, schedules, books and records, and (ix) other information relevant to the Business (the “Information”); and, during such period, each Seller shall furnish or make available reasonably promptly to such Representatives copies of all such Information as may reasonably be requested, including but not limited to a copy of each report, schedule or other document filed or received by any of Sellers pursuant to federal or state securities laws or with any Governmental Entity at any time prior to the Closing. In addition, in furtherance of the foregoing, promptly following the date of this Agreement, Sellers shall provide to Buyer an operating plan and budget for the Business for the remaining 2005 fiscal year and the 2006 fiscal year (the “Plan and Budget”). The Sellers shall exercise reasonable efforts to manage the operations of the Business to the Plan and Budget. The Sellers will promptly provide Buyer written copies of any reports, data or summaries describing any material variance or deviation from the Plan and Budget. Upon reasonable notice, Sellers shall make available all managers, officers, employees, agents or advisors to Buyer’s Representatives for purposes of reviewing, providing, discussing, or describing any of the Information or otherwise keeping the Buyer and its Representatives apprised with respect to, and responding to Buyer’s inquiries regarding, the Business and the Plan and Budget. Buyer agrees that it will not, and will cause its Representatives to not, use any information obtained pursuant to this Section for any purpose unrelated to the consummation of the transactions contemplated by this Agreement. No information or knowledge obtained in any investigation pursuant to this Section shall affect or be deemed to modify any representation or warranty contained in this Agreement or the conditions to the obligations of the parties to consummate the transactions contemplated thereby.

4.6Publicity. The parties must approve and agree upon any press releases or public announcements to be made by any party pertaining to the transactions contemplated by this Agreement. No party shall issue any such press releases or make any such public announcements without the consent of the other parties, which consent shall not be unreasonably withheld, except as required to obtain the consents, waivers and authorizations listed in the Schedules and in connection with Buyer’s financing of the transaction contemplated hereby. Notwithstanding the proceeding provisions, each party hereto shall be free to make such disclosures and filings as may be required by law without the other parties’ prior written consent; but such party shall provide the other parties a copy of any such disclosure or filing.

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4.7Cooperation with SEC Filings.

(a)All parties understand that Buyer is a publicly-owned company and is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and may be required to include in its reports filed with the Securities and Exchange Commission (the “SEC”) pursuant to the Exchange Act, or in any registration statements it may file with the SEC pursuant to the Securities Act of 1933, as amended (the “Securities Act”):

(i)certain reviewed consolidated financial statements of Sellers;

(ii)certain unaudited stub period consolidated financial statements of Sellers;

(iii)certain pro forma financial information relating to Sellers; and

(iv)the consent(s) of the accountants who reviewed Sellers’ financial statements to the inclusion of the reviewed financial statements in such reports or registration statements of Buyer.

(b)Sellers agree to provide to Buyer upon Buyer’s written request, as promptly as reasonably practicable after receipt of any such written request and in any event by the delivery date reasonably specified in any such written notice, any of the items specified under clauses (i) through (iii) above that Buyer is required under applicable SEC rules and regulations to include in a report under the Exchange Act or in a registration statement under the Securities Act, and to cause the Sellers independent certified public accountants to provide any required consent specified in clause (iv) above.

4.8Employees.

(a)At or prior to the Closing, Buyer hereby agrees to offer employment to each individual listed on Schedule 4.8 on the terms and conditions set forth in Schedule 4.8. In addition, Buyer shall have the right to interview each of the Sellers employees as soon as possible after execution of this Agreement and can offer employment, at the sole discretion of Buyer, to any of the Sellers’ employees. For all purposes under the employee benefit plans of Buyer providing benefits after the Closing Date, each Seller employee that becomes an employee of Buyer shall be credited for purposes of eligibility and vesting (but not for purposes of benefits accrued) under Buyer’s 401(k), medical and insurance plans with his or her years of service with the Sellers before the Closing Date, to the same extent as such individual was entitled to credit for such service under the Company Plans, except to the extent such credit would result in a duplication of benefits.

(b)Sellers agree to make health insurance plan continuation coverage available to the extent required by Part 6 of Title I of ERISA (and similar provisions under the Code and any similar continuation coverage law) (collectively “COBRA”) under the appropriate Company Plan for each employee or former employee of Sellers (and any covered dependent of any such employee or former employee) who ceased to be covered under such Company Plan under circumstances permitting the election of continuation coverage, regardless of whether such

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employee or former employee (or dependent) ceased to be so covered before or at the Closing Date. Premiums for such continuation coverage shall be borne by the applicable employee or former employee.

(c)Sellers agree to make good faith efforts to continue to maintain a health plan following Closing Date which is reasonably comparable to the health plan it has maintained during the one year period prior to Closing Date, and such health plan shall be designed so that it will fully meet all obligations which COBRA may impose upon Sellers and Buyer regarding offering continuation coverage to any past or present employees (and their dependents) of the Business (and any other affiliated entity related to the Business or Sellers) (collectively “Sellers COBRA Continuees”).  Sellers agree to immediately notify Buyer in the event it cannot or does not maintain such a health plan for Sellers COBRA Continuees.

(d)In the event Buyer determines that Buyer or any affiliate of Buyer (or any health plan of Buyer or an affiliate of Buyer) (collectively “Buyer Plan”) has become responsible for providing health coverage to any Sellers COBRA Continuees, then Sellers shall fully indemnify Buyer Plan for all costs of Buyer Plan providing COBRA coverage to Sellers COBRA Continuees. The amount of such indemnification shall be determined on a monthly basis by Buyer by taking into account the costs of all Sellers COBRA Continuees covered by Buyer Plan (including, without limitation, the actual costs of claims paid on behalf of Sellers COBRA Continuees, the administrative costs of such claims and of otherwise maintaining coverage for Sellers COBRA Continuees, the cost of maintaining reasonable stop-loss coverage for Sellers COBRA Continuees, and any additional costs assessed generally by virtue of increased underwriting costs attributable to Sellers COBRA Continuees). COBRA premiums paid by Sellers COBRA Continuees shall offset the costs for Sellers COBRA Continuees for that plan year of the Buyer Plan, but any positive credit shall not be paid to Sellers at any time (although such positive credit may be considered through the end of the Buyer Plan’s plan year). Buyer shall have the discretion to determine whether it is necessary for Buyer Plan to provide COBRA coverage for any Sellers COBRA Continuees and also to determine the amount of the costs of such COBRA coverage for Sellers COBRA Continuees, and Sellers shall not have the right to dispute any such determinations by Buyer unless Sellers can prove that Buyer’s determination was arbitrary and capricious. Sellers shall recompense Buyers Plan for any and all such costs (either directly, or from the aforementioned escrow) immediately upon demand by Buyer, which may be on a monthly basis (or in the event of large claims, on a weekly basis).

4.9Notice of Breach. Through the Closing Date, each party shall promptly give the other parties written notice with particularity upon having knowledge of any matter that may constitute a breach of any representation, warranty, agreement or covenant contained in this Agreement. Through the Closing Date, each party shall promptly supplement the schedules to this Agreement (a “Supplement”) after the occurrence of any event that changes or is reasonably likely to change in any material respect any statement made by such party in this Agreement or in any such Schedule, provided that no such Supplement or modification will be effective to amend or otherwise modify any Schedule or any other party’s rights under this Agreement, unless such updated information shall be acceptable to the applicable party in its sole discretion and such acceptance is expressly set forth in an amendment to this Agreement.

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4.10Obligation to File Tax Returns. Sellers shall cause to be prepared and filed all tax returns with the appropriate Governmental Entities relating to the Business for periods ending on or prior to the Closing Date and shall pay all taxes due with respect to such tax returns.

4.11Obligation to Remediate. If, prior to the Closing, any Regulated Material is Released or found to have been Released or contained or present on or in any property used in connection with the past or present operation of the Business, and if Sellers do not elect to terminate this Agreement pursuant to Section 7.1(f) below, Sellers shall diligently pursue and complete the required assessment and remediation activities, requested, specified or directed by the applicable Governmental Entities having jurisdiction or as otherwise required by applicable Environmental Laws in order to obtain from such Governmental Entity the highest level of a “no further action” or “spill inactivation” letter or other similar designation with respect to each such environmental contamination prior to the Closing.

4.12Customer Notices. Buyer and Sellers shall cooperate to prepare and deliver, at least thirty (30) days prior to the Closing (or such other time as may be required by applicable law or Order), a notice, in form and substance reasonably acceptable to each of them in compliance with Section 64.1120(e) of the FCC’s rules and any and all other applicable state and federal law, to customers notifying them of the pending sale transaction contemplated by this Agreement. Sellers shall provide Buyer with the Sellers’ information necessary, including subscriber names and addresses, for Buyer to comply with the requirements of Section 64.1120(e) of the FCC’s rules and any and all other applicable state and federal law with respect to customer notifications required as a result of the transaction contemplated by this Agreement.

4.13Financial Statements.Sellers shall provide Buyer with the monthly unaudited balance sheets and related statements of income and cash flow to date of each of the Sellers for the additional months between the date hereof and the closing date in each instance within forty-five (45) days after the end of the month in question. Sellers shall provide Buyer with the audited year ending December 31, 2005 consolidated balance sheets and related consolidated statements of income and cash flow (including the related rates thereto, if any) of each of the Sellers by March 31, 2006 and the regulatory version of the year ending December 31, 2005 consolidated balance sheets and the related statement of income and cash flow (including the related notes thereto, if any, upon preparation of the same in the normal course of business.

ARTICLE V

CONDITIONS TO CLOSING

5.1Conditions to Each Party’s Obligations to Effect the Closing. The respective obligations of each party to consummate the transactions contemplated by this Agreement are subject to the satisfaction at or prior to the Closing Date of the following conditions:

(a)Injunction. There shall not be in effect, enacted, promulgated or threatened any action, statute, rule, regulation, executive order, decree, ruling or injunction or other order of any court or any Governmental Entity which seeks to or declares this Agreement invalid in any respect or seeks to or prevents or delays the consummation of the transactions contemplated hereby or which challenges the validity or enforceability of this Agreement;

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provided, however, that prior to invoking this condition the invoking party shall have used its reasonable efforts to have resolved any such threatened actions or actions or to have any decree, ruling, injunction or order vacated.

(b)Governmental Filings and Consents. All governmental consents, orders, approvals, certifications, authorizations, permits, filings, licenses or notifications legally required by the MPSC, KCC or FCC or any other Governmental Entity for the consummation of the transactions contemplated hereby shall have been given or obtained on terms that are satisfactory and acceptable to the Buyer in its sole discretion and shall be final, nonappealable, and in effect on the Closing Date.

(c)Resolution of Pending Complaint and Investigations. All issues that have been or can be raised by any Governmental Entity, including but not limited to the MPSC, FCC, NECA, USAC or KCC, that are related to or arise out of (i) the operation of Business by the Sellers prior to the Closing Date; (ii) the allegations contained in the Complaint of the Staff of the MPSC pending in Case No. TC-2005-0357 before the Public Service Commission of the State of Missouri; or (iii) any over-earnings of the Business prior to the Closing Date, must have been reasonably resolved.

5.2Conditions to Sellers’ Obligations to Effect the Closing. The obligations of the Sellers to consummate the transactions contemplated by this Agreement are subject to the satisfaction at or prior to the Closing Date of the following additional conditions:

(a)The representations and warranties of Buyer contained in this Agreement that address matters only as of a particular date shall be true and correct as of such date and all other representations and warranties of the Buyer contained in this Agreement shall be true and correct as of the Closing Date and the Sellers shall have received a certificate of an executive officer of Buyer to the foregoing effect.

(b)Buyer shall have performed and complied with in all material respects its obligations under this Agreement to be performed or complied with by Buyer on or prior to the Closing Date, and the Sellers shall have received a certificate of an executive officer of Buyer to the foregoing effect.

5.3Conditions to the Buyer’s Obligations to Effect the Closing. The obligations of Buyer to consummate the transactions contemplated by this Agreement are subject to the satisfaction on or prior to the Closing Date of the following additional conditions:

(a)The representations and warranties of the Sellers contained in this Agreement that address matters only as of a particular date shall be true and correct as of such date and all other representations and warranties of the Sellers contained in this Agreement shall be true and correct as of the Closing Date and the Buyer shall have received a certificate of an executive officer, manager or general partner as applicable of each Seller to the foregoing effect.

(b)Each Seller shall have performed and complied with in all material respects its obligations under this Agreement to be performed or complied with on or prior to the Closing Date, and Buyer shall have received a certificate of an executive officer, manager or general partner as applicable of each Seller to the foregoing effect.

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(c)During the period from the date of this Agreement to the Closing Date, there shall not have been any change, effect or circumstance constituting a material adverse change in the Business, Purchased Assets, Financial Statements, Schedules for this Agreement, business prospects, regulatory climate, condition (financial or otherwise) or results of operations of the Business or Sellers. Buyer shall have received a certificate, dated the Closing Date, from the Sellers, in a form reasonably satisfactory to the Buyer certifying the same.

(d)Buyer and its lender shall have received favorable legal opinions, dated the Closing Date, from (i) Davis Wright Tremaine LLP, counsel to the Sellers, substantially in the form attached hereto as Exhibit 5.3(d)(i) or in such other form as may be agreed by Buyer and Sellers’ counsel; (ii) Fischer & Dority, PC, special counsel to Buyer, substantially in the form attached hereto as Exhibit 5.3(d)(ii); (iii) James M. Caplinger, Chtd., special counsel to Buyer, substantially in the form attached hereto as Exhibit 5.3(d)(iii); and (iv) federal regulatory counsel designated by Buyer as special counsel to Buyer, substantially in the form attached hereto as Exhibit 5.3(d)(iv). Buyer will take all actions reasonably requested by its counsel to enable such counsel to deliver the opinion required of it hereunder.

(e)Buyer shall have received such other certificates, instruments, deeds (quitclaim with covenant) of all real or personal property owned by Sellers, assignments of all leases (under which a Seller is lessee) with applicable consents, assignments of all easements held by Sellers with applicable consents, and documents in confirmation of the representations and warranties of Sellers or in furtherance of the transactions contemplated by this Agreement as Buyer or its counsel may reasonably request.

(f)The Buyer shall have timely received the monthly unaudited balance sheets and related statements of income and cash flow of each Seller for the additional months between the date hereof and the Closing Date, and the consolidated balance sheets and the related consolidated statements of income and cash flow (including the related notes thereto, if any) of each of the Sellers for the year ending December 31, 2005 (audited and regulatory versions), all of which financial statements shall have been prepared in accordance with the standards reflected elsewhere herein and none of which financial statements shall have reflected any change, effect or circumstance constituting a material adverse change or any other breach of any representation or warranty contained herein.

(g)No report or opinion (for example, a phase I environmental report) obtained by the Buyer from a Representative as contemplated in Section 4.5 shall reflect the existence of an adverse change as a result of any matter not expressly agreed to be accepted or consented to by the Buyer herein that is not cured at or prior to Closing by Sellers at Sellers’ sole expense.

(h)The Sellers shall have removed or shall pay at Closing all Liens on the Purchased Assets other than Permitted Liens.

(i)The Buyer shall have been furnished with such other and further documents and certificates, including certificates of the Sellers, as the Buyer shall reasonably request to evidence compliance with the conditions set forth in this Agreement.

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(j)At the Closing, the Sellers shall have delivered to the Buyer Certificates issued by the appropriate Governmental Entities evidencing good standing of the Sellers in their respective jurisdictions of incorporation and in each jurisdiction in which each is qualified to do business as a foreign corporation.

(k)At the Closing, the Sellers shall have delivered to the Buyer Certificates of Title to all vehicles, free and clear of all Liens, duly assigned to the Buyer.

(l)The Buyer’s Affiliate that will operate the Business after Closing (“Buyer’s Affiliate”) must be certified by the MPSC and KCC as of the Closing as an Eligible Telecommunications Carrier. In addition, as of the Closing the Buyer’s Affiliate must have obtained a waiver of the FCC rules to the extent necessary to ensure that all federal Universal Service Funds to which the study area associated with the Business is entitled are paid as of Closing of the transaction contemplated by this Agreement to the Buyer’s Affiliate in its capacity as an incumbent rural local exchange carrier designated as an Eligible Telecommunications Carrier in an amount satisfactory to Buyer in its sole discretion. Seller shall cooperate with Buyer and Buyer’s Affiliate prior to the Closing in its efforts to obtain any necessary waivers or approvals including but not limited to the provision of all information required to determine the amount of Universal Service Funding to which the Buyer’s Affiliate will be entitled subsequent to the Closing of the transaction contemplated by this Agreement. Buyer’s Affiliate shall have received consent from NECA indicating that Buyer’s Affiliate may participate without limitation in the NECA interstate exchange access tariff as a concurring carrier and in the NECA revenue pool processes. Such consent shall be in a form reasonably satisfactory to Buyer.

(m)Sellers shall have replaced or repaired any and all Purchased Assets that have suffered, sustained or incurred any material loss, damage or destruction.

(n)Buyer shall have received a tax clearance letter for each of the Sellers from the Missouri Department of Revenue.

ARTICLE VI
SURVIVAL OF TERMS; INDEMNIFICATION

6.1Survival; Limitations. All of the terms and conditions of this Agreement, together with the representations, warranties and covenants contained herein or in any instrument or document delivered or to be delivered pursuant to this Agreement and the agreements of the parties to indemnify each other as set forth in this Article VI shall survive the execution of this Agreement and the Closing Date notwithstanding any investigation heretofore or hereafter made by or on behalf of any party hereto and shall continue for, and all claims with respect thereto shall be made three (3) years from the Closing Date (the “Indemnification Period”).

6.2Escrow of Liquid Assets. Five Million Dollars ($5,000,000) of the Purchase Price otherwise payable to Sellers for the Purchased Assets (the “Escrow Amount”) shall be maintained in an escrow account (the “Escrow Account”) in U.S. Bank Trust National Association or such other bank as may be agreed to by the parties, pursuant to the terms and provisions of an Escrow Agreement to be executed at Closing substantially in the form attached hereto as Exhibit 6.2 (the “Escrow Agreement”). The Escrow Amount shall be reduced to Two

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Million Dollars ($2,000,000) on the first anniversary of the Closing Date if at that time Buyer has no pending claims against the Escrow Account for any indemnity payments pursuant to Section 6.3 below. If Buyer has one or more pending claims against the Escrow Account on the first anniversary of the Closing Date, the Escrow Account shall instead be reduced to the sum of Two Million Dollars ($2,000,000) plus the indemnification amount of the claims of Buyer pending at that time. Once the claim or claims of Buyer pending after the first anniversary of the Closing Date have been resolved, the Escrow Account shall be reduced to Two Million Dollars ($2,000,000). Any indemnity payment due to Buyers under Section 6.3 shall be paid to Buyer solely from the Escrow Account in the manner provided in the Escrow Agreement and Buyer shall have no recourse against Sellers with respect to any indemnification obligations under Section 6.3 that exceed the then current balance in the Escrow Account.

6.3Indemnification by the Sellers. After the Closing Date, subject to the limitations set forth in Sections 6.1 and 6.2 hereof, the Buyer and its Affiliates, successors and assigns shall be indemnified and held harmless jointly and severally by the Sellers against and in respect of any and all damage, loss, liability, cost or expense (including, unless otherwise provided herein, the reasonable fees and expenses of counsel and any tax liability resulting from any indemnity payment made hereunder) resulting from, or in respect of, any of the following to the extent the aggregate amount thereof exceeds Twenty-Five Thousand Dollars ($25,000):

(a)Misrepresentation or Breach. Any misrepresentation or breach of warranty of any of the Sellers or nonfulfillment of any obligation on the part of Sellers under this Agreement, or contained in any Schedule or Exhibit to this Agreement or from any misrepresentation in or omission from any certificate, Schedule, Exhibit, related agreement, Financial Statement or instrument delivered by or on behalf of the Sellers hereunder.

(b)Taxes. All taxes of the Sellers.

(c)Governmental Action. Any action by any Governmental Entity that negatively and materially impacts the revenue or receivables of the Business after the Closing that is a direct result of the operation of the Business prior to Closing and that is specifically applicable to the Business and not subject of a policy law, rule or regulation of general application.

(d)Employee Matters. All costs, expenses or loss of revenue incurred by Buyer, the Business, or any of Buyer’s employee benefit plans after the Closing arising out of or related to any of Sellers’ COBRA Continuees as provided in Section 4.8(d) hereof or any Seller defined benefit pension plan.

(e)Easements and Permits. All costs, expense or loss of revenue incurred by the Business after the Closing arising out of or related to the failure of the Sellers to obtain or record any easement, right of way, license or permit for the physical plant of the Business.

(f)Regulated Materials. All costs, expenses or loss of revenue incurred by the Business after the Closing related to the Release, use or storage of any Regulated Materials attributable to any period prior to Closing.

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(g)Other Claims. Any Claim (as defined in Section 8.9(c)) arising out of the Business or operation of the Business by Sellers or any Claim relating to the Excluded Liabilities or Excluded Assets of the Business.

(h)Related Expenses. All expenses and costs, including but not limited to reasonable legal fees, paid or incurred in connection with any such indemnified Claim.

6.4Indemnification by the Buyer. After the Closing Date, subject to the limitations set forth in Sections 6.1 hereof, the Sellers and their respective Affiliates, successors, representatives and assigns shall be indemnified and held harmless by the Buyer against and in respect of any and all damage, loss, liability, cost or expense (including, unless otherwise provided herein, the reasonable fees and expenses of counsel and any tax liability resulting from any indemnity payment made hereunder) resulting from, or in respect of, any of the following to the extent the aggregate amount thereof exceeds Twenty Five Thousand Dollars ($25,000).

(a)Misrepresentation or Breach. Any misrepresentation or breach of warranty of the Buyer or nonfulfillment of any obligation on the part of the Buyer under this Agreement, or contained in any Schedule or Exhibit to this Agreement or from any misrepresentation in or omission from any certificate, Schedule, Exhibit, related agreement or instrument delivered by or on behalf of the Buyer hereunder.

(b)Taxes. All Taxes of the Buyer or of the Business attributable to any period on or after the Closing Date.

(c)Other Claims. Any Claim of a third party arising out of the operation of the Business by Buyer or the Purchased Assets after the Closing Date or relating to the Assumed Liabilities.

(d)Related Expenses. All expenses and costs, including but not limited to legal fees, reasonably paid or incurred in connection with any such indemnified Claim.

6.5Third Party Claims.

(a)Generally. Except as otherwise provided in this Agreement, the following procedures shall be applicable with respect to indemnification for third party Claims. Promptly after receipt by the party seeking indemnification hereunder (hereinafter referred to as the “Indemnitee”) of notice of the commencement of any action or the assertion of any Claim, liability or obligation by a third party (whether by legal process or otherwise), against which Claim, liability or obligation another party to this Agreement (hereinafter the “Indemnitor”) is, or may be, required under this Agreement to indemnify such Indemnitee, the Indemnitee shall, if a claim thereon is to be, or may be, made against the Indemnitor, immediately notify the Indemnitor in writing of the commencement or assertion thereof and give the Indemnitor a copy of such Claim or process and all legal pleadings. The Indemnitee’s failure to give timely notice as required by this Section 6.5(a) shall not serve to eliminate or limit the Indemnitor’s obligation to indemnify the Indemnitee unless such failure prejudices the rights of the Indemnitor, and then only to the extent of such prejudice. Moreover, the Indemnitee shall have the right to take any actions or steps it deems reasonable to avoid the occurrence of any prejudice to the rights of the Indemnitee. The Indemnitor shall have the right to assume the defense of such action with

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counsel of reputable standing unless with respect to such action (A) injunctive or equitable remedies have been sought therein in respect of the Indemnitee or its business or (B) such action is for an alleged amount of less than Five Thousand Dollars ($5,000); provided, that the Indemnitee and counsel to the Indemnitee shall have the right to participate in the defense of any and all Claims pursuant to the provisions of Section 6.5(b) hereof. The Indemnitor and the Indemnitee shall reasonably cooperate in the defense of such Claims. If the Indemnitee shall be required by judgment or a settlement agreement to pay any amount in respect of any obligation or liability against which the Indemnitor has agreed to indemnify the Indemnitee under this Agreement, the Indemnitor shall immediately pay such amount to the Indemnitee in order to enable the Indemnitee to make such payment, and otherwise shall promptly reimburse the Indemnitee in an amount equal to the amount of such payment, in either case, plus all reasonable out-of-pocket expenses (including legal fees and expenses) incurred by such Indemnitee at the specific written request of the Indemnitor, or as otherwise authorized by Section 6.5(b) hereof, in connection with such obligation or liability subject to this Article VI. No Indemnitor, in the defense of any such Claim, shall, except with the consent of the Indemnitee, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnitee of a release from all liability with respect to such Claim. In the event that the Indemnitor does not accept the defense of any matter for which it is entitled to assume such defense as provided in this Section 6.5(a), the Indemnitee shall have the full right to defend against any such Claim and shall be entitled to settle or agree to pay in full such Claim in its sole discretion. With respect to any matter as to which the Indemnitor is not entitled to assume the defense pursuant to the terms of this Section 6.5(a), the Indemnitee shall not enter into any settlement for which an indemnification Claim will be made hereunder without the approval of the Indemnitor, which shall not be unreasonably withheld.

(b)Counsel. An Indemnitee shall have the right to employ its own counsel, but the fees and expenses of such counsel shall be at the expense of the Indemnitee, unless (i) the employment of such counsel shall have been authorized in writing by the Indemnitor in connection with the defense of such Claim and the Indemnitor has agreed in writing to pay such fees and expenses, or (ii) the Indemnitor shall not have employed counsel in the defense of such Claim (which counsel may be in-house counsel unless and until a lawsuit has been commenced). In either of which events, such fees and expenses of not more than one additional counsel for the Indemnitee shall be borne by the Indemnitor.

6.6Other Claims.

(a)In the event an Indemnitee should have a claim under this Article VI against an Indemnitor that does not involve a third party Claim, the Indemnitee shall promptly give notice (the “Indemnitee Notice”) and the details thereof, including copies of all relevant information and documents, to the Indemnitor within a period of thirty (30) days following the discovery of the claim by the Indemnitee (the “Claim Notice Period”). The failure by any Indemnitee to give the Indemnitee Notice within the Claim Notice Period shall not impair the Indemnitee’s rights hereunder except to the extent that the Indemnitor demonstrates that it has been prejudiced thereby. The Indemnitor will notify the Indemnitee within a period of twenty (20) days after the receipt of the Indemnitee Notice by the Indemnitor (the “Indemnity Response Period”) whether the Indemnitor disputes its liability to the Indemnitee under this Article VI with

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respect to such Claim. If the Indemnitor notifies the Indemnitee that it does not dispute the Claim described in such Indemnitee Notice or fails to notify the Indemnitee within the Indemnity Response Period whether the Indemnitor disputes the claim described in such Indemnitee Notice, the actual damages as finally determined will be conclusively deemed to be a liability of the Indemnitor under this Article VI and the Indemnitor shall pay the amount of such damages to the Indemnitee on demand. If the Indemnitor notifies the Indemnitee within the Indemnity Response Period that the Indemnitor disputes its liability with respect to such Claim, the Indemnitor and the Indemnitee will proceed in good faith to negotiate a resolution of such dispute, and if not resolved through negotiations within a period of thirty (30) days from the date of such notice or such longer period as may be agreed to by the parties in writing, such dispute shall be resolved by arbitration in accordance with Section 6.6(b) hereof.

(b)Any dispute required to be submitted to arbitration pursuant to this Section 6.6 shall be finally and conclusively determined in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the “Rules of Arbitration”) then in effect by the decision of three (3) arbitrators (the “Board of Arbitration”) selected in accordance with the Rules of Arbitration. The Board of Arbitration shall meet in Kansas City, Missouri and shall render a decision in writing (concurred in by a majority of the members of the Board of Arbitration) with respect to and stating the amount, if any, which the Indemnitor is required to pay to the Indemnitee in respect of the claim made by the Indemnitee. The decision of the Board of Arbitration shall be rendered as soon as practical following commencement of proceedings with respect thereto. The Board of Arbitration shall cause its written decision to be delivered to the Indemnitee and the Indemnitor. Any decision made by the Board of Arbitration shall be final, binding and conclusive on the Indemnitee and the Indemnitor and entitled to be enforced to the fullest extent permitted by law and entered in any court of competent jurisdiction.

The parties hereto hereby consent to the jurisdiction of the foregoing Board of Arbitration and to the jurisdiction of any local, state or Federal court located in the State of North Carolina for the purpose of enforcing the decision or award of the Board of Arbitration or otherwise. The parties hereto agree that all service of process may be made on any such party by personal delivery or by registered or certified mail addressed to the appropriate party at the address for such party set forth in this Agreement.

All fees, costs and expenses of the prevailing party in any arbitration, including, but not limited to, attorneys’ fees, shall be paid by the losing party and shall be awarded to the prevailing party as part of the decision of the Board of Arbitration. For purposes hereof, a “Prevailing Party” shall mean the party which substantially prevails in its position in arbitration. Each and every arbitration proceeding commenced pursuant to this Section 6.6(b) shall be consolidated with any arbitration proceedings simultaneously or previously commenced (but not concluded) under this Section 6.6(b).

6.7Continued Liability for Indemnity Claims. The liability of any Indemnitor hereunder with respect to claims hereunder shall continue for so long as any Claims for indemnification may be made hereunder pursuant to this Article VI and, with respect to any such indemnification Claims duly and timely made, thereafter until the Indemnitor’s liability therefore is finally determined and satisfied.

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ARTICLE VII
TERMINATION AND ABANDONMENT

7.1Methods of Termination. This Agreement may be terminated and the transactions herein contemplated may be abandoned at any time:

(a)By mutual written consent of the Buyer and the Sellers.

(b)By the Buyer if as of the Closing Date any of the conditions specified in Article V hereof have not been satisfied (and remain so unsatisfied for more than twenty (20) days after the Buyer has notified the Sellers in writing thereof) or if any of the Sellers are otherwise in default in any material respect under this Agreement (and remains in default for more than twenty (20) days after the Buyer has notified the Sellers in writing of such default) or if at any time prior to the Closing Date it becomes apparent to the Buyer (on reasonable grounds) that (i) any of the Sellers will be unable to satisfy one or more of the representations and warranties in Article II hereof or one or more of the covenants or agreements in Articles IV or V hereof, or (ii) any of the conditions contained in Article V hereof will not be satisfied.

(c)By the Sellers if as of the Closing Date any of the conditions specified in Article V hereof have not been satisfied (and remain so unsatisfied for more than twenty (20) days after the Sellers have notified the Buyer in writing thereof) or if the Buyer is otherwise in default in any material respect under this Agreement (and remains in default for more than twenty (20) days after the Sellers have notified the Buyer in writing of such default) or if at any time prior to the Closing Date it becomes apparent to the Sellers (on reasonable grounds) that (i) the Buyer will be unable to satisfy one or more of its representations and warranties in Article III hereof or one or more of the covenants or agreements in Article IV or V hereof, or (ii) any of the conditions contained in Article V hereof will not be satisfied.

(d)By either party in the event the Closing has not occurred by July 3, 2006, unless such failure to close shall be due to a breach of this Agreement by the party seeking to terminate the Agreement.

(e)By the Buyer if a material adverse change shall be shown or indicated (in the sole discretion of the Buyer) in any of the Financial Statements delivered after the date hereof or otherwise with respect to any of the conditions to Closing set forth in Section V hereof, and written notice of termination of this Agreement shall have been given by the Buyer within thirty (30) business days of the Buyer’s receipt of such Financial Statements or the Buyer’s discovery of such material adverse change.

(f)By the Sellers, if prior to the Closing, any Regulated Material is Released or found to have been Released or contained or present on or in any property used in connection with the past or present operation of the Business, and the cost of the required assessment and remediation activities requested, specified or directed by the applicable Governmental Entities having jurisdiction or as otherwise required by applicable Environmental Laws in order to obtain from such Governmental Entity the highest level of a “no further action” or “spill inactivation” letter or similar designation with respect to each such environmental contamination exceeds Five Hundred Thousand Dollars ($500,000).

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(g)By the Buyer if the settlements or resolutions with any Governmental Entity, including but not limited to the MPSC, FCC, NECA, USAC or KCC, of any issues that have been or can be raised or are related to or arising out of (i) any of the allegations contained in the Complaint of the Staff of the MPSC pending in Case No. TC 2005-0357 before the Public Service Commission of the State of Missouri or (ii) any over-earnings of the Business prior to the Closing Date are not satisfactory to Buyer in its sole discretion or negatively affect the revenues of the Business after the Closing Date.

(h)In the event of any failure to perform as described in this Section 7.1, the non-breaching party shall have such remedies for breach of contract as are allowed by law in addition to or in substitution of the right of termination.

7.2Procedure Upon Termination. If this Agreement is terminated as provided herein:

Each party shall as promptly as practicable redeliver to the party furnishing the same, all data, information and other written material (including all copies thereof) of any other party relating to the transactions contemplated hereby, whether obtained before or after the execution hereof.

All information received by any party hereto with respect to the business of any other party (other than information which is a matter of public knowledge or which has heretofore been or is hereafter published in any publication for public distribution or filed as public information with any governmental authority) shall not at any time be used by such party, or disclosed to third parties.

7.3If this Agreement is terminated for any reason other than as a result of Buyer’s failure to perform as provided in Section 7.1(c) and if the purchase price that the Buyer is willing to pay the Sellers for the Purchased Assets is greater than Twenty-Five Million Dollars ($25,000,000) at the time of the termination of this Agreement, then upon termination of this Agreement Sellers shall make payment to the Buyer in an amount equal to the Buyer’s third party out-of-pocket costs incurred in connection with the transaction contemplated by this Agreement. The Sellers shall be allowed thirty days after receipt of notice from Buyer of a change in the purchase price to decide whether or not to accept the change in the purchase price. If within eighteen (18) months after the termination of this Agreement, Sellers consummate a Competing Transaction, then Sellers shall also make payment to Buyer, concurrently with the consummation of such Competing Transaction (via wire or certified check), in an amount equal to One Million Dollars ($1,000,000).

ARTICLE VIII
MISCELLANEOUS AND GENERAL

8.1Payment of Expenses. Except as provided in Section 7.3, whether or not the transactions contemplated by this Agreement shall be consummated, each party hereto shall pay its own expenses incident to preparing for, entering into and carrying out this Agreement and the consummation of the transactions contemplated hereby.

8.2Modification or Amendment. The parties hereto may modify or amend this Agreement, by written agreement executed and delivered by duly authorized officers of the respective parties.

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8.3Waiver of Conditions. The conditions to each party’s obligations to consummate the transactions contemplated by this Agreement are for the sole benefit of such party and may be waived in writing by such party in whole or in part to the extent permitted by applicable law.

8.4Counterparts. For the convenience of the parties hereto, this Agreement may be executed in any number of counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement.

8.5Governing Law; Dispute Resolution. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina, without giving effect to the principles of conflicts of law thereof; provided, however, that this Agreement shall be interpreted, construed and applied in accordance with the language herein and the intent of the parties ignoring any presumptions, rules or construction or similar rules under the law of the State of North Carolina or any other state. Unless otherwise provided, any and all disputes arising under this Agreement may, but are not required to be adjudicated in the state or federal courts located in the State of Missouri and each party consents to the nonexclusive jurisdiction of such courts.

8.6Notices. Any notice, request, instruction or other document to be given hereunder by any party to the other parties shall be in writing and delivered personally or sent by registered or certified mail, postage prepaid, or by facsimile transmission (with a confirming copy sent by overnight courier), as follows:

(a)If to Sellers:

Terrence Peck
Local Exchange Company, LLC
40 Park Road
Islamorada, FL 33036

with a copy to:

Randall Lowe, Esq.
Davis Wright Tremaine LLP
1500 K Street NW
Washington, DC 20005
Fax: (202) 508-6699

(b)If to Buyer:

Walter E. Leach, Jr.
Executive Vice President, Corporate Development
FairPoint Communications, Inc.
521 E. Morehead Street, Suite 250
Charlotte, NC 28202
Fax:  (704) 344-8121

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with a copy to:

Susan L. Sowell, Esq.
Assistant General Counsel
FairPoint Communications, Inc.
521 East Morehead Street, Suite 250
Charlotte, NC  28202
Fax:  (704) 344-1594

or to such other persons or addresses as may be designated in writing by the party to receive such notice.

8.7Entire Agreement; Assignment. This Agreement (including the Schedules and Exhibits hereto) constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, written or oral, between the parties with respect thereto. The parties agree and acknowledge that (i) this Agreement has not been entered into under time pressure, and that all parties have had an adequate opportunity to review this Agreement with counsel, (ii) no oral assurances have been given by any party that this Agreement is an interim agreement or that a more comprehensive Agreement is or will be forthcoming, (iii) there are no oral conditions or promises that supplement or modify the Agreement, and (iv) this Section 8.7 does not constitute “boilerplate,” but rather is a critical substantive provision of the Agreement. This Agreement may not be assigned by any party (by operation of law or otherwise) without the written consent of the other parties hereto, provided however, that no consent from any party shall be required for the assignment in whole or in part of the Buyer’s rights hereunder to any Affiliate or Affiliates of the Buyer.

8.8Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto and its respective successors and assigns. Nothing in this Agreement, express or implied, other than the right to receive the consideration payable pursuant to Article I hereof, is intended to or shall confer upon any other person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement.

8.9Certain Definitions. As used herein:

(a)An “Affiliate” of, or a person “affiliated” with, a specific person is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified.

(b)“Assumed Contracts” means the following contracts, obligations, understandings or commitments (whether written or oral) the Sellers to the extent same relate to

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the Business:  (i) all contracts entered into prior to the date hereof which (A) are set forth on Schedule 1.1(e) and (B) for which consent to assignment (if required) has been obtained at or prior to the Closing, (ii) all contracts entered into by Sellers from and after the date hereof, provided the Buyer has consented in writing to the execution of such contract or such contract is specifically permitted under Section 4.2 hereof.

(c)“Claim” shall mean any action, written claim, complaint, lawsuit, written demand, suit, notice of a violation, litigation, proceeding, arbitration or other dispute noticed in writing or otherwise, whether civil, criminal, administrative or otherwise, by corporation, partnership, Governmental Entity, entity, person, corporation, partnership, organization or joint venture.

(d)“Governmental Entity” shall mean any federal, state or local government or any court, tribunal, administrative agency or commission or other governmental or other regulatory authority or agency, including the MPSC, KCC or FCC and other public utility or service commission or similar agency.

(e)“Lien” means any lien, encumbrance, pledge, mortgage, security interest, claim, lease, charge, option, right of first refusal, easement, servitude, or transfer restriction of any kind, character or nature.

(f)“Permitted Liens” shall mean any (i) platting, subdivision, zoning, building and other similar legal requirements relating to land which are not violated by the buildings, structures and other improvements located thereon, (ii) easements, restrictive covenants, rights-of-way, leases, encroachments and other encumbrances and agreements (other than contracts or options pursuant to which any property owned by either Seller is or may be required to be sold), whether or not of record, (iii) reservations of coal, oil, gas, minerals and mineral interests, whether or not of record, and (iv) Liens for taxes and other governmental charges, assessments or fees which are not yet due and payable.

8.10Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, each of which shall remain in full force and effect.

8.11Captions; Interpretation. The Article, Section and paragraph captions herein are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof. No party shall be deemed to have been the drafter of this Agreement, which is the product of detailed, arm’s length negotiations between the parties and their respective counsel.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective duly authorized officers as of the date first above written.

FAIRPOINT COMMUNICATIONS, INC.
By:		/s/ Walter E. Leach, Jr.
Name:						Walter E. Leach, Jr.
Title:					Executive Vice President Corporate Development
LOCAL EXCHANGE COMPANY LLC
By:	/s/ Terrence Peck
Name:							Terrence Peck
Title:					Managing Member
CASS COUNTY TELEPHONE LIMITED PARTNERSHIP
By:			/s/ Terrence Peck
Name:							Terrence Peck
Title:					Managing Member GP
LEC LONG DISTANCE, INC.
By:				/s/ Terrence Peck
Name:						Terrence Peck
Title:					President

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EX-2.4

Exhibit 2.4

STOCK PURCHASE AGREEMENT

Dated as of

February 17, 2006

By and Among

SOUTHERN ILLINOIS CELLULAR CORP.

And

CROSSLINK WIRELESS, INC.,

EGYPTIAN COMMUNICATION SERVICES, INC.,

HAMILTON COUNTY COMMUNICATIONS, INC.,

HTC HOLDING CO.,

MJD SERVICES CORP.,

SHAWNEE COMMUNICATIONS, INC.,

AND WABASH INDEPENDENT NETWORKS, INC.

And

ALLTEL COMMUNICATIONS, INC.

STOCK PURCHASE AGREEMENT

This Stock Purchase Agreement (this “Agreement”) is made as of the 17^th day of February, 2006 by and among Alltel Communications, Inc., a Delaware corporation (“Buyer”), Southern Illinois Cellular Corp., an Illinois corporation (“SICC”) and Crosslink Wireless, Inc., an Illinois corporation (“Crosslink”), Egyptian Communication Services, Inc., an Illinois corporation (“Egyptian”), Hamilton County Communications, Inc., an Illinois corporation (“Hamilton”), HTC Holding Co., an Illinois corporation (“HTC”), MJD Services Corp., a Delaware corporation (“MJD”), Shawnee Communications, Inc., an Illinois corporation (“Shawnee”), and Wabash Independent Networks, Inc., an Illinois corporation (“Wabash”), (each a “Shareholder” and collectively the “Shareholders”). Buyer, SICC, and the Shareholders are each referred to individually as a “party” and collectively as the “parties.”

RECITALS:

A.SICC and its Subsidiaries, all of which are listed on Schedule 2.1 hereto (the Subsidiaries”), are engaged in the business of marketing, selling and providing mobile wireless voice and data telecommunications services (including the provision of long distance telecommunications services for wireless calls) and related services (together the “Cellular Services”).

B.The Shareholders are the record and beneficial owners of 100% of the issued and outstanding shares of capital stock of SICC (the “Shares”), and the Shares are set forth on Schedule 2.4(a) hereto.

C.The Shareholders desire to sell, and Buyer desires to purchase, all of the Shares.

D.This Agreement sets forth the terms, conditions and understandings of the parties with respect to Buyer’s purchase of the Shares.

NOW, THEREFORE, in consideration of the foregoing, and the mutual promises and agreements set forth herein, the parties hereby agree as follows:

ARTICLE 1
PURCHASE OF STOCK

1.1Purchase of Stock. Subject to the terms and conditions hereinafter set forth in this Agreement, at the Closing Buyer shall purchase and acquire all of the Shares from the Shareholders, and the Shareholders shall sell, transfer and convey all of the Shares to Buyer, free and clear of all Liens.

1.2Purchase Price. The purchase price for the Shares shall be One Hundred Sixty Million Dollars ($160,000,000) (the “Purchase Price”), representing $11,400.07125 per share. The Purchase Price, as adjusted in accordance with Section 1.4, shall be paid to the Shareholders at the Closing by wire transfer in immediately available funds as follows: (i) Fifteen percent (15%) of the Purchase Price, as adjusted in accordance with Section 1.4 (the “Escrowed

Amount”), to the Escrow Agent to be held for a period of fifteen (15) months pursuant to the terms and conditions of an Escrow Agreement in substantially the form of attached Exhibit A; and, (ii) the remainder of the Purchase Price to an account designated by the Shareholders in writing at least one Business Day prior to the Closing.

1.3Allocation of Purchase Price. SICC and the Shareholders represent that as part of the bidding process through which Buyer was selected to enter into this Agreement to purchase the Shares, all bidders were required to analyze and separately state the valuation to be attributed to the ownership by SICC of a 22.72% limited partnership interest in Illinois RSA 6 and 7 Limited Partnership (“RSA 6 & 7”) and Buyer acknowledges the foregoing procedure was required of Buyer. Buyer acknowledges that the amounts allocated by Buyer in its sole and arms length discretion for SICC’s interest in RSA 6 & 7 is [****](1) in cash (the “RSA 6 & 7 Value”). While the interest of SICC in RSA 6 & 7 is not being purchased directly by Buyer hereunder, such interest is being purchased indirectly through Buyer’s purchase of the Shares, and the parties hereby allocate the RSA 6 & 7 Value to the purchase of such interests.

1.4Purchase Price Adjustments. The following adjustments shall be made to the Purchase Price.

(a)Purchase Price Adjustment Regarding Rights of First Refusal.

(i)SICC and the Shareholders have advised Buyer they believe that the sale of the Shares in accordance with this Agreement will trigger a First Refusal Right with regard to SICC’s ownership of its interest in RSA 6 & 7 in accordance with the provisions of the Agreement Establishing Illinois RSA 6 and 7 Limited Partnership dated October 25, 1989. If SICC’s interest in RSA 6 & 7 is purchased by exercise of this First Refusal Right in accordance with the provisions of Section 6.19, SICC and the Shareholders expect that SICC will receive gross proceeds equal to RSA 6 & 7 Value, subject however to SICC’s liability for income taxes with regard to such sale. The parties agree that if this First Refusal Right is exercised in accordance with the provisions of Section 6.19 and the sale of SICC’s interest in RSA 6 & 7 has closed and the RSA 6 & 7 Value has been distributed to the Shareholders, the Purchase Price shall be adjusted to be reduced by an amount equal to the sum of (x) the RSA 6 & 7 Value, plus (y) any federal, state and local tax liability of SICC (on a consolidated basis) resulting from, and solely from such sale (the “RSA 6 & 7 Tax Liability”). The projected amount of the RSA 6 & 7 Tax Liability shall be estimated in writing by SICC’s independent accounting firm within fifteen (15) days of written request from SICC (and in no event later than 15 business days prior to the Closing), and shall be provided to SICC, the Shareholders and Buyer for their review and approval. The estimated RSA 6 & 7 Tax Liability shall be subject to review and approval of the Buyer and dispute resolution in accordance with the procedures applicable to the Initial Working Capital as set forth in Section 1.4(b)(iii), even though neither the proceeds of any sale of RSA 6 & 7 nor the RSA 6 & 7 Tax Liability shall be included in determining Working Capital.

(1) Material omitted pursuant to a request for confidential treatment under Rule 24b-2 of the Exchange Act of 1934. Material filed separately with the Securities and Exchange Commission.

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(ii)In the event the First Refusal Right with respect to SICC’s interest in RSA 6 & 7 has not been exercised or has been exercised but the closing of the sale of SICC’s interest in RSA 6 & 7 has not yet occurred by the Closing Date, there shall be no adjustment to the Purchase Price with respect to the RSA 6 & 7 Value and the gross proceeds of the sale of SICC’s interest in RSA 6 & 7 shall be retained by SICC for the benefit of Buyer.

(b)Purchase Price Adjustment Regarding Working Capital.

(i)The Purchase Price shall be adjusted on a dollar for dollar basis upward or downward to the extent the Working Capital at Closing is different than [****](2) as set forth in Schedule 1.4(b).

(ii)For the purposes of this Section 1.4, the Working Capital amount to be used for this adjustment shall be calculated as of the Effective Time as the current assets of SICC and its Subsidiaries, including Southern Illinois RSA Partnership (“SIRP”), less the current liabilities of SICC and its Subsidiaries, including SIRP, with all amounts determined on a consolidated basis in accordance with GAAP and consistent with SICC’s historical accounting practices and methodologies, and disregarding any actions that may have been taken by Buyer from and after the time the Closing actually occurred, if such time is before the Effective Time, except for the method of calculating estimates for reserves for uncollectible subscriber accounts receivable, obsolete inventories and accruals for contingent liabilities regarding litigation which will follow the methodologies described in notes (B), (C) and (H) to Schedule 1.4(b). In determining Working Capital: (A) current liabilities and current assets shall be adjusted to exclude the amounts attributable to the following items, but only to the extent such amounts are deducted from the calculation of the Purchase Price in accordance with other provisions of Section 1.4: (i) amounts related to any Indebtedness, including Indebtedness of CoBank, ACB (“CoBank”), outstanding and accrued interest, prepayment and/or loan commitment fees thereto, (ii) amounts related to Employment Related Payments (as defined in Section  1.4(d)) and any accrued severance or retention bonus payments pursuant to Section 6.25, and (iii) fees payable or deferred expenses related to Daniels & Associates L.P. and other transaction expenses of the Shareholders consistent with Section 1.4(e); (B) current liabilities shall also exclude the RSA 6 & 7 Tax Liability; (C) current liabilities and current assets shall exclude amounts related to accrued, prepaid or deferred Federal or state income taxes; and, (D) current assets shall exclude accounts receivable for outcollect roaming revenue. For purposes of clarification, current liabilities shall include any liability or obligation, other than items referred to above in 1.4(b)(ii)(A)(ii), relating to or arising under any employee benefit or compensation plan, agreement, arrangement, or program accrued through, or attributable to any period prior to, the Closing Date, as well as accrued wages and workers’ compensation, vacation, including vacation carryover, if applicable, and sick days/short term disability benefits accrued through, or attributable to, any period prior to the Closing Date.

(2) Material omitted pursuant to a request for confidential treatment under Rule 24b-2 of the Exchange Act of 1934. Material filed separately with the Securities and Exchange Commission.

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(iii)In order to effect the adjustment for Working Capital at the Closing, SICC and the Shareholders shall estimate in good faith the initial Purchase Price adjustment for Working Capital using the then most recent month-end financial statements, and shall deliver not less than seven (7) business days prior to the Closing Date a written statement to Buyer (with appropriate supporting document for the details of the calculation) of its estimate of: (a) Working Capital; (b) the RSA 6 & 7 Tax Liability; (c) all amounts to be deducted from the purchase price for Indebtedness, Employment Related Payments and transaction expenses to be deducted from the Purchase Price pursuant to Section 1.4; and, (d) the portion of the Purchase Price to be paid by the Buyer at Closing after reflecting all adjustments contemplated by this Agreement. SICC and the Shareholders shall cooperate with Buyer to provide Buyer with a reasonable opportunity to review and comment upon the pre-closing estimates of SICC and the Shareholders. SICC and the Shareholders shall provide Buyer and its authorized representatives reasonable access to all books, records and employees of SICC and its Affiliates having relevant information concerning the estimated amounts that will adjust the Purchase Price in accordance with Section 1.4. Within five (5) business days after receipt of the written statement of SICC and the Shareholders, Buyer shall, in a written notice to SICC, either accept SICC’s and the Shareholders’ calculations or provide a written notice containing Buyer’s good faith calculation of the amounts reflected in the written statement and describing any objections to the Shareholder’s calculation with particularity. If Buyer does not provide such written notice with the 5 business day timeframe, the amounts shown on the written statement from SICC and the Shareholders shall be utilized. If Buyer notifies SICC of its revised calculation in accordance with this Section, Buyer, SICC and the Shareholders shall attempt to resolve their differences through representatives who are duly authorized to negotiate with respect to all differences, and any resolution by them as to disputed amounts shall be in writing. If the parties are not able to resolve their differences prior to the Closing Date, the parties shall use the arithmetic mean of the two calculations of such amounts for the purposes of calculating the amount to be paid at Closing to the Shareholders pursuant to Section 1.2. The amount of Working Capital determined prior to Closing in accordance with this Section shall be referred to as the “Initial Working Capital Adjustment Amount.”  The parties shall use the Initial Working Capital Adjustment Amount for comparison to the December 31, 2005 Working Capital amount specified in Section 1.4(b)(i) to determine the amount of the Working Capital adjustment to be made to the Purchase Price at the Closing.

(iv)As promptly as practicable after the Closing Date, but in no event later than forty-five (45) days after the Closing Date, the Buyer shall prepare and deliver to the Shareholders a written statement (with appropriate supporting documentation) (collectively, the “Closing Date Statement”) of the final Working Capital amount calculated in accordance with this Agreement. Within fifteen (15) business days of receipt of the Closing Date Statement, the Shareholders shall, in a written notice to Buyer, either accept the Closing Date Statement or Dispute the same, in the manner described in Section 1.5, and provide a description of any objections with reasonable particularity. If Buyer shall not have received a written notice of Dispute from the Shareholders to the proposed adjustments within this 15 business day period, the Shareholders will be deemed irrevocably to have accepted such Closing Date Statement.

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In addition, any item included in the Closing Date Statement that is not Disputed by the Shareholders with reasonable particularity shall be deemed to have been irrevocably accepted by the Shareholders (“Resolved Items”) and any amounts included within such item shall be deemed to be final, binding and conclusive. If the Shareholders notifies Buyer of its Dispute of the Closing Date Statement in accordance with this Section, the parties shall, within ten (10) calendar days (or such longer period as the parties may mutually agree) following such notice (the “Resolution Period”), attempt through representatives who are duly authorized to negotiate with respect to all outstanding differences to resolve their differences, and any written resolution by them as to any disputed amounts shall be final, binding and conclusive. Any amounts remaining in dispute at the end of the Resolution Period (the “Unresolved Items”) shall be resolved pursuant to Section 12.11; provided, however, that for the purposes of any such dispute the arbitrators to be selected shall also be certified public accountants duly licensed and practicing in the State of Illinois. The final Working Capital amount determined as of the Effective Time in accordance with the foregoing post-closing procedures is referred to as the “Final Working Capital Adjustment Amount.”  If the Final Working Capital Adjustment Amount less the Initial Working Capital Adjustment Amount is a positive amount, then, within ten (10) business days after such final determination, Buyer shall pay to the Shareholders such amount in immediately available funds in the same manner as provided in Section 1.2(b)(ii). If the Final Working Capital Adjustment Amount less the Initial Working Capital Adjustment Amount is a negative amount, then, within ten (10) business days after such final determination, the Shareholders shall pay to Buyer such amount in immediately available funds to an account designated by Buyer.

(c)Purchase Price Adjustment Regarding Indebtedness Repayment. In the event any amounts are owed by SICC or any of its Subsidiaries to a third party for Indebtedness on the Closing Date, the Purchase Price shall be adjusted at the Closing to be reduced by the total amount of all principal then outstanding and owed to the holder of such Indebtedness and any interest, prepayment and/or loan commitment feesor other amounts accrued thereon through the Effective Time. The Buyer shall pay the amount of the Purchase Price adjustment required for this purpose to the holder of such Indebtedness at the Closing in immediately available funds upon Buyer’s receipt of a pay-off letter from the payee in form reasonably satisfactory to Buyer.

(d)Purchase Price Adjustment Regarding Certain Employment Related Payments. The Purchase Price shall be adjusted at the Closing to be reduced by an amount equal to the total of: (i) the deferred compensation to be paid to Terry Addington pursuant to the Deferred Compensation Agreement dated November 10, 1998, as amended through the date hereof (the “Deferred Compensation”); and (ii) with respect to Terry Addington, Michael Beehn, Michael Jaksich, Dale Lewis and Tania Seger, an amount equal to the retention bonus to be paid to each of them pursuant to the provisions of Section 1(A) of the document titled “Agreement” entered into with Terry Addington on October 19, 2005 and with each of the other individuals listed above on October 20, 2005, as such agreements are in effect on the date hereof (collectively, the “Executive Retention Bonus” and collectively with the Deferred Compensation, the “Employment Related Payments”). The Buyer shall pay the amount of the Purchase Price adjustment required for this purpose to such individuals at the Closing in immediately available funds upon Buyer’s receipt of a release from the payee in form reasonably satisfactory to Buyer.

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For purposes of clarification, no adjustment shall be made to the Purchase Price for amounts paid pursuant to Section 6.25.

(e)Purchase Price Adjustment Regarding Daniels & Associates, L.P. and Other Shareholder Expenses. The Purchase Price shall be adjusted at the Closing to be reduced by: (i) an amount equal to the payment due Daniels & Associates, L.P. (“Daniels”) with regard to this transaction pursuant to the engagement agreement dated July 12, 2005; and, (ii) other unpaid expenses of the Shareholders, to the extent that SICC is responsible for such expenses, directly related to the negotiation, execution and closing of the transaction contemplated by this Agreement; with amounts of the Purchase Price adjustments required for this purpose with respect to any such amounts unpaid as of the Closing Date to be paid by Buyer to Daniels and such other parties at the Closing in immediately available funds.

1.5Shareholder Communications and Actions.

(a)Appointment. Each Shareholder hereby irrevocably constitutes and appoints George Rawlinson, of Crosslink Wireless, Inc., as the true and lawful agent and attorney-in-fact (the “Shareholder Representative”) with the powers set forth in this Agreement. If George Rawlinson is unwilling or unable to serve as Shareholder Representative, each Shareholder hereby irrevocably constitutes and appoints Kevin Jacobsen, of Egyptian Communication Services, Inc., as the successor Shareholder Representative. If Kevin Jacobsen is unwilling or unable to serve as Shareholder Representative, each Shareholder hereby irrevocably constitutes and appoints H.R. Gentsch, of HTC Holding Co., as the successor Shareholder Representative. If H.R. Gentsch is unwilling or unable to serve as Shareholder Representative, a successor Shareholder Representative shall be appointed by a plurality of the Shareholders, with each such Person voting based on the number of Shares held immediately prior to the Effective Time. The absence of a Shareholder Representative, due to resignation or any other reason whatsoever, shall not impair or prejudice any right or remedy Buyer may have at law or equity or under the terms of this Agreement.

(b)Communications and Actions. Buyer shall be entitled to rely upon any communication or writings given by or to, or executed by the Shareholder Representative. All notices to be sent to any Shareholder pursuant to this Agreement or any other agreement contemplated hereby or delivered in connection herewith shall be addressed to the Shareholder Representative and copies thereof shall be simultaneously sent to all Shareholders, provided that the notice so sent or delivered to the Shareholder Representative shall be deemed proper and sufficient notice to each Shareholder hereunder without regard to whether the notices sent to the other Shareholders are actually sent or received. Each Shareholder hereby consents and agrees that the Shareholder Representative is authorized to accept and deliver notice on behalf of such Shareholder pursuant hereto and pursuant to all other agreements contemplated hereby or delivered in connection herewith and to deliver waivers and consents on behalf of each Shareholder. All such notices, when delivered by the Buyer or its agent to the Shareholder Representative, as applicable, shall be binding on all of the Shareholders. Delivery of notice by the Shareholder Representative to the Buyer shall constitute delivery of notice to the Buyer by all the Shareholders.

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(c)Any claim made by Buyer after Closing, whether against the Escrowed Amount or otherwise under this Agreement, may be disputed or contested by the Shareholders only if at least four (4) Shareholders agree to make such dispute or contest such matter in a writing (“Dispute”) delivered to Buyer and/or the Escrow Agent.

ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF SICC
AND THE SHAREHOLDERS

SICC and the Shareholders hereby jointly and severally represent and warrant to Buyer that the statements contained in this Article II are true and correct, except as set forth in the accompanying disclosure schedules:

2.1Organization. Schedule 2.1 sets forth a complete list of the following information pertaining to SICC and the Subsidiaries: (a) its name and jurisdiction of formation; (b) jurisdiction(s) where each entity is qualified to do business as a foreign entity; (c) its entire authorized capital stock or equity interests, its entire issued and outstanding capital stock or equity interests, and a true, accurate and complete equity holder’s list for each Cellular Entity together with percentage ownership in the case of SICC’s ownership interest in each of the Subsidiaries, and, in the case of SICC’s shareholders, the number of Shares held by each Shareholder. Each of SICC and the Subsidiaries (d) is duly organized, validly existing and in good standing under the laws of its state of formation, (e) is qualified to do business in each jurisdiction in which such qualification is required, except where failure to so qualify would not reasonably be expected to have a material adverse effect on it, and (f) has all required power and authority to own or lease its property and assets and to carry on its business as presently conducted. The Shareholders have delivered to Buyer prior to the date hereof true, correct and complete copies of SICC’s and the Subsidiaries’ Articles of Incorporation and Bylaws or other organizational documents (including any amendments, modifications, supplements or modifications thereto and waivers in effect thereunder). Neither SICC nor any Subsidiary is in violation of any term of its Articles of Incorporation or its Bylaws, and the Articles of Incorporation and Bylaws of SICC and its Subsidiaries are valid, binding and in full force and effect.

2.2Power and Authority. Subject to the receipt of required Consents: (a) SICC has all required corporate power and authority to enter into and perform this Agreement and the Related Agreements and the transactions contemplated hereby and thereby; and, (b) each Shareholder has all required authority to enter into and perform this Agreement and the Related Agreements and the transactions contemplated hereby and thereby.

2.3Authorization; No Contravention.

(a)The execution and delivery of, and performance by SICC and the Shareholders of their respective obligations under this Agreement and the Related Agreements have been duly authorized by all required action other than any required Consents. Each of this Agreement and the Related Documents constitute a legal, valid and binding obligation of SICC and each Shareholder, as applicable, enforceable against each of them in accordance with its applicable terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization,

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moratorium, fraudulent conveyance or other similar laws affecting the enforcement of creditors’ rights generally, and general principles of equity and limitations on the availability of equitable remedies.

(b)Except as listed on Schedule 2.3, SICC’s and each Shareholder’s execution and delivery of this Agreement and the Related Agreements and the other agreements contemplated hereby and thereby, and the respective performance of each of them under such agreements and the transactions contemplated hereby and thereby, will not: (i) violate, conflict with or result in: (1) any breach or default (with or without notice or lapse of time or both) or give rise to any right of termination, modification, cancellation, prepayment, or acceleration of any obligation or to the loss of a material benefit under any contract, instrument, agreement, indenture, obligation or commitment (including all contracts, agreement or instruments required to be scheduled on Schedules 2.13,  2.16, 2.17 or 2.20) to which any of SICC, the Subsidiaries or any Shareholder is a party or by which its or his assets are bound; (2) conflict with or result in a violation under any provision of the Articles of Incorporation or Bylaws of SICC or its Subsidiaries; (3) the creation of any Lien, charge or encumbrance of any nature upon any of the properties or assets of any of SICC or its Subsidiaries, or (4) a First Refusal Right ; (ii) violate or result in a material violation of, or constitute a default under, any provision of any law, statute, ordinance, regulation, franchise, license or rule, or any decree, judgment or order of, or any restriction imposed by, any court or Governmental Authority upon any of the properties or assets of SICC or its Subsidiaries; or (iii) require any notice to, filing with, or consent or approval of any Governmental Authority or other third party.

(c)No appraisal, dissenter’s or similar rights (whether existing by contract, statute or otherwise) apply to this Agreement or the Related Agreements, and the respective performance of the parties under such agreements and the transactions contemplated thereby, or to the extent any such appraisal, dissenter’s or similar rights may exist or apply with respect this Agreement and the other Related Agreements contemplated hereby, and the respective performance of each of the parties under such agreements and the transactions contemplated hereby, the Shareholders have irrevocably waived and extinguished such rights.

2.4Capitalization; Stockholders.

(a)The authorized capital stock, and all of the issued and outstanding shares of capital stock, of SICC are set forth on Schedule 2.4(a) hereof, and except as set forth on such schedule there is no other class of equity interest in SICC issued and outstanding or reserved for issuance. The Shares represent 100% of the issued and outstanding shares of capital stock of SICC. Other than as described in Schedule 2.4(a), there are no outstanding warrants, options, preemptive, conversion or other rights to purchase or acquire any of such shares, nor any outstanding securities convertible into such shares or outstanding warrants, options or other rights to acquire any such convertible securities. Except as set forth on Schedule 2.4(a), there are no voting trusts or other agreements or understandings with respect to the voting or disposition of any of the Shares, and neither SICC nor any Shareholder has Knowledge of any First Refusal Rights or other restrictions on the transfer of the Shares other than those arising from federal and state securities laws or under this Agreement.

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(b)All of the outstanding shares of SICC capital stock have been duly authorized and validly issued in accordance with all applicable federal and state securities laws, not in violation of preemptive or other similar rights of any shareholder, and are fully paid and non-assessable. Except as set forth on Schedule 2.4(b), each Shareholder identified on Schedule 2.4(a) as the holder of any Shares is the sole record and beneficial owner of such Shares free and clear of any Liens, such Shareholder has good, valid and marketable title to such Shares, and all such Shares are duly authorized, validly issued and fully paid. Upon delivery of the certificates representing the Shares at the Closing and delivery of the consideration therefor as provided for by this Agreement, Buyer will acquire good, valid and marketable title to the Shares, free and clear of all Liens.

2.5Subsidiaries and Affiliates. (a)Except for the Cellular Entities set forth on Schedule 2.5(a), SICC has no other Subsidiaries or Affiliates nor does it have any investments in, or loans or advances to, any other corporation, Subsidiary, trust, partnership or business entity, nor is it a party to any joint venture. The Cellular Interests identified on Schedule 2.5(a) represent the entire right, title and interest of SICC and its Affiliates in and to the Cellular Entities. Except as set forth on Schedule 2.5(a), SICC (or its applicable Affiliate that owns a Cellular Interest as set forth on Schedule 2.5(a) as the holder of any Cellular Interests) is the sole record and beneficial owner of such Cellular Interests free and clear of any Liens, such entity has good, valid and marketable title to such Cellular Interests, and all such Cellular Interests are duly authorized, validly issued and fully paid. Upon delivery of the certificates representing the Shares at the Closing and delivery of the consideration therefor as provided for by this Agreement, Buyer will acquire the indirect ownership of the Cellular Interests as shown on Schedule 2.5(a), free and clear of all Liens.

(b)Except as set forth on Schedule 2.5(b), SICC and its Affiliates hold 100% of all Cellular Interests of all Cellular Entities. Schedule 2.5(b) lists, with respect to each Person that has any interest in any of the Cellular Entities that are not 100% owned by SICC and its Affiliates: (i) its name; (ii) its jurisdiction of incorporation or organization; (iii) its entire authorized capital stock or other equity or similar interests; (iv) the Cellular Interests held by SICC or its Affiliates; and, (v) to the Knowledge of the Shareholders, all other issued and outstanding capital stock or other equity or similar interests, including all Third-Party Interests, the name of each record and beneficial holder of the Cellular Interests and its other capital stock or other equity or similar interests, including the Third-Party Interests; (vi) the percentage interest of SICC or its Affiliate in RSA 6 & 7 and, to the Knowledge of the Shareholders, each other record and beneficial owner; and, (vii) the current capital contribution account balance (or account balance for any equity or other similar interests) of SICC or its applicable Affiliate with respect to its Cellular Interest and, to the Knowledge of the Shareholder, each Third Party Interest. SICC (or its applicable Affiliate that owns a Cellular Interest set forth on Schedule 2.5(b)) has rights of participation (as represented by the percentage interest set forth on Schedule 2.5(a)) with any owners of Third-Party Interests in the earnings, profits, losses and distributions of RSA 6 & 7 as specified in the Agreement Establishing Illinois RSA 6 & 7 Limited Partnership dated October 25, 1989, a true and complete copy of which has been delivered to Buyer prior to the date hereof.

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(c)Except as set forth on Schedule 2.5(c), neither SICC, its Subsidiaries nor any Shareholder have received notice of any exercise or intention to exercise any First Refusal Rights, or any tag along, put or other similar rights with respect to any Cellular Interests or Third-Party Interests.

2.6Financial Statements. (a)SICC has previously delivered to Buyer true, correct and complete copies of the audited statements of operations, cash flow and stockholders’ equity and the related balance sheets of SICC and its Subsidiaries (on a consolidated basis) as of and for the fiscal years ended December 31, 2003 and December 31, 2004 (the “Audited Statements”) and the unaudited statements of operations, cash flow and stockholders’ equity and the related balance sheets of SICC and its Subsidiaries (on a consolidated basis) as of and for the twelve months ended December 31, 2005 (the “Unaudited Statements,” and collectively with the Audited Statements, the “SICC Financial Statements”).

(b)The SICC Financial Statements (including related notes and schedules) have been prepared from the books and records of SICC and its Subsidiaries and the Audited Statements have been prepared in accordance with GAAP applied on a consistent basis. The Unaudited Statements have been prepared in accordance with GAAP except for (i) normal year-end adjustments and (ii) any other adjustments noted therein. Except as set forth in the SICC Financial Statements or Schedule 2.6(b) to this Agreement, SICC and the Subsidiaries do not have (i) any material contingent obligations, liabilities or material forward or long-term commitments or (ii) any Indebtedness other than liabilities that would be properly classified as current liabilities in accordance with GAAP applied on a consistent basis. The SICC Financial Statements (i) have been prepared to the extent required, in accordance with the rules and regulations of the FCC, (ii) fairly present the financial condition of SICC and the Subsidiaries as of the dates thereof, except as set forth in the notes thereto and subject to normal year-end adjustments consistent with past practice, and (iii) are true and correct as of the respective dates thereof in all material respects. The Shareholders have no Knowledge that the SICC Financial Statements are not true and correct in all material respects as of the respective dates thereof. Since December 31, 2002, SICC has not made any change in the accounting practices or policies applied in the preparation of its financial statements, except as required by GAAP, any Governmental Authority rule or policy or application of law.

(c)Except as otherwise specifically disclosed on Schedule 2.6(b) or 2.18 or in the SICC Financial Statements, neither SICC nor any Subsidiary has any accrued or contingent liability or liabilities arising out of any transaction or state of facts existing prior to the date hereof.

2.7Business; Franchises and Regulations. (a)SICC and each of the Subsidiaries has ownership of and/or other good right to use (i) all franchises, permits, registrations, licenses and other authorizations required by applicable law or regulation (the “Franchises”), and (ii) all United States and foreign issued patents, patent rights, patent applications, registered trademarks, trademark applications, registered service marks, service mark applications, trade names, copyrights, software, trade dress, customer lists, processes, products, technologies, discoveries, trade secrets, copyrightable work, apparatus, licenses, confidential marketing and customer information, confidential financial information, inventions (whether or not patentable), and know-how (the “Intellectual Property”) used in their respective businesses as presently

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conducted or required or necessary to permit SICC and each of the Subsidiaries to own their respective properties and to conduct their respective businesses as presently conducted. To the Knowledge of SICC and each Shareholder, the use of the Intellectual Property by SICC and its Subsidiaries does not interfere with, infringe upon, misappropriate or otherwise come into conflict with any patent, trademark, service mark, trade name, copyright, brand name, logo, symbol or other intellectual property or proprietary information of any other Person, and to the Knowledge of SICC and each Shareholder, no other Person is interfering with, infringing upon, misappropriating or otherwise coming into conflict with any Intellectual Property of SICC or its Subsidiaries.

(b)Except as would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the validity or value of any Intellectual Property: (i) no Person or entity has given notice to SICC or its Subsidiaries, nor does SICC, its Subsidiaries or any Shareholder have Knowledge of any reasonable basis to believe, that the use of any Intellectual Property that is necessary and material to the day-to-day operation of SICC or its Subsidiaries (“Material Intellectual Property”) by SICC or its Subsidiaries or any licensee is infringing or has infringed any domestic or foreign patent, trademark, service mark, trade name, or copyright or design right, or that SICC or its Subsidiaries has misappropriated or improperly used or disclosed any trade secret, confidential information or know-how; and, (ii) the execution, delivery and performance of this Agreement and the Related Agreements by SICC and the Shareholders and the consummation of the transactions contemplated hereby and thereby will not breach, violate or conflict with any instrument or agreement concerning any Material Intellectual Property, will not cause forfeiture or termination or give rise to a right of forfeiture or termination of any of the Material Intellectual Property or impair the right of Buyer to make, use, sell license or dispose of, or to bring any action for the infringement of, any Material Intellectual Property.

(c)From and after Closing, SICC and its Subsidiaries will have the right to use all of the Intellectual Property and Material Intellectual Property.

(d)Schedule 2.7 sets forth all of the Franchises, including the issuer and termination or expiration date of each. To the Knowledge of SICC and each Shareholder, each of the Franchises was duly and validly issued by the issuer thereof in accordance with procedures that complied with all then-existing requirements of applicable law. Each of the Franchises held by SICC and each of the Subsidiaries is in full force and effect, free of all Liens, except Permitted Liens, and is not subject to any restrictions or conditions which, individually or in the aggregate, would materially impair the ability of SICC or any of the Subsidiaries to own their respective properties or to carry on their respective businesses as presently conducted, and SICC and each of the Subsidiaries is in material compliance with the terms thereof with no conflict with the valid rights of others that could materially affect or impair in any manner the business, assets or condition, financial or otherwise, of SICC or any of the Subsidiaries. To the Knowledge of SICC and each Shareholder, no event has occurred which permits, or after notice or lapse of time or both would permit, the revocation or termination of any of the Franchises. No proceedings to revoke, refuse, renew, modify or restrict the Franchises are pending or, to the Knowledge of SICC and each Shareholder, Threatened. SICC and each of the Subsidiaries has timely and properly made all filings and reports required by the FCC, the ICC, the FAA and all other regulatory entities having jurisdiction over them.

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2.8FCC Licenses.

(a)Schedule 2.8 correctly sets forth all of the FCC Licenses held by SICC and each Subsidiary and the expiration or termination date of each such FCC License. SICC and its Subsidiaries are the exclusive holders of, and have good, valid and marketable title, free and clear of all Liens, to the FCC License(s) set forth opposite their names on Schedule 2.8. No Person other than SICC and its Subsidiaries has any right, title or interest (legal or beneficial) in or to the FCC License(s) set forth opposite their names on Schedule 2.8. No Person other than SICC and its Subsidiaries is licensed to use, or otherwise has a right to use, the FCC Licenses held by SICC and its Subsidiaries. SICC and each of the Subsidiaries hold all required FCC Licenses in accordance with applicable law or regulation that are used in any of their businesses as presently conducted. Each FCC License was duly and validly issued to SICC or the respective Subsidiary in accordance with procedures that complied with all requirements of applicable law. Each FCC License is in full force and effect in accordance with its terms, and there is no outstanding notice of cancellation or termination or, to the Knowledge of SICC and each Shareholder, any Threatened cancellation or termination in connection therewith. Except as provided in the FCC’s rules and regulations, none of the FCC Licenses are subject to any restrictions or conditions that limit the operations of such license (other than restrictions or conditions generally applicable to licenses of that type). No proceedings (i)  to revoke, refuse to renew, modify , restrict or otherwise challenge the validity of the FCC Licenses or (ii) that would reasonably be expected to result in (A) the revocation, cancellation, forfeiture (other than a monetary payment), non-renewal, suspension, modification or amendment of any of the FCC Licenses, or (B) the payment of a fine, sanction, penalty, damages or contribution in connection with the use of any of the FCC Licenses by SICC or its Subsidiaries are pending or, to the Knowledge of SICC or any Shareholder, Threatened. Neither SICC nor any Shareholder has any Knowledge that any of the FCC Licenses (i) could be revoked, canceled or suspended, and (ii) would not be renewed or extended in the ordinary course of business. None of SICC, its Subsidiaries, or the Shareholders has entered into any obligation, agreement, arrangement or understanding to transfer the FCC Licenses or that would adversely affect Buyer’s ownership or use of the FCC Licenses after Closing.

(b)Schedule 2.8 sets forth and describes all applications in respect of the FCC Licenses filed by SICC or any Subsidiary with a Governmental Authority that are currently pending; the information contained in each such application is true and complete in all material respects. Except as set forth in Schedule 2.8, all Interference Consents with respect to the FCC Licenses are terminable by either party thereto with no more than 60 calendar days’ advance notice. SICC will deliver to Buyer, within ten business days after the execution of this Agreement by both parties, a copy of all known Interference Consents with respect to the FCC Licenses.

2.9Overbillings; Refunds. Except as reflected on the SICC Financial Statements or as set forth on Schedule 2.9, neither SICC nor any Subsidiary has any liabilities for any customer overbillings or prospective refunds of overearnings.

2.10Capital Improvements Required by Authorities. Neither SICC nor any Subsidiary is required by any federal, state or local regulatory body to make any changes, upgrades or

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enhancements with respect to their physical plant or network and, except for possible future CALEA requirements, none of them has Knowledge that any such changes, upgrades or enhancements will be so required in the foreseeable future.

2.11Compliance with Law. (a)Except as set forth on Schedule 2.11(a), SICC and the Subsidiaries have been and each of them is in material compliance with all applicable statutes, laws, ordinances, and regulations (including, rules, regulations and orders regarding implementation of CALEA, E 911 (Phase I and II), number portability, telephone service for the hearing impaired and other laws and FCC regulations) applicable to their respective assets (including cell sites and cell towers), businesses or operations. SICC and its Subsidiaries have complied in all material respects with the terms and conditions of the FCC Licenses, except in any such case where such conflict, default, violation or noncompliance affects the wireless industry generally. SICC and each of the Subsidiaries has all permits, licenses, registrations, franchises and other authorizations from, and have made all necessary filings with, all governmental agencies, required to conduct their businesses as now being conducted or as currently contemplated to be conducted.

(b)Except as set forth on Schedule 2.11(b), neither SICC nor its Subsidiaries has received any request from any PSAP or Governmental Authority with jurisdiction or control over a PSAP, requesting the provision of Phase II E-911 services in its service area. Neither SICC nor its Subsidiaries has received written notice of any formal or informal complaint or order filed against it alleging any material non-compliance by it with respect to any laws or regulations relating to Phase II E-911 services in its service area.

2.12Absence of Certain Developments. Except as set forth in Schedule 2.12, since December 31, 2004, SICC and its Subsidiaries have conducted their respective businesses and operations in the ordinary and usual course consistent with past practice and there have been no (a) material adverse change in the assets, liabilities, properties, business prospects, financial condition or results of operations of SICC or any Subsidiary (including the commencement against SICC or any Subsidiary of any proceeding by any regulatory authority, other than those affecting the Cellular Services industry generally or the Cellular Services industry in Illinois generally), (b) loan by SICC or any Subsidiary to any officer, director, employee or stockholder thereof, nor any agreement or commitment therefor, (c) increase, whether direct or indirect, in the compensation paid or payable to any officer, director, employee, Person or entity performing services as an independent contractor, consultant or agent of SICC or any Subsidiary except in the ordinary course of business, (d) loss, destruction or damage to any property of SICC or any Subsidiary, whether or not insured, in excess of $25,000 in the aggregate, (e) incidents of significant labor difficulty of any nature involving SICC or any Subsidiary, and no material change in the personnel of SICC or any Subsidiary or the terms and conditions of any employment contracts or independent contractor or consulting agreements to which any of them are parties, (f) acquisition or disposition of any assets (or any contract or arrangement therefor) nor any other transaction by SICC or any Subsidiary other than in the ordinary course of business, (g) creation, incurrence, guarantee or assumption of any Indebtedness by SICC or any Subsidiary (other than pursuant to existing credit facilities), (h) change in accounting methods or practices by SICC or any Subsidiary affecting their respective assets, liabilities or business, (i) revaluation by SICC or any Subsidiary of any assets, including without limitation, writing off notes or accounts receivable or obsolete inventory or the acceleration of its practices for the

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collection of receivables, except in the ordinary course of business consistent with past practices, (j) mortgage, pledge or other encumbrance of any material assets of SICC or any Subsidiary, (k) increase or change in any assumptions underlying or methods of calculating any bad debt, contingency or other reserves, other than in the ordinary course of business, and (l) payment, discharge or satisfaction of any liabilities other than the payment, discharge or satisfaction in the ordinary course of business. For the purposes of Section 2.12(a), changes shall not be material unless the aggregate value thereof exceeds $250,000; and, provided further that neither (x) the effects of any events, circumstances or conditions resulting from changes, developments or circumstances in worldwide or national conditions (political, economic, or regulatory) that generally adversely affect the local, regional or national market for Cellular Services or that generally adversely affect companies engaged in the telecommunications business (including proposed legislation or regulation by any governmental or regulatory body or the introduction of any technological changes in the telecommunications industry), (y) any effects of competition resulting from the offering of personal communication services or other wireless telecommunications services, nor [****](3) will constitute a material adverse change.

2.13Title to Properties.

(a)SICC and each of the Subsidiaries have good, valid and marketable title to, or in the case of leased property, good, valid and marketable leasehold interests in, all of their properties and assets, free and clear of all Liens except Permitted Liens; provided, however, that title to the FCC Licenses shall be as stated in Section 2.8(a) above. No Person other than SICC or a Subsidiary owns any interest in any of such properties and assets, except with respect to the leased property disclosed on Schedule 2.13, and all such properties and assets are in the possession and subject to the control of SICC or its applicable Subsidiary.

(b)All owned or leased real property of SICC and each of the Subsidiaries is listed on Schedule 2.13. Schedule 2.13 sets forth the address of each parcel of leased real property, and a true and complete list of all leases for each such leased real property (including the date and name of the parties to such lease document). A true and complete copy of each lease to which SICC or a Subsidiary is a party has been made available to Buyer. Except as set forth on Schedule 2.13, each such lease is in full force and effect and affords SICC and the respective Subsidiary peaceful and undisturbed possession of the subject matter of such lease. No default or event of default on the part of SICC, any Subsidiary, or, to the Knowledge of any Shareholder, on the part of the lessor exists under any lease. Neither SICC nor any of the Subsidiaries, nor any Shareholder has received any notice of default under any such lease, nor do SICC, any of the Subsidiaries or the Shareholders have Knowledge that the owner of any leased property intends to terminate such lease, and, no event has occurred which with notice or the lapse of time, or both, would constitute a default under any such lease. SICC and each Subsidiary holds all material easements, rights-of-way and other rights necessary to own, operate and maintain its respective properties and, to SICC’s and each Shareholder’s Knowledge, is not in breach of, or default under, any such easement, right-of-way or other right and there are no materially burdensome limitations or obligations on SICC or any Subsidiary under any such easement, right-of-way or other right.

(3) Material omitted pursuant to a request for confidential treatment under Rule 24b-2 of the Exchange Act of 1934. Material filed separately with the Securities and Exchange Commission.

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(c)Neither SICC nor any Subsidiary is in material violation of any zoning, land-use, building or safety law, ordinance, regulation or requirement or other law or regulation applicable to the operation of its owned or leased properties, nor have any of them received any notice of violation with which it has not complied, in any case in which the consequences of such violation if asserted by the applicable regulatory authority would be materially adverse. All real property occupied pursuant to leases, and substantially all tangible personal property owned or leased by SICC and the Subsidiaries required for the purpose of carrying on its business and operations, is in good operating condition and repair, reasonable wear and tear excepted, and no material portion of any such real or personal property has suffered any damage by fire or other casualty which has not heretofore been repaired and restored to the extent necessary or useful in the continued operation of its business.

2.14Condition of Assets. All assets used by SICC and the Subsidiaries are in good operating condition and repair, normal wear and tear excepted, and are suitable for the purposes for which they are currently utilized.

2.15Tax Matters.

(a)Each of SICC and its Subsidiaries has timely filed all Tax reports and returns that it was required to file. All such reports and returns are correct and complete in all material respects. All Taxes owed by SICC and its Subsidiaries, whether or not shown on any Tax return, have been paid and there is an adequate accrual on SICC’s financial statements for all Taxes not yet due. Neither SICC nor any Subsidiary currently is the beneficiary of any extension of time within which to file any report or return. In the last six (6) years no claim has been made by a Taxing Authority in a jurisdiction where SICC or any Subsidiary does not file reports and returns that it is or may be subject to taxation by that jurisdiction. Other than Liens for real estate taxes that are not delinquent, there are no Liens for Taxes on any of the assets of SICC or any Subsidiary. Notwithstanding anything in this paragraph to the contrary, the parties acknowledge that SICC and its Subsidiaries intend to file their federal consolidated income Tax return for 2005 under an extension of time if granted by the IRS.

(b)Each of SICC and its Subsidiaries has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, creditor, independent contractor, stockholder or other third party.

(c)Neither SICC, any Subsidiary, any Shareholder, nor any officer or employee of SICC or any Subsidiary responsible for Tax matters has Knowledge or has any reasonable basis to believe that any Taxing Authority will assess any additional Taxes for any period for which returns have been filed. There is no dispute or claim concerning any Tax liability of SICC or any Subsidiary either (i) claimed or raised by any Taxing Authority in writing, or (ii) as to which any of the directors and officers (and employees responsible for Tax matters) of SICC or any Subsidiary has Knowledge based upon personal contact with any agent of such Taxing Authority. Neither SICC, any Subsidiary, any Shareholder nor any officer or employee responsible for Tax matters has received a request from any Taxing Authority for information related to Tax matters. Schedule 2.15(c) lists all tax returns filed with respect to SICC and its Subsidiaries for taxable periods ended on or after December 31, 2000 that have been audited or

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currently are the subject of an audit. SICC has made available to Buyer true, correct and complete copies of all federal, state and local income Tax returns, examination reports and statements of deficiencies assessed against or agreed to by SICC and its Subsidiaries since December 31, 2000 and will deliver to Buyer any such documents received on or before the Closing Date promptly upon receipt or as such documents are prepared by SICC or any Subsidiary.

(d)Neither SICC nor any Subsidiary has waived any statute of limitations in respect to Taxes, agreed to any extension of time with respect to a Tax assessment or deficiency or entered into a closing agreement pursuant to Section 7121 of the Internal Revenue Code of 1986, as amended (the “Code”).

(e)SICC is not a “foreign Person” within the meaning of Section 1445(b)(2) of the Code and SICC will provide to Buyer at Closing appropriate certificate for purposes of such section.

(f)Neither SICC nor any Subsidiary is bound by any agreement (either with any person or any taxing authority) with respect to Taxes, including any contractual obligation to indemnify another Person with respect to Taxes.

(g)Except as set forth on Schedule 2.15(g), neither SICC nor its Subsidiaries is party to any agreement, contact arrangement, or plan that has resulted or would result, separately or in the aggregate, in the payment of any “excess parachute payment” within the meaning of Code §280G (or any corresponding provision of state, local or foreign tax law) in connection with the transactions contemplated hereunder.

(h)Neither SICC nor any Subsidiary (i) has filed a consent under Section 341(f) of the Code nor has any such entity agreed to have any such provision of corresponding state, local or foreign income Tax law apply to any disposition of any asset such entity owns, (ii) is required to make any adjustments with respect to a change in Tax accounting methods and no such entity has proposed such adjustment or received written notice that the IRS or another Tax authority has proposed such adjustment, (iii) has distributed the stock of any corporation in a transaction satisfying the requirements of Section 355 of the Code since April 16, 1997, and no stock of SICC or any Subsidiary has been distributed in a transaction satisfying the requirements of Section 355 of the Code since April 16, 1997, and (iv) is a party to any safe harbor lease within the meaning of Section 168(f)(8) of the Code, as in effect prior to amendment by the Tax Equity and Fiscal Responsibility Act of 1982, and none of the assets of SICC or any Subsidiary has been financed with, or directly or indirectly secures, any industrial revenue bonds or Indebtedness, the interest on which is Tax exempt under Section 103(a) of the Code, and none of the assets of SICC or any Subsidiary is Tax exempt use property within the meaning of Section 168(h) of the Code.

(i)None of the Tax attributes of SICC or any Subsidiary are subject to the limitations of Code Sections 382, 383 or 384 or Treas. Reg. Section 1.1502 21(c). Except as set forth on Schedule 2.15(i), neither SICC nor any Subsidiary is party to any joint venture, partnership, or

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other arrangement or contract, which could be treated as a partnership for federal income Tax purposes.

(j)Neither Buyer, SICC nor any of their respective Subsidiaries will be obligated to pay any documentary or stamp Taxes or similar recording and filing fees pursuant to Illinois law in connection with the transfer of the Shares to Buyer at Closing.

2.16Insurance. SICC and each of the Subsidiaries has in force all policies of insurance described in Schedule 2.16 in the amounts and covering the risks described therein. Neither SICC nor any of the Subsidiaries has ever been refused any insurance coverage for which it has applied.

2.17Contracts and Commitments. Except as set forth in Schedule 2.17 or in the SICC Financial Statements, neither SICC nor any of the Subsidiaries: (a) is a party to any contract, obligation, understanding or commitment (whether written or oral) that involves a potential or actual commitment or aggregate payments to or from SICC or any Subsidiary in excess of $50,000 in a calendar year, or which is otherwise material and not entered into in the ordinary course of business; (b) has any employment contracts, stock redemption or purchase agreements, financing agreements, collective bargaining agreements, consulting or management services agreements, independent contractor agreements, or agreements with any current or former officers, directors, employees or shareholder of SICC or any Subsidiary, or to any Persons or organizations related to or Affiliated with any such Persons; (c) has any contract or arrangement concerning directory publishing matters or billing and collection matters; (d) has any contract or arrangement that limits the ability of any of SICC or any Subsidiary to compete in any line of business or to compete with any other Person; (e) has any contract relating to any Indebtedness or any guarantee or indemnification of or the granting of security for Indebtedness or any other obligation or liability; (f) has any contract relating to E911 services, interconnection or co-location arrangements, or other arrangements with any local exchange carrier, competitive access provider or other telecommunications carrier; (g) has any contract relating to licenses to or from SICC or any Subsidiary with respect to software or hardware used in the businesses of any of SICC or any Subsidiary; (h) has any contract relating to any indemnity obligations of any of SICC or any Subsidiary, (i) has entered into any joint venture or partnership agreement, (j) has granted powers of attorney to a third person, or (k) has any agreement or commitment relating to the acquisition or divestiture of the capital stock or other equity securities of any Person. To the Knowledge of SICC and each Shareholder, neither SICC nor any Subsidiary is in default under any material agreement, instrument, contract, obligation, understanding or commitment and there is no state of facts which upon notice or lapse of time or both would constitute such a default.

2.18Litigation. Except as set forth on Schedule 2.18, neither SICC, the Shareholders nor Subsidiaries or Affiliates of SICC have received notice of (written or oral) or otherwise has Knowledge of any investigation, complaint, charge, claim, grievance, action, suit or proceeding at law or in equity or by or before any governmental or administrative authority or instrumentality, public board, self-regulatory board, or other agency (including, without limitation, the FCC and the ICC), court, arbitrator, or similar tribunal, or any other body (for purposes of this Section, collectively, “adjudicative body”) now pending or Threatened against SICC or any Subsidiary. Neither SICC, the Shareholders nor the Subsidiaries or Affiliates of SICC have received notice of (written or oral) or otherwise has Knowledge of any investigation,

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civil investigative demand, complaint, action, suit or proceeding at law or in equity or by or before any adjudicative body now pending against SICC, a Subsidiary or any director, officer or key employee of SICC or a Subsidiary which has a reasonable possibility of hindering the enforceability or performance of this Agreement or any action taken or to be taken pursuant hereto, nor to the Knowledge of SICC or any Shareholder has there occurred any event or does there exist any condition on the basis of which any such litigation, proceeding or investigation might properly be instituted. There is no outstanding judgment, injunction, decree or order issued by any adjudicative body against SICC or a Subsidiary except FCC and/or ICC orders issued in the ordinary course or affecting the Cellular Services industry generally, or those Cellular Services operating in Illinois specifically.

2.19Environmental Matters.

(a)SICC and each Subsidiary has obtained from Governmental Authorities any permits, licenses, authorizations or other consents (“Environmental Permits”) required, if any, under applicable Environmental Law for the operation of their respective business as currently conducted.

(b)For any real property owned or leased by SICC or any Subsidiary (the “Properties”) at which any Hazardous Substance has ever been or is now being generated, used, stored, treated or otherwise managed by SICC or any Subsidiary, each such activity has been and is in material compliance with applicable Environmental Laws. No Hazardous Substances have been, or are being, Released, discharged, disposed, placed, or otherwise caused to come to be located on or in the soil, surface water or groundwater in, on or under any of the Properties by SICC or a Subsidiary or, to the Knowledge of SICC and the Shareholders, by any other Person that would require reporting under applicable Environmental Laws. No Hazardous Substances have been shipped or transported from any of the Properties for treatment, storage or disposal at any other facility by SICC or a Subsidiary or, to the Knowledge of SICC and any Shareholder, by any other Person, except in compliance with Environmental Laws. Neither SICC nor its Subsidiaries have disposed, stored, treated, or sent for disposal, storage or treatment, any solid waste, pollutant, contaminant or waste (whether hazardous waste or other waste), or Hazardous Substances, except in compliance with applicable Environmental Laws, and then only to a facility which possessed any required permits under all applicable Environmental Laws. There are no, and to the Knowledge of SICC and any Shareholder never have been any, underground or above ground storage tanks at any of the Properties. No environmental remediation or other environmental response is occurring on any of the Properties, nor has SICC or a Subsidiary issued a request for proposal or otherwise asked an environmental remediation contractor to begin plans for such environmental remediation or other environmental response.

(c)To the Knowledge of SICC and any Shareholder, no circumstances exist that would form the basis for (i) any notice of violation of any applicable Environmental Law, or (ii) any notice of any suit, action, claim, liability (contingent or otherwise) or proceeding (whether at law, in equity, or administrative) concerning or related to Environmental Laws that could result in a material liability with respect to the business or the assets that are the subject of this Agreement. SICC and the Subsidiaries have never received any notice of liability as a potentially responsible party under Environmental Laws.

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(d)For purposes of this Agreement, the term “Environmental Laws” shall mean all federal, state, or local laws, statutes, ordinances and regulations relating to the emission or discharge of pollutants and/or Hazardous Substances or to the environment, including without limitation, requirements under the Clean Air Act, Federal Water Pollution Control Act, Resource Conservation and Recovery Act, Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”), the Oil Spill Act, each as amended and in effect from time to time. The term “Hazardous Substances” shall include any substance defined as a Hazardous Substance under Section 101(14) of the Comprehensive Environmental Response Compensation and Liability Act, asbestos, polychlorinated biphenyls, or any substance regulated as hazardous or toxic under applicable Environmental Laws. The term “Release” shall have the meaning ascribed thereto in CERCLA.

(e)SICC and the Subsidiaries have been and are in material compliance with all applicable Environmental Laws.

2.20Benefit Arrangements.

(a)Except as set forth in Schedule 2.20, neither SICC nor any ERISA Affiliate is or ever has been a party to any collective bargaining agreement or employment contract, nor have any of them (alone or with one or more entities) ever sponsored, maintained or participated in, nor do any of them currently sponsor, maintain or participate in, nor have any of them ever contributed to or been obligated to contribute to, nor are any of them currently contributing to or obligated to contribute to, any “employee benefit plan” (within the meaning of Section 3(3) of ERISA) or any deferred compensation, bonus, stock option, stock purchase, retainer, consulting, severance, incentive, employee perquisites, or fringe benefit plan, program, agreement or arrangement (“Benefit Arrangement”). With respect to each Benefit Arrangement, true, correct and complete copies of the following documents have been filed or distributed in accordance with applicable law and made available to Buyer: (i) all current plan documents and amendments thereto; (ii) Forms 5500 for the three (3) most recent plan years for which such Forms have been filed; (iii) summary plan descriptions; (iv) the most recent determination letter received from the Internal Revenue Service; and, (v) related trust agreements, insurance policies and contracts and other funding or administrative agreements for such Benefit Arrangements.

(b)SICC and each ERISA Affiliate are and have always been in compliance with the applicable provisions of ERISA and the Code (including, without limitation, COBRA and the Health Insurance Portability & Accountability Act) and other laws applicable to their Benefit Arrangements. Each Benefit Arrangement that is intended to be “qualified” within the meaning of Section 401(a) of the Code is so qualified.

(c)No condition exists as a result of which any of SICC or any ERISA Affiliate would have any liability, whether absolute or contingent, including any obligations under any Benefit Arrangement or obligations under federal or state tax laws, with respect to any misclassification of a Person performing services for any of SICC or an ERISA Affiliate as an independent contractor or leased employee rather than as a common-law employee.

(d)No action, suit, proceeding, hearing or investigation with respect to any Benefit Arrangement (other than routine claims for benefits) is pending or Threatened. No Benefit

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Arrangement contains any provision that would give rise to any accelerated vesting, obligation to fund, increase in benefits, severance, termination or other payments as a result of the transactions contemplated by this Agreement (either alone or upon the occurrence of any additional or subsequent events) or as a result of a termination of employment.

2.21Brokers or Finders. Apart from Daniels & Associates, L.P., neither SICC nor any Shareholder has engaged the services of any brokers or finders in connection with the execution and delivery of this Agreement.

2.22Records. Buyer has been provided with access to a copy of SICC’s and the Subsidiaries’ minute books and, except as set forth in Schedule 2.22 (a) such minute books contain true, accurate and complete records of all meetings of, or written consents in lieu of meetings executed by, their respective board of directors or other governing bodies (and all committees thereof) and their respective equity holders; (b) all actions and transactions taken or entered into by SICC or the Subsidiaries or otherwise requiring action by its boards of directors or other governing bodies and/or shareholders and equity holders have been duly authorized or ratified as necessary and are evidenced in such minute books; and, (c) the stock certificate books and stock records of SICC and the Subsidiaries are true and complete.

2.23Books of Account. SICC’s and the Subsidiaries books and records are complete and correct and have been properly maintained in accordance with normal business practices, and accurately and fairly reflect all of its properties, assets, liabilities, transactions and appropriate accruals.

2.24Intercompany Contracts; Related Party Matters. (a)Except as set forth on Schedule 2.24, there are no contracts, understandings, arrangements or commitments between or among SICC and any Subsidiary, Affiliate or the Shareholders. Except as provided in Schedule 2.24(a), none of the Shareholders, officers or directors of SICC, any Subsidiary, any Shareholder or Affiliate of any of them, is a party to any agreement, understanding or proposed transaction with SICC, any of its Subsidiaries, or, to the Knowledge of SICC and each Shareholder, any Cellular Entity. Except as set forth on Schedule 2.24(a), neither SICC, any of its Subsidiaries nor, to the Knowledge of SICC and each Shareholder, any Cellular Entity has guaranteed or assumed any obligations of, or has any Indebtedness to, their respective officers or directors, or of the Shareholders, or of the Affiliates of any of them and none of the Shareholders or any director, officer, agent or employee of any Shareholder or their Affiliates owes any Indebtedness to the Company or its Subsidiaries. Except as set forth on Schedule 2.24(a), neither any Shareholder, SICC or any of its Subsidiaries nor any director, officer, agent or employee of any Shareholder, the Company or any of its Subsidiaries (i) has any direct or indirect financial interest in any supplier or customer of SICC or its Subsidiaries or (ii) owns, directly or indirectly, in whole or in part, or has any other interest in, any tangible or intangible property or other assets which SICC or any of its Subsidiaries currently uses in the conduct of their business.

(b)To the Knowledge of SICC and each Shareholder, in connection with the operation of the business of SICC and its Subsidiaries, neither SICC nor any Subsidiary, nor any of their respective Affiliates (including the Shareholders), nor any of their respective officers, agents or employees has (i) made any unlawful contributions, gifts, entertainment or other

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unlawful expenses, (ii) made any unlawful payment to any governmental official, (iii) established or maintained any unrecorded fund or made any false entry on the books and records of the businesses or of SICC or Subsidiary, or (iv) made any bribe, rebate, kickback or similar unlawful payment or given a gift that is not deductible for federal income tax purposes.

2.25Accounts Receivable. The accounts receivable of SICC and each of the Subsidiaries as stated in the SICC Financial Statements are actual and bona fide receivables representing obligations for the total dollar amount of such receivables as shown on its books that resulted from the regular course of business. Such receivables are fully collectible in accordance with their terms, subject to the billing write-offs taken by SICC on a historical basis and are subject to no counterclaim, offset or reduction of any nature except for the amounts, if any, set forth on Schedule 2.25.

2.26CALEA Compliance. Except as set forth on Schedules 2.11(a) and 2.11(b), SICC is in compliance with the FBI’s current CALEA requirements and is not in violation of any statute, regulation, rule or requirement associated with CALEA.

2.27First Refusal Rights.

(a)Each of the Shareholders, by their signatures on this Agreement, hereby waive and relinquish their respective First Refusal Rights as set out in the Pre-Incorporation Subscription and Partial Cross-Market Settlement Agreement dated March 15, 1989 as such rights relate to the transfer of Shares pursuant to this Agreement.

(b)Except as set forth on Schedule 2.27  neither the execution of this Agreement or any Related Agreement nor the performance of any of the transactions contemplated hereby or thereby will create, result in or otherwise trigger any First Refusal Right.

(c)Schedule 2.27 sets forth with respect to each First Refusal Right (i) the Cellular Entity and Cellular Interests to which it relates; (ii) the sections of the applicable agreement that govern the terms and conditions of the First Refusal Right; (iii)  the name of each First Refusal Right Holder or other Person (including the Cellular Entity) entitled to receive notice of such First Refusal Right and its applicable participation percentage, (iv) the address to which any notice of any First Refusal Right must be sent; (v) the offer price (prior to giving effect to any over-subscription or similar rights in the event that any holder of a Third Party Interest fails to exercise its First of Refusal Rights in full) payable by each First Refusal Right Holder as a result of the First Refusal Right, (vi) any other material terms and conditions that must be contained in an Offer Notice; and, (vii) the time period, if any, by which an Offer Notice must be given to any Person.

2.28Labor Matters.

(a)Except as set forth on Schedule 2.28(a), none of the following is presently pending or, to the Knowledge of SICC and each Shareholder, Threatened against SICC or its Subsidiaries: (a) any material unfair labor practice charges, complaints, disputes or proceedings, or representation elections, petitions or demands; (b) grievances or arbitration demands arising pursuant to any collective bargaining agreement; (c) any material claims, charges, complaints or

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other proceedings alleging wrongful discharge, unlawful retaliation, or employment discrimination of any nature; (d) union organizing effort; (d) slowdown, work stoppages, strikes, lockouts or other similar concerted action by employees of SICC or its Subsidiaries. None of the employees of SICC or its Subsidiaries are represented by a labor union or labor organization and none of SICC or any Subsidiary is subject to any collective bargaining agreement covering any employee.

(b)Neither SICC nor any of its Subsidiaries has any liabilities under the Worker Adjustment and Retraining Notification Act (the “WARN Act”) as a result of any action taken by SICC or its Subsidiaries.

(c)SICC and its Subsidiaries are in material compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, and unfair labor practices.

2.29Subscribers; Rate Plans; Form of Agreements. As of December 31, 2005, the aggregate number of Postpay Subscribers was not fewer than [****].(4)  Schedule 2.29 sets forth a true, correct and complete (a) description of the terms of each rate plan and promotion still in effect that has been offered by SICC and its Subsidiaries in their businesses since January 1, 2004, (b) description of the products and services provided to subscribers of the businesses in addition to basic voice cellular; and, (c) copy of each form of subscriber agreement used in the businesses during the 24 month period preceding the date hereof.

2.30Towers.

(a)Schedule 2.30(a) sets forth a list of all Towers, including for each Tower the address and height and whether the Tower is located on real property owned or leased by SICC or a Subsidiary. Except as disclosed on Schedule 2.30(a), (i) each of the Towers has an engineered foundation and is a steel structure and (ii) all improvements on the real property at the sites on which the Towers are located (such real property and improvements thereon are referred to collectively herein as the “Tower Sites”) are in compliance in all material respects with all applicable laws, including, without limitation, all rules, regulations and orders of the FCC and the United States Federal Aviation Administration, and applicable title covenants, conditions, restrictions and reservations necessary to conduct the business of SICC and its Subsidiaries.

(b)The utility services available to each Tower Site are adequate for the present use of such Tower Site by SICC or its applicable Subsidiary and any third party who is a tenant of SICC or any Subsidiary using the Tower Sites, are being supplied by utility companies, and to the Knowledge of SICC and each Shareholder there is no condition, individually or in the aggregate, which will result in the termination of the present access from such Tower Site to such utility services.

(4) Material omitted pursuant to a request for confidential treatment under Rule 24b-2 of the Exchange Act of 1934. Material filed separately with the Securities and Exchange Commission.

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(c)SICC or its applicable Subsidiary has obtained all easements and rights of way that are reasonably necessary to provide vehicular and pedestrian ingress and egress to and from each of the Tower Sites for the conduct of their business. No litigation, arbitration, investigation or other proceeding is pending or, to the Knowledge of SICC or each Shareholder, Threatened which, individually or in the aggregate, would have the effect of terminating or materially limiting such access.

2.31Roaming.

(a)Schedule 2.31(a) contains a true, correct and complete:

(i)list of the five Commercial Mobile Service providers (“Roaming Partners”) for which SICC and its Subsidiaries (on a consolidated basis) recognized the most Roaming Revenue during the calendar year ending December 31, 2005;

(ii)the monthly amount of Roaming Revenues applicable thereto for each Roaming Partner during the calendar year ending December 31, 2005;

(iii)the monthly number of minutes of Cellular Service provided by SICC or any Subsidiary to subscribers of the Roaming Partners for each Roaming Partner during the calendar year ending December 31, 2005;

(iv)the monthly amount of Roaming Expenses for each Roaming Partner for the year 2005;

(v)the monthly number of minutes of Commercial Mobile Service provided by the Roaming Partners to subscribers of SICC or its Subsidiaries for each Roaming Partner during the calendar year ending December 31, 2005;

(vi)the monthly amount of Roaming Revenues and Roaming Expenses applicable to each Commercial Mobile Service provider (other than the Roaming Partners) for the year 2005;

(vii)the monthly number of minutes of Cellular Service provided by SICC and its Subsidiaries to subscribers of all other Commercial Mobile Service providers (other than the Roaming Partners) for the year 2005;

(viii)the monthly amount of minutes of Commercial Mobile Service provided by all other Commercial Mobile Service providers (other than the Roaming Partners) to subscribers of SICC or its Subsidiaries for each Commercial Mobile Service provider for the year 2005; and,

(ix)list of each agreement, contract or commitment (including, without limitation, all amendments, supplements and modifications thereto and waivers in effect thereunder, and if any such amendment, supplement, modification or waiver that is oral, then a written summary thereof) for roaming services with each Roaming Partner.

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Buyer acknowledges that all of the information set forth on Schedule 2.31(a) and as specified above is subject to periodic and customary adjustments from time to time that are inherent in the roaming billing and settlement process within the industry.

(b)Other than as set forth on Schedule 2.31(b) and as otherwise provided below, neither SICC nor any Subsidiary has an obligation, requirement or commitment of any kind or description whatsoever (whether written or oral) to load any SID or BID of any Commercial Mobile Service provider into any cellular handsets, including any cellular handsets possessing tri-mode capabilities, sold or licensed, or that may be sold or licensed in the future, by SICC or any Subsidiary or to send or deliver any amount of roaming traffic or revenue to any Person, including the Roaming Partners. Notwithstanding the foregoing, Buyer acknowledges that SICC and its Subsidiaries receive SID and BID loads on a regular basis, and take prompt action to load them as soon as reasonably possible.

(c)Except as set forth on Schedule 2.31(c), there are no claims, actions or disputes pending, or to the Knowledge of SICC and each Shareholder Threatened, between SICC or any Subsidiary and any other Person, including the Roaming Partners, with regard to roaming charges, including any claim of overcharging or undercharging.

2.32Viza Partnership Put Option. The parties acknowledge that SIRP may be obligated to the FCC for “unjust enrichment” payments pursuant to the rules and regulations of the FCC relating to the put option regarding the Viza Wireless Limited Partnership exercised by Zagarri Holdings, Inc. on January 20, 2006. These payments, if any, will either be paid out of Working Capital prior to Closing or, in the event not paid prior to Closing, reflected as a current liability in the Closing Date Statement. Neither Buyer nor SICC, nor any of their respective Subsidiaries, will be subject to any liability or obligation of any nature whatsoever to the FCC for any such “unjust enrichment” payments made after the Closing, unless such payments are reflected as a current liability in the Closing Date Statement.

2.33Disclosure. No representations or warranty made by SICC or any of the Shareholders in this Agreement and no statement made in any document, schedule or exhibit referred to herein and furnished by SICC or the Shareholders contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading. Neither SICC nor any Shareholder has Knowledge of any fact relating to SICC or any Subsidiary, or their respective business, property, operations, or condition (financial or otherwise), that has not been disclosed to Buyer and which materially adversely affects SICC or any Subsidiary, or which would prevent SICC or the Shareholders from completing the transactions contemplated by this Agreement.

ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF BUYER

Buyer represents and warrants to SICC and the Shareholders as follows:

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3.1Organization and Corporate Power. Buyer (a) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, (b) is qualified to do business as a foreign corporation in each jurisdiction in which such qualification is required, except where the failure to so qualify would not reasonably be expected to have a material adverse effect on Buyer, and (c) has all required corporate power and authority to own or lease its properties and assets and to carry on its business as presently conducted. Subject to receipt of the required Consents, Buyer has all required corporate power and authority to enter into and perform this Agreement and the Related Agreements and the transactions contemplated hereby and thereby.

3.2Authorization; No Contravention. The execution and delivery of, and performance by Buyer of its obligations under, this Agreement and the Related Documents and the delivery of the Purchase Price have been duly authorized by all requisite corporate action, and, except as otherwise may be specifically provided in this Agreement, each of this Agreement and the Related Documents to which Buyer is a party constitutes the legal, valid and binding obligation of Buyer, enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws affecting the enforcement of creditors’ rights generally, and general principles of equity and the availability of equitable remedies. Buyer’s execution and delivery of this Agreement and the Related Documents, and its performance of the transactions contemplated hereby and thereby, will not: (a) violate, conflict with or result in a any breach or default (with or without notice or lapse of time or both) or give rise to any right of termination, modification, cancellation, prepayment, or acceleration of any obligation or to the loss of a material benefit under any contract, instrument, agreement, indenture, obligation or commitment to Buyer is a party or by which it or its assets are bound, any provision of Buyer’s Bylaws or Articles of Incorporation, or the creation of any lien, charge or encumbrance of any nature upon any of the properties or assets of Buyer; (b) violate or result in a violation of, or constitute a default under, any provision of any law, statute, ordinance, regulation or rule, or any decree, judgment or order of, or any restriction imposed by, any court or other federal, state or local governmental agency upon any of the properties or assets of Buyer or its Subsidiaries; or (c) require any notice to, filing with, or consent or approval of any Governmental Authority or other third party which will not, prior to the Closing, have been duly and properly given, made or obtained.

3.3Brokers or Finders. Except for Stephens Inc., Buyer has not engaged the services of any brokers or finders in connection with the execution of this Agreement, and Buyer shall be solely responsible for all fees of Stephens Inc.

3.4Litigation. There is no investigation, complaint, action, suit or proceeding at law or in equity or by or before any governmental instrumentality or other agency now pending against Buyer or any director, officer or key employee of Buyer which has a reasonable possibility of hindering the enforceability or performance of this Agreement or any action taken or to be taken pursuant hereto, nor to the Knowledge of Buyer has there occurred any event or does there exist any condition on the basis of which any such litigation, proceeding or investigation might properly be instituted. There is no outstanding judgment, injunction, decree or order issued by any governmental instrumentality or other agency (including, without limitation, the FCC and the ICC) against Buyer which has a reasonable possibility of hindering

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the enforceability or performance of this Agreement or any action taken or to be taken pursuant hereto.

3.5Investment Representation Statement. Buyer is an “accredited investor,” as that term is defined in Regulation D promulgated by the Securities and Exchange Commission (“SEC”). Buyer acknowledges that the Shares are restricted securities that may not be resold or otherwise distributed except upon registration thereof with the SEC and any applicable state securities regulatory agencies or pursuant to an available exemption. Buyer will acquire the Shares at the Closing for its own account, for investment and not with a view to the distribution thereof. Buyer acknowledges having had access to the Shareholder’s virtual data room, including all of the documents identified on attached Schedule 3.5, and further acknowledges having received and had full opportunity to review any additional documents requested by Buyer (which, together with the documents identified on Schedule 3.5, are referred to as the “Diligence Documents”). Buyer further acknowledges having had the opportunity to review the Diligence Documents with Buyer’s legal, tax, regulatory and other advisors, and thereafter having had full opportunity to discuss all of Buyer’s questions with the management of SICC and each Subsidiary and having received satisfactory answers to all such questions. Notwithstanding the foregoing, the Buyer shall be entitled to rely upon the representations, warranties, covenants and agreements of SICC and the Shareholders contained in this Agreement and the Related Agreements or in any document, agreement or certificate delivered by or on behalf of SICC or a Shareholder pursuant thereto.

3.6Disclosure. No representations or warranty made by Buyer in this Agreement and no statement made in any document, schedule or exhibit referred to herein and furnished by Buyer contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading. Buyer has no Knowledge of any fact relating to Buyer, or its business, property, operations, or condition (financial or otherwise), that has not been disclosed to SICC and each Shareholder which would prevent Buyer from undertaking and completing the transactions contemplated by this Agreement.

3.7Financial Ability to Perform. Buyer currently has the financial ability to perform all of its obligations under this Agreement, and warrants that all cash required to pay the Purchase Price at Closing is currently available to Buyer without condition or contingency.

ARTICLE 4
BUYERS’ CONDITIONS OF CLOSING

The obligations of the Buyer hereunder shall be subject to compliance by SICC and the Shareholders with their agreements herein contained and to the fulfillment to the satisfaction of or waiver in writing by Buyer on or before the Closing Date of the following conditions:

4.1Certificate. (a)The representations and warranties of SICC and the Shareholders (i) contained in this Agreement (other than those contained in Sections 2.1, 2.2, 2.3, 2.4, 2.5, 2.6(b), 2.12 and 2.27(b) shall be true and correct in all respects (in

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the case of any such representation or warranty containing any materiality qualification) or in all material respects (in the case of any such representation or warranty without any materiality qualification), in each case with the same force and effect as though such representations and warranties had been made on and as of the Closing and (ii) contained in Sections 2.1, 2.2, 2.3, 2.4, 2.6(b), 2.12 and 2.27(b) shall be true and correct in all respects with the same force and effect as though such representations and warranties had been made on and as of the Closing.

(b)SICC and the Shareholders shall have performed and complied with all agreements, covenants and conditions contained herein that are required to be performed or complied with by them on or before the Closing Date.

(c)On the Closing Date one or more certificates to the effect of the matters set forth in clauses (a) and (b) of Section 4.1 shall be executed by an Officer of SICC and by the Shareholders and delivered to Buyer.

4.2Delivery of Documents. SICC and the Shareholders shall have executed and delivered to Buyer (or shall have caused to be executed and delivered to Buyer, as applicable, by the appropriate Persons) the following, all of which shall be reasonably satisfactory to Buyer:

(a)A certified true, correct and complete copy of resolutions of SICC’s Board of Directors, approving this Agreement and all Related Agreements and all transactions contemplated by this Agreement and the Related Agreements;

(b)A true, correct and complete copy of SICC’s and each Subsidiary’s charter documents certified as of a date within ten (10) business days of the Closing Date by the appropriate Secretary of State and as of the Effective Time by the secretary of each entity;

(c)A true, correct and complete copy of the Bylaws of SICC and the Subsidiaries certified by the secretary of each entity;

(d)A certificate issued by the Secretary of State of Illinois as of a date within ten (10) business days of the Closing Date certifying that each of SICC and the Subsidiaries is in good standing;

(e)Stock certificates representing all Shares, duly endorsed for transfer and accompanied by any required transfer tax stamps, if applicable under Illinois law;

(f)The Escrow Agreement, executed by SICC, the Shareholders and the Escrow Agent.

(g)an unconditional release executed by each Shareholder and effective as of the Effective Time of all rights and claims against SICC or its Subsidiaries or Affiliates (other than claims against Buyer under this Agreement and any Related Documents) in the form attached as Schedule 4.2(g).

(h)A true, correct and complete copy of the corporate minute books of the Company and its Subsidiaries, certified by the secretary of each entity.

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(i)all other documents, certificates, instruments or writings required to be delivered by SICC or the Shareholders at or prior to Closing under this Agreement or any Related Agreement and such other instruments and certificates as may be reasonably requested by the Buyer.

4.3Opinion of Counsel. Buyer shall have received the favorable written opinions dated the Closing Date of: (a) counsels for each of the Shareholders; and, (b) counsel for SICC with respect to FCC and related matters, substantially in the forms attached hereto as Schedules 4.3(a) and 4.3(b), respectively.

4.4Regulatory Matters; Consents.

(a)The FCC and, if required by law the ICC, shall have approved the consummation of the transactions contemplated hereby and such approvals shall (i) be free of any terms, conditions or restrictions that are reasonably unacceptable to Buyer, and (ii) have become Final Orders and shall remain in full force and effect.

(b)The approval of any other Governmental Authority and receipt of the Consents required for the consummation of the transactions contemplated hereby shall have been obtained free of any terms, conditions or restrictions that are reasonably unacceptable to Buyer and remain in full force and effect and all applicable waiting periods under the HSR Act shall have expired or been terminated.

4.5Litigation. There shall not be in effect any order, injunction or decree at law or in equity or by or before any governmental or administrative instrumentality or other agency of competent authority, or before any court or similar tribunal of competent authority, which enjoins, prohibits or restrains the consummation or performance, as the case may be, of this Agreement, the Related Agreements, the Closing or any action taken or to be taken pursuant to this Agreement.

4.6Properties. Buyer shall have received, if requested by Buyer and, except as provided in Section 6.20, at its sole expense, title insurance and surveys in form and substance reasonably satisfactory to Buyer on all real property owned by SICC and the Subsidiaries. Buyer shall have received, if requested by Buyer and, except as provided in Section 6.20, at its sole expense, Phase I environmental assessments in form and substance reasonably satisfactory to Buyer on all real property owned or leased by SICC and the Subsidiaries. If Buyer determines to obtain title insurance, surveys and/or Phase I environmental assessments, Buyer agrees it shall order the same within ten (10) days after the execution of this Agreement and shall arrange to have all of the same delivered to and reviewed by Buyer no later than forty-five (45) days after the execution of this Agreement; provided, however, that the results of any of the foregoing shall have no effect on the Closing unless, and then only to the extent, they evidence a breach of the warranties and representations of SICC and/or the Shareholders under this Agreement. If for any reason Closing does not occur hereunder, Buyer agrees to provide to the Shareholders, at no expense to SICC or the Shareholders, copies of any Phase I Environmental Assessments obtained hereunder.

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4.7Adverse Changes. From the date hereof through Closing, and without regard to the regulatory approvals described in Section 5.4(a), actions taken in accordance with the written request of Buyer, undertaken in accordance with the express terms of this Agreement, or actions taken by any Governmental Authority affecting the Cellular Services industry generally or those Cellular Services operating in Illinois generally, there shall have been: (a) no material adverse change in the assets and properties, business operations, liabilities, financial condition, or results of operation of SICC or the Subsidiaries; and, (b) no material damage to the assets and properties of SICC or the Subsidiaries caused by fire, flood, casualty, act of God or the public enemy or other cause, the loss of any of which is not adequately covered by insurance. For the purposes of this Section 4.7 such changes and/or damage shall not be material unless the aggregate value thereof exceeds $500,000; and, provided further that neither (a) the effects of any events, circumstances or conditions resulting from changes, developments or circumstances in worldwide or national conditions (political, economic, or regulatory) that generally adversely affect the local, regional or national market for Cellular Services or that generally adversely affect companies engaged in the telecommunications business (including proposed legislation or regulation by any governmental or regulatory body or the introduction of any technological changes in the telecommunications industry), (b) any effects of competition resulting from the offering of personal communication services or other wireless telecommunications services, nor [****](5) will constitute a material adverse change.

4.8Directors and Officers. SICC shall have delivered resignations of all directors and officers of SICC and the Subsidiaries whose resignation is requested by Buyer to be effective as of the Closing Date. Buyer shall provide a written list of requested resignations to SICC and the Shareholders no later than five days prior to the Closing Date.

4.9Subscribers. On the Closing Date, the SICC and its Subsidiaries shall have no fewer than [****](6) Postpay Subscribers. SICC shall be deemed to be in compliance with this Section 4.9 if SICC and its Subsidiaries spends on an average monthly basis at least [****](7) for advertising and promotional activities, consistent with past practice for the same months in 2005, for the period from the execution of this Agreement through the Closing Date. SICC agrees it shall not reduce its current commission structure and will continue to offer sales subsidies in a manner consistent with past practices.

(5) Material omitted pursuant to a request for confidential treatment under Rule 24b-2 of the Exchange Act of 1934. Material filed separately with the Securities and Exchange Commission.

(6) Material omitted pursuant to a request for confidential treatment under Rule 24b-2 of the Exchange Act of 1934. Material filed separately with the Securities and Exchange Commission.

(7) Material omitted pursuant to a request for confidential treatment under Rule 24b-2 of the Exchange Act of 1934. Material filed separately with the Securities and Exchange Commission.

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ARTICLE 5
THE SHAREHOLDERS’ CONDITIONS OF CLOSING

The Shareholders’ obligations hereunder shall be subject to Buyer’s compliance with its agreements herein contained and to the fulfillment to the satisfaction of or waiver in writing by at least four (4) of the Shareholders on or before the Closing Date of the following conditions:

5.1Certificate. The representations and warranties of Buyer contained in Article III of this Agreement shall be true and correct in all material respects with the same force and effect as though such representations and warranties had been made on and as of the Closing Date; Buyer shall have performed and complied with all agreements, covenants and conditions contained herein that are required to be performed or complied with by it on or before the Closing Date; and, on the Closing Date one or more certificates to such effect executed by the Executive Vice President of Buyer shall be delivered to the Shareholders.

5.2Delivery of Documents. Buyer shall have executed and delivered to the Shareholders (or shall have caused to be executed and so delivered by the appropriate Persons) the following:

(a)A certificate issued by the Secretary of State of Delaware certifying that Buyer is validly existing in such state;

(b)The Escrow Agreement, executed by Buyer.

(c)All other documents, certificates, instruments or writings required to be delivered by Buyer at or prior to Closing under this Agreement or any Related Agreement, and such other instruments and certificates as may be reasonably requested by the Shareholders.

5.3Opinion of Counsel. The Shareholders shall have received the favorable written opinion of counsel to Buyer dated as of the Closing Date, substantially in the form attached hereto as Schedule 5.3.

5.4Regulatory Matters; Third Party Contracts.

(a)The FCC and, if required by law the ICC, shall have approved the consummation of the transactions contemplated hereby and such approvals shall have become Final Orders and remain in full force and effect.

(b)The approval of any other Governmental Authority and the receipt of the Consents required for the consummation of the transactions contemplated hereby shall have been obtained and all applicable waiting periods under the HSR Act shall have expired or been terminated.

5.5Litigation. There shall not be in effect any order, injunction or decree at law or in equity or by or before any governmental or administrative instrumentality or other agency of competent authority, or before any court or similar tribunal of competent authority, which enjoins, prohibits or restrains the consummation or performance, as the case may be, of this Agreement, the Related Agreements, the Closing or any action taken or to be taken pursuant to this Agreement.

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5.6Consideration. Buyer shall have paid the Purchase Price, in the manner contemplated by Section 1.2, as adjusted in accordance with Section 1.4.

ARTICLE 6
MUTUAL COVENANTS

Until the Closing Date, and to the extent otherwise agreed in this Article 6 for periods after the Closing Date, each of Buyer, SICC and the Shareholders agree that, except with the prior written consent of Buyer, which shall not be unreasonably withheld, they shall act, or refrain from acting where so required, and SICC and the Shareholder shall cause the Subsidiaries to so act or refrain from acting, to comply with the following:

6.1Regular Course of Business.

(a)Generally. SICC shall operate its business and the business of the Subsidiaries in the ordinary course and consistent with past practices. Without limiting the generality of the foregoing, SICC shall:

(i)Maintain all of its properties and the Subsidiaries’ property in customary repair, order and condition;

(ii)Maintain (except for expiration due to lapse of time or cancellation by another party pursuant to the terms thereof) in the ordinary course of business all leases, contracts, agreements, understandings and commitments (whether written or oral) in effect without change, modification or termination except as expressly provided herein;

(iii)Comply with the provisions of all laws, regulations and orders of Governmental Authorities and all Franchises and FCC Licenses applicable to each of SICC and the Subsidiaries and the conduct of their respective businesses;

(iv)Fund and complete capital expenditures in accordance with Schedule 6.1(a);

(v)use commercially reasonable efforts to preserve intact the services of its employees, agents, dealers, distributors and resellers;

(vi)conduct and, as applicable, continue the rate plans and promotions as disclosed on Schedule 2.29;

(vii)maintain customer service operations in the ordinary course of business consistent with past practice, and refrain from changing any policies or practices relating to customer service in any material manner;

(viii)use commercially reasonable efforts to maintain all of its right, title and interest in and to, and the validity of, the FCC Licenses and its other governmental authorizations and not engage in any transactions or take any action or omit to take any action which will or would reasonably be likely to adversely affect any right, title or

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interest in and to, or the validity of, any of the FCC Licenses or other governmental authorizations;

(ix)not materially change any policies or procedures with respect to the classification or treatment of disconnects or the granting of adjustments to subscriber accounts;

(x)maintain levels and types of Inventory in the ordinary course of business consistent with past practice, and not capitalize the costs of cellular handsets or accessories or any marketing, advertising or similar costs related to the acquisition of subscribers;

(xi)not terminate, amend, modify or waive any terms or conditions of any agreement, contract or commitment for roaming services (including, without limitation, the agreements, contracts or commitments with Roaming Partners) or fail to perform, enforce, or exercise any material rights or obligations thereunder; and,

(xii)[****](8)

(b)Insurance. SICC and each Subsidiary shall maintain in full force and effect its insurance policies with the coverage and in the amounts set forth on Schedule 2.16.

(c)Claims. SICC shall promptly notify Buyer of any actions, lawsuits or investigations that may be commenced against it or a Subsidiary and any material claims or complaints that may be lodged or Threatened against it or a Subsidiary or that otherwise come to the Knowledge of SICC and each Shareholder.

(d)Supplement. From time to time prior to the Closing Date, SICC and the Shareholders shall promptly notify Buyer of any changes with respect to the information set forth in this Agreement or the Schedules hereto and of any matters hereafter arising which, if in existence at the date hereof, would have been required to be set forth in this Agreement or the Schedules hereto. No information provided to Buyer pursuant to this Section 6.1(d) shall be deemed to constitute a change, modification or amendment of any representation or warranty herein or Schedule hereto or any other provision contained in this Agreement unless such updated information shall be acceptable to Buyer in its sole discretion and such acceptance is expressly set forth in a written amendment to this Agreement or the relevant Schedule pursuant to Section 12.1 hereof. Such amendment shall, except to the extent otherwise expressly set forth therein, be deemed a waiver by Buyer of any breach of any such representation, warranty or other provision to which such update relates.

6.2Amendments. No change or amendment shall be made to the Certificates of Incorporation or Bylaws of SICC or any Subsidiaries, or shall be agreed to by SICC, any Subsidiary or any Shareholder with respect to the governing documents of any other Cellular

(8) Material omitted pursuant to a request for confidential treatment under Rule 24b-2 of the Exchange Act of 1934. Material filed separately with the Securities and Exchange Commission.

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Entity, and neither SICC nor any Subsidiary shall merge into or consolidate with any other Person or change the character of its business.

6.3Capital Changes. Neither SICC nor any Subsidiary shall issue, sell, purchase or redeem any shares of its capital stock of any class or issue or sell any securities convertible into, or options, warrants or other rights to subscribe for, any shares of its capital stock, nor shall SICC, any Subsidiary or the Shareholders agree to any such action with respect to any other Cellular Entity. The Shareholders shall not sell, pledge or otherwise encumber any of the Shares or the Cellular Interests and SICC and its Subsidiaries shall not sell, pledge or otherwise encumber the shares of the Subsidiaries or the Cellular Interests.

6.4Borrowing. SICC shall not incur, assume or guarantee any Indebtedness other than borrowings under its existing credit facility with CoBank.

6.5Property. Neither SICC nor any Subsidiary shall (a) sell, license, lease, transfer, or otherwise dispose of any of its assets or properties (including the Cellular Interests), except for the disposition of obsolete items of personal property or used items of personal property that are being replaced in the ordinary course of business, and in both events consistent with past practices, or allow any of such assets or properties (including the Cellular Interests) to become subject to a Lien other than a Permitted Lien, and neither SICC, any Shareholder nor any Subsidiary will agree to any such action with respect to any other Cellular Entity or (b) declare, set aside or pay any noncash dividend or make any noncash distribution with respect to the capital stock, limited partner interests, general partner interests, membership interests, units or other equity or similar interests of SICC or any Cellular Entity.

6.6Other Changes. Except as set forth in Schedule 6.6, as provided elsewhere in this Agreement, or as permitted in writing by Buyer, neither SICC nor any Subsidiary shall, and nor shall SICC, any Subsidiary or Shareholder agree to any of the following with respect to a Cellular Entity:

(a)Enter into or terminate any agreement or transaction, make any commitment or incur any obligation other than in the ordinary course of business consistent with past practice;

(b)Make any tax election or settle or compromise any federal, state, local tax liability material to SICC or any Cellular Entity;

(c)Pay, discharge, or satisfy any claims, liabilities, or obligations (whether accrued, absolute, contingent, unliquidated, or otherwise, and whether asserted or unasserted), other than the payment, discharge, or satisfaction of monetary obligations in (A) the ordinary course of business consistent with past practice, or (B) accordance with the terms of (i) liabilities reflected or reserved against in the SICC Financial Statements, or (ii) incurred since the dates thereof in the ordinary course of business consistent with past practice; provided, however, that SICC and/or any Subsidiary may prepay any long-term Indebtedness owed to CoBank without the incurrence of additional Indebtedness; and, provided further, no such payments shall be made to the Shareholders or any other their Affiliates.

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(d)Waive, release, grant, or transfer any rights of value, other than in the ordinary course of its business consistent with the past practice;

(e)Change any of the accounting principles or practices used by it, except for any change required by reason of a concurrent change in GAAP and notice of which is given in writing to Buyer;

(f)Enter into any agreement providing for the acceleration of payment or performance or other consequence as a result of the change of control of SICC;

(g)Award or pay any bonuses to officers, directors or employees in excess of awards or bonuses historically paid; or

(h)Take any action or fail to take any action that would make any of the representations or warranties of SICC contained in this Agreement untrue or inaccurate at any time from the date of this Agreement or would result in any of the conditions set forth in this Agreement not being satisfied.

6.7Interim Information. (a)SICC shall supply Buyer with a copy of its internal unaudited monthly financial statements within twenty-five (25) days after the end of each month, commencing with the month of signing of this Agreement, and shall provide Buyer with SICC’s consolidated audited financial statements that include all entities except for RSA 6 & 7 as of and for the period ended December 31, 2005 by March 15, 2006, and SICC’s consolidated audited financial statements that include all entities as of and for the period ended December 31, 2005 within a reasonable time after the financial information from RSA 6 & 7 is available to SICC and its auditors.

(b)SICC shall, and shall cause each of its Affiliates to, (i) give Buyer and its employees, agents and representatives reasonable access during all reasonable times to the books and records, facilities and assets of SICC and the Cellular Entities or used in their business, (ii) provide such financial and operating data and other information as Buyer may reasonably request and (iii) make available, at and for reasonable locations and times, each of the officers, employees, agents and representatives of SICC and its Affiliates in order to facilitate transfer and transitional matters.

6.8Compensation. Except as disclosed on Schedule 6.8, SICC and its Subsidiaries shall not increase the compensation (in whatever form) or the benefits payable or to become payable to any officer, director, consultant, or employee, except for increases in salaries for employees for the year 2006 consistent with past practice and in amounts (individually and in the aggregate) not be more than the standard, customary increases given to such employees in years prior to 2006.

6.9Consents and Authorizations. Buyer and SICC shall, within ten (10) days after the execution of this Agreement, complete the filing of the application to obtain FCC approval and any required ICC approval of the transactions contemplated hereby. Buyer and SICC shall diligently pursue and use reasonable efforts to obtain such consents, waivers and authorizations as promptly as practicable after the date hereof, each at its own cost and expense.

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6.10Notice of Transfer. Buyer and SICC shall cooperate in providing any required notices to the appropriate Governmental Authority regarding any issues of ownership or control or change thereof (including any such issues relating to the Franchises).

6.11Further Assurances. On the terms and subject to the conditions of this Agreement, the parties hereto shall use reasonable efforts at their own expense to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable regulations to consummate and make effective as promptly as possible the transactions contemplated by this Agreement, and to cooperate with each other in connection with the foregoing, including, without limitation, using reasonable efforts to (a) obtain all necessary waivers, consents and approvals from other parties to loan agreements, leases, mortgages and other contracts; (b) obtain all necessary consents, approvals and authorizations as are required to be obtained under any judgment, decree, order, law, statute, ordinance, rule or any regulations or in connection with any Franchises; and, (c) fulfill all conditions to the obligations of the parties under this Agreement. Each of the parties hereto further covenants and agrees that he, she or it shall use reasonable efforts to prevent a Threatened or pending preliminary or permanent injunction or other Order. Notwithstanding the foregoing or anything contained in this Agreement to the contrary, in no event shall Buyer be required to, or SICC or any Subsidiary be permitted to, agree to any divestiture of any businesses, assets or product lines of the Buyer, SICC, or any of their respective Subsidiaries in order to enable or obtain any FCC Consent or any approval of a third party or Governmental Authority under any antitrust law or other legal requirement that is necessary to consummate the transactions contemplated by this Agreement or any Related Agreement.

6.12Consents.

(a)Each of the parties hereto shall act promptly to prepare and file all required requests for, and use reasonable efforts to obtain all waivers, authorizations, Consents and approvals of all Persons and Governmental Authorities necessary, proper or advisable in connection with the consummation of the transactions contemplated by this Agreement prior to the Closing Date. The parties shall: (i) cooperate to promptly file any notification required to be filed under the HSR Act to consummate the transactions contemplated hereby within ten (10) days of the execution of this Agreement; (ii) request early termination of the waiting period thereunder; and, (ii) use all commercially reasonable efforts to comply as promptly as practicable with any request made pursuant to the HSR Act for additional information.

(b)All applications and notices filed with any Governmental Authority will comply in all material respects with all requirements of law. The parties shall diligently and jointly prosecute all such applications and take all such actions and give all such notices as may be required or requested by the FCC or any other Governmental Authority or as may be appropriate in an effort to expedite the grant of such consents by the FCC or such Governmental Authority. The parties agree to cooperate with each other in connection with either party’s efforts to satisfy applicable regulatory requirements in connection with the transactions contemplated by this Agreement, each at its own cost and expense.

(c)Except to the extent prohibited by requirements of law, each of the parties hereto shall provide to each of the other parties hereto copies of all filings and material correspondence

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with all Governmental Authorities with respect to the applications and notices described in this Article 6. SICC shall promptly provide Buyer with copies of all applications, notices, filings and other correspondence to the FCC, the ICC and other Governmental Authorities and any notices, consents, approvals, Authorizations, orders or correspondence received from the FCC, the ICC or other Governmental Authorities.

6.13No Solicitation or Negotiation. Unless and until this Agreement is terminated, SICC and the Shareholders shall not, and shall use reasonable efforts to cause, as applicable, the Subsidiaries, their other Affiliates and their directors, officers, employees, representatives, agents, advisors, accountants, and attorneys of each of them, not to initiate or solicit, directly or indirectly, any inquiries or the making of any proposal with respect to, or engage in negotiations concerning, or provide any information or data to any Person with respect to, or have any discussions with any Person relating to, or enter into, or agree to enter into, any acquisition, business combination, reorganization, purchase or similar transaction relating to all or any significant portions of the assets of, or any equity interest in, directly or indirectly, SICC or any Cellular Entity, or otherwise facilitate any effort or attempt to do or seek any of the foregoing and shall immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing. SICC and each Shareholders will promptly (but no later than 24 hours after receipt) communicate to Buyer (and provide a written copy of any relevant materials relating to) the fact that it or any Affiliates or other Person covered by this Section 6.13 has received any proposal or inquiry in respect of any such transaction and of any such information requested from it or of any such negotiations or discussions being sought to be initiated.

6.14Public Announcements. Prior to the Closing Date, no party hereto nor any Affiliate, representative or shareholder of such party, shall disclose any of the terms of this Agreement to any third party without the other parties’ prior written consent, except as required to obtain the Consents, waivers and authorizations listed in the Schedules and except as reasonably necessary to meet the disclosure requirements imposed by federal law on any party that has any class of securities registered with the U. S. Securities and Exchange Commission. Subject to the foregoing, the form, content and timing of all press releases, public announcements or publicity statements with respect to this Agreement and the transactions contemplated hereby shall be subject to the prior approval of both SICC and the Shareholders, on the one hand, and Buyer, on the other, which approval shall not be unreasonably withheld.

6.15Directors’ and Officers’ Insurance. For a period of five (5) years after the Effective Time, SICC shall maintain director and officer liability insurance for acts and omissions and coverage in amount and scope consistent with the coverage maintained by them as of the date hereof, and will pay all premiums required to establish tail coverage without interruption to continue the same level of liability coverage maintained as the date hereof for each director and officer that resigns or is asked to resign in connection with this transaction; provided, however, that in no event will Buyer be required to expend in the aggregate for such coverage in excess of 200% of the annual premium paid by SICC as of the date of this Agreement for the year ended December 31, 2006; provided further, however, that if this aggregate cap will be reached, Buyer shall use reasonable efforts to give the Shareholder Representative at least thirty (30) days prior notice and the opportunity to pay any excess in order to continue such insurance; provided further, however, that the failure of Buyer to deliver

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such notice shall impose no liability of any kind whatsoever (whether relating to such insurance or otherwise) to Buyer, SICC or any of their respective Subsidiaries.

6.16Payment of Certain Fees. Each Party shall bear its own fees and incurred in connection with obtaining FCC and all other Governmental Agency approval of the transactions contemplated by this Agreement and the Related Documents, and the parties shall each pay one-half of any related application fees and the filing fee associated with filings required under the HSR Act.

6.17Tax Matters. Without the prior written consent of Buyer, neither SICC nor any Subsidiary shall make or change any election, change an annual accounting period, adopt or change any accounting method, file any amended Tax Return, enter into any closing agreement, settle any Tax claim or assessment relating to SICC or any Cellular Entity, surrender any right to claim a refund of Taxes, consent to any extension or waiver of the limitation period applicable to any Tax claim or assessment relating to SICC or any Cellular Entity, or take any other similar action relating to the filing of any Tax Return or the payment of any Tax, if such election, adoption, change, amendment, agreement, settlement, surrender, consent or other action would have the effect of increasing the Tax liability of SICC or any Cellular Entity for any period ending after the Closing Date or decreasing any Tax attribute of SICC or any Cellular Entity existing on the Closing Date.

6.18Long Term Debt. With respect to long-term Indebtedness, where required by the underlying debt instruments, as soon as practicable after the date of this Agreement, SICC and Buyer shall cooperate with each other and shall contact the appropriate creditors to request, and use their reasonable efforts to obtain, the creditor’s consent (“Creditor Consent”) to the transfer of control of SICC and any other consents necessary to avoid the occurrence of any event of default under any long term Indebtedness upon Closing. Each Party shall bear its own costs and expenses in obtaining such consents.

6.19First Refusal Rights.

(a)General. Between the date of this Agreement and through the Closing and subject to the terms and conditions of this Section 6.19, the SICC and the Shareholders shall, and shall cause each of its Affiliates to, at the Shareholder’s sole cost and expense, [****](9)  Without limiting any provision of this Section 6.19, SICC and the Shareholders shall keep Buyer reasonably apprised as to the status of its efforts and promptly furnish to Buyer copies of all notices and correspondence related hereto. Buyer agrees to cooperate reasonably with SICC in connection therewith. SICC shall not provide any notice to a third party under this Section 6.19 unless it relates to a Cellular Interest in [****](10) as set forth on Schedule 2.27 or Buyer agrees in writing or consents thereto in writing, which consent shall not be unreasonably withheld.

(b)Notice to First Refusal Right Holders.

(9) Material omitted pursuant to a request for confidential treatment under Rule 24b-2 of the Exchange Act of 1934. Material filed separately with the Securities and Exchange Commission.

(10) Material omitted pursuant to a request for confidential treatment under Rule 24b-2 of the Exchange Act of 1934. Material filed separately with the Securities and Exchange Commission.

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(i)SICC shall, and shall cause each of its Affiliates to, provide notice to each holder of a First Refusal Right (or other Person entitled to notice) listed on Schedule 2.27 in a form of notice reasonably acceptable to Buyer that applies to each particular First Refusal Right (the “Offer Notice”) in accordance with the terms and conditions of this Section 6.19. SICC shall deliver the Offer Notice to the holders of the First Refusal Rights holders on the date specified in writing by Buyer, which date Buyer agrees will be as promptly as practicable, but in no event later than fifteen (15) days after the execution of this Agreement. Unless otherwise required by the terms of a First Refusal Right, SICC and the Shareholders shall not, and shall cause each of its Affiliate not to, deliver any Offer Notice until SICC and Buyer have agreed upon the date at which such Offer Notice should be delivered to the First Refusal Right holder.

(ii)Each Offer Notice will be accompanied by a purchase agreement that provides the general terms and conditions on which any holder of a First Refusal Right will be entitled to purchase any portion or all of a Cellular Interest pursuant to a First Refusal Right. SICC and Buyer will agree on a mutually acceptable form of purchase agreement within ten (10) days after the execution of this Agreement.

(iii)[****](11)

(c)Responses from First Refusal Right Holders.

(i)SICC and the Shareholders will immediately advise Buyer of any notices or communications (whether written or oral) and provide Buyer with copies of any notices or communications received by SICC, the Shareholders, or any of their Affiliates in response to an Offer Notice or otherwise related to a First Refusal Right.

(ii)In the event that SICC, the Shareholders or any of their Affiliates is required to deliver any subsequent Offer Notices to holders of First Refusal Rights in addition to the original Offer Notice specified in Section 6.19(b), SICC and the Shareholders shall, and shall cause each of its Affiliates to, provide such notice in a form reasonably acceptable to Buyer.

(iii)In the event that SICC is required to recalculate the offer price payable by any First Refusal Right holder due to the presence of over-subscription or similar rights that are triggered if any other holder of First Refusal Right fails to purchase its proportionate share of any Cellular Interests subject to a First Refusal Right, then SICC will prepare a revised calculation of such offer price and obtain Buyer’s written approval, which will not be unreasonably withheld, of such calculation prior to distributing any notice containing such revised offer price in accordance with Section 6.19(c)(ii).

6.20Tower Documents. Prior to the Closing, SICC shall, and shall cause its Affiliates to, make available to Buyer any and all Tower Documents for any Tower Site. If, prior to the

(11) Material omitted pursuant to a request for confidential treatment under Rule 24b-2 of the Exchange Act of 1934. Material filed separately with the Securities and Exchange Commission.

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Closing Date, Buyer determines that any of the Tower Documents for any Tower Site are missing, inaccurate or incomplete, at Buyer’s sole discretion, SICC (at its cost and expense) shall obtain and deliver, or cause to be obtained and delivered, to Buyer full, correct and complete copies of such missing, inaccurate or incomplete Tower Documents. Notwithstanding the foregoing provisions of this Section 6.20, SICC shall not be required to obtain, create or furnish any of the items specified in the definition of Tower Documents if any of such items are not available, unless SICC or any of its Affiliates is required by any judgment, decree, order, law, statute, ordinance, rule, regulation or other legal requirement in effect prior to the Closing Date to possess such Tower Documents.

6.21Software Licenses. With respect to the third party software licenses of SICC set forth on Schedule 6.21 that contain change of control provisions that would be triggered on the Closing, SICC and the Shareholders shall use commercially reasonable efforts to assist Buyer and SICC in efforts to enter into license agreements substantially similar to such existing software license agreements in order for Buyer to operate the business on and after the Closing Date in the manner it was operated prior to the Closing Date.

6.22Customer Lists. All documents and computer files containing the names and addresses of customers of the business of SICC and its Subsidiaries shall remain the property of SICC and its Subsidiaries at Closing and all copies thereof in the possession of the Shareholders or their Affiliates shall be turned over to Buyer and shall not be used or retained in whole or in part by the Shareholders or their Affiliates after the Closing. For two (2) years following the Closing Date, neither the Shareholders nor any of their Affiliates shall use any customer lists to solicit customers or for any other purpose.

6.23Post-Closing Assurances. Each of the parties hereto will cooperate with the other and execute and deliver to the other party such other instruments and documents and take such other actions as may be reasonably requested from time to time by such other party as necessary to carry out, evidence and confirm the intended purposes of this Agreement. Each of the parties will cause its respective directors, officers, employees and advisors to comply with this Section to the extent necessary or desirable to fulfill the purposes thereof.

6.24Non-Compete; Confidential Information.

(a)The Shareholders acknowledge that (i) they have been engaged in the business of SICC and its Subsidiaries; (ii) they have assisted the development of such business; (iii) they have had access to trade secrets and Intellectual Property of and confidential information concerning the business; (iv) the agreements and covenants contained in this Section 6.24 are essential to protect the business, which is being purchased by Buyer; and, (v) Buyer has advised the Shareholders that Buyer would not purchase the business but for such agreements and covenants. Accordingly, and except as provided below in this Subsection (a), the Shareholders covenant and agree that, for or a period of two (2) years following the Closing Date, the Shareholders shall not, and shall not permit any of their Affiliates to, directly or indirectly market, sell, or provision Cellular Service in the counties and communities of the state of Illinois set forth on Schedule 6.24. Buyer shall, during this two (2) year period, continuously offer the Shareholders and any of their Affiliates the right to act as agents to resell cellular service offered by SICC and its Affiliates, or any successors thereto, on terms that are customary and reasonable

39

and that are generally available to any other agent of Buyer reselling such service. Notwithstanding anything in this Section 6.24 to the contrary, none of the following activities shall be restricted by or constitute a breach of this Section 6.24: the ownership by the Shareholders or any of their Affiliates, as a passive investment, of less than 5% of the outstanding shares of capital stock of any corporation listed on a national securities exchange or publicly trading on Nasdaq, or the resale of Cellular Services by HTC Technologies Co. in the portion of Randolph County, Illinois identified on Schedule 6.24.

(b)The Shareholders acknowledge that a violation or breach of this Section 6.24 will cause harm to Buyer, SICC and the Subsidiaries that would not be quantifiable and for which no adequate remedy would exist at law. Accordingly, in addition to any relief at law which may be available to Buyer for such violation or breach and regardless of any other provision contained in this Agreement, Buyer will be entitled to injunctive and other equitable relief restraining such violation (without any requirement that Buyer provide any bond or other security) and shall be entitled to recovery of attorneys’ fees in connection therewith.

(c)For a period of five years from and after the Closing Date, neither any Shareholder nor any of its Affiliates shall use or take any action whatsoever which would result in disclosure to any third party of any confidential information about the SICC, its Subsidiaries, the Cellular Entities, the Cellular Interests or the business of SICC and its Subsidiaries, provided that none of such parties shall be required to maintain as confidential any information which (i) is or becomes generally available to the public other than as a result of a disclosure by a Shareholder or any of its Affiliates, agents or representatives; (ii) is obtained from a third party, provided that such third party is not bound by a confidentiality agreement with or other contractual, legal or fiduciary obligation of confidentiality to any other Person with respect to such information; or, (iii) is required to be disclosed by a Shareholder or any of its Affiliates under any requirement of law, provided that Buyer shall be given prompt written notice of the request for such information and such Shareholder shall use commercially reasonable efforts to obtain assurances that confidential treatment will be accorded the information.

6.25Employees.

(i)For purposes of vesting, eligibility to participate and level of benefits (but not benefit accrual under pension or similar plans) under the employee benefit plans (including, without limitation, severance plans) of Buyer and its Subsidiaries providing benefits to any employees of SICC or its Subsidiaries (collectively, an “SICC Employee”) after the Effective Time (the “New Plans”), each SICC Employee shall be credited with his or her years of service with SICC and its Subsidiaries before the Effective Time, to the same extent as such SICC Employee was entitled, before the Effective Time, to credit for such service under any similar SICC employee benefit plan in which such SICC Employee participated or was eligible to participate immediately prior to the Effective Time, provided, that the foregoing shall not apply to the extent that its application would result in a duplication of benefits or for newly established plans and programs for which prior service of Buyer’s employees is not taken into account.

(ii)From and after Closing, each SICC Employee will remain covered under the terms of the SICC employee benefit plans in which such SICC Employee participated

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immediately before Closing (such plans, collectively, the “Old Plans”) until such time as Buyer transfers the SICC Employee to a New Plan. Notwithstanding the foregoing sentence, any SICC Employee whose employment with SICC or an Affiliate is severed at or after the Closing will be paid by Buyer or an Affiliate under Buyer’s severance plan generally applicable for Buyer employees, except with respect to Terry Addington, Michael Beehn, Michael Jaksich, Dale Lewis and Tania Seger, who will be paid by Buyer or an Affiliate pursuant to Section 1(b) of their respective agreements with SICC. Buyer shall cause any eligible expenses incurred by such employee and his or her covered dependents during the portion of the plan year of the Old Plan ending on the date such employee’s participation in the corresponding New Plan begins to be taken into account under such New Plan for purposes of satisfying all deductible, coinsurance and maximum out-of-pocket requirements applicable to such employee and his or her covered dependents for the applicable plan year as if such amounts had been paid in accordance with such New Plan to the extent information is provided by the SICC Employee.

(iii)SICC may provide a retention pool (the “Retention Pool”) for the purpose of retaining the services of key employees of SICC, which shall be funded by Buyer in the amount set forth on Schedule 6.25(iii). Prior to the Closing Terry Addington, or in the event that he is not able to perform such function, his designee (Mr. Addington or such designee, the “Administrator”), and Buyer shall mutually determine the SICC Employees eligible to receive retention awards from the Retention Pool (each a “Retention Bonus”) and any criteria for payment of the Retention Bonus, and shall determine the final allocation of payments from the Retention Pool. From and after the Closing, Mr. Addington may be replaced as Administrator of the Retention Pool by a individual to be designated by Buyer, after which the administration of the Retention Pool shall be conducted in Buyer’s sole discretion. Participants in the Retention Pool shall receive, as soon as administratively possible, any Retention Bonus which would have been otherwise due to them in the event that their employment is terminated due to a “qualifying resignation” or terminated without cause or as a result of death or disability prior to the date of required service for the Retention Bonus. For purposes of clarification, such individuals eligible to receive the Executive Retention Bonuses shall not be eligible to participate in the Retention Pool. The Administrator shall be indemnified for all good faith actions taken in connection with the Retention Pool, to the fullest extent permitted by applicable Law. Buyer shall have no obligation to make payments pursuant to the Retention Pool in the event this Agreement is terminated or abandoned. For purposes of this Section 6.25, the term “qualifying resignation” is defined as a resignation of any employee within thirty (30) business days following the occurrence of any of the following events: (i) without employee’s consent, a significant and material reduction of employee’s base pay or duties or responsibilities relative to employee’s base pay or duties or responsibilities in effect immediately prior to such reduction (for purposes of clarification, a change in the title will not, in any circumstance, be deemed a “qualifying resignation”) or (ii) a relocation of employee’s principal workplace outside of a one hundred (100) mile radius from the employee’s principal workplace as of the Closing. The Administrator of the Retention Pool shall at his/her sole discretion determine if a qualifying resignation has occurred.

6.26[****](12)

(12) Material omitted pursuant to a request for confidential treatment under Rule 24b-2 of the Exchange Act of 1934. Material filed separately with the Securities and Exchange Commission.

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ARTICLE 7
TAX MATTERS

7.1Tax Matters.

(a)Cooperation. The Buyer, SICC and the Shareholders shall cooperate fully, as and to the extent reasonably requested by the other party, in connection with the filing of Tax returns and any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the retention and (upon the other party’s request) the provision of records and information reasonably relevant to any such audit, litigation, or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. SICC, the Shareholders and Buyer agree (A) to retain all books and records with respect to Tax matters pertinent to SICC and its Subsidiaries relating to any taxable period beginning before the Closing Date until expiration of the statute of limitations (and, to the extent notified by Buyer or the Shareholders, any extensions thereof) of the respective taxable periods, and (B) to give the other party reasonable written notice prior to transferring, destroying or discarding any such books and records and, if the other party so requests, SICC or the Shareholders, as the case may be, shall allow the other party to take possession of such books and records.

(b)Mitigation. The parties further agree, upon request, to use their best efforts to obtain any certificate or other document from any Governmental Authority or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including with respect to the transactions contemplated hereby).

(c)Tax Sharing Agreements. Any Tax sharing agreement or policy between the SICC or its Affiliates and the Shareholders or their Affiliates shall be terminated as of the Closing Date and will have no further effect as to SICC or its Affiliates for any Taxable period after the Closing.

(d)Liability for Taxes; Filing of Returns.

(i)Responsibility for Pre-Closing Taxes. From and after the Closing Date, the Shareholders jointly and severally agree to pay any Taxes payable by SICC and its Subsidiaries (i) for all taxable periods ending on or prior to the Closing Date and (ii) for all Straddle Periods, for that portion of such taxable period up to and including the Closing Date, but in either event only to the extent such Taxes have not been previously paid by SICC and/or its Subsidiaries prior to the Closing, were not deducted from the Purchase Price pursuant to Section 1.4, or are not reflected in current liabilities in the calculation of the Initial Working Capital Adjustment Amount or, if completed, the Final Working Capital Adjustment Amount. The income of SICC and its Affiliates will be apportioned based on the actual income related to the period up to and including the Closing Date and to the period after the Closing Date by closing the books of SICC and its Affiliates as of the Effective Time. For purposes of this Section, in the case of any Taxes that are imposed on a periodic basis and are payable for a Straddle Period, the portion of such Tax which relates to the portion of such Taxable period ending on the

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Closing Date shall (i) in the case of any Taxes not based upon or related to income or receipts, be deemed to be the amount of such Tax for the entire Taxable period multiplied by a fraction the numerator of which is the number of days in the Taxable period ending on the Closing Date and the denominator of which is the number of days in the entire Taxable period, and (ii) in the case of any Tax based upon or related to income or receipts, be deemed to be the amount which would be payable if the relevant Taxable period ended on the Closing Date. Any tax credits relating to a Straddle Period shall be applied to the taxable period ending on the Closing Date. Additionally, any overpayments of taxes and tax refunds that are not included in the Working Capital Adjustment Amount shall first off-set any Taxes that may then be claimed due from the Shareholders under this Section 7.1, and to the extent no such Taxes are then claimed as due shall be paid to the Shareholders within fifteen (15) days of the receipt thereof.

(ii)Preparation of Tax Returns. The Shareholders shall cause to be prepared, at SICC’s expense and in a manner consistent with past practices, all Tax Returns of SICC and its Subsidiaries for taxable years or periods ending on or before the Closing Date but which are due to be filed after the Closing Date (taking into account all applicable extensions of time for filing), and shall cause such Tax Returns to be delivered to the Buyer for comment and approval, which approval shall not be unreasonably withheld, no later than thirty (30) days prior to the due date for filing any such Tax Return (taking into account any applicable extensions of time to file). If the Buyer has any comments to the Tax Returns, the Shareholders will consider any such comments in good faith.

(iii)Filing Tax Returns; Tax Shortfalls. The Buyer shall file all such Tax Returns and pay any Taxes due thereon, but only to the extent such Taxes are reflected in the calculation of the Initial Working Capital Adjustment Amount or, if completed, the Final Working Capital Adjustment Amount (otherwise, the Shareholders shall pay such Taxes). To the extent the Shareholders owe the Buyer an amount for Taxes under this Section 7.1 that was not deducted from the Purchase Price pursuant to Section 1.4 or that is not reflected in the calculation of the Initial Working Capital Adjustment Amount or, if completed, the Final Working Capital Adjustment Amount (a “Tax Shortfall”), the Buyer shall notify the Shareholder Representative of the amount of such Tax Shortfall, together with a detailed explanation of the calculation thereof, as soon as practicable but no later than fifteen (15) days before such obligation is due to be paid. The Shareholders shall cause the amount of such Tax Shortfall to be transferred by wire transfer to Buyer no later than five (5) days before such payments are due; provided that Shareholders shall remain jointly and severally liable for the payment of Taxes under this Section 7.1 to the extent that the amount of funds transmitted via such wire transfer is less than the amount of such Taxes owed.

(e)Tax Proceedings. In case any written claim, demand or deficiency with respect to any Tax is asserted or any action is commenced or written notice is given by any Taxing authority against SICC or Buyer, in respect to which indemnity may be sought against the Shareholders in accordance with Section 10.1 of this Agreement, Buyer shall give prompt written notice to the Shareholders. The failure of Buyer to give timely notice hereunder shall not

43

affect rights to indemnification hereunder, except to the extent that the Shareholders are actually prejudiced by such failure. The Shareholders shall promptly give written notice to Buyer of any written or other notification received by the Shareholders from a Taxing authority of a proposed adjustment with respect to any Tax of SICC or its Affiliates which is attributable to Tax periods ending on or before the Closing Date and shall also promptly give written notice to Buyer if a Taxing authority threatens to assert against SICC or Buyer the Tax Liability of any others (including, but not limited to, the Shareholders). The Shareholders shall have the right to control, contest and defend at its sole cost and expense and with counsel reasonably acceptable to the Buyer. Buyer shall reasonably cooperate with respect to the portion of any claim, action or proceeding with respect to any Tax for which the Shareholders are responsible at the sole cost and expense of the Shareholders. The Shareholders jointly and severally agree to pay to Buyer and SICC all of their reasonable expenses which they shall incur in connection with such cooperation. The Shareholders shall keep Buyer reasonably informed of the progress of any such claim, action or proceeding and shall allow Buyer’s reasonable participation therein at Buyer’s expense. The Shareholders may not settle any such claim, action or proceeding in a manner which would materially adversely affect SICC or its Affiliates after the Closing Date unless the Shareholders obtain the prior written consent of Buyer, which consent shall not unreasonably be withheld. Buyer may request that the Shareholders decline to take any further action with respect to any claim, demand or deficiency described herein, and the Shareholders thereafter shall take no further action provided that Buyer has notified the Shareholders in writing that it waives its right to indemnification for any liability resulting therefrom. In the event the Shareholders request SICC to pay Taxes to a Governmental Authority prior to contesting the assessment thereof and thereafter to file a claim or suit for refund, the Shareholders shall advance to SICC, on an interest-free basis, the amount of any such payment, after which SICC shall promptly pay the amount to the Governmental Authority as directed by the Shareholders.

(f)Resolution of Disagreements. If Buyer and the Shareholders disagree as to the amount of Taxes for which each is liable under this Agreement or the amount of any Tax Shortfall, Buyer and the Shareholders shall promptly consult each other in an effort to resolve such dispute. If any such dispute cannot be resolved within 60 calendar days of the initial date of consultation, Buyer and the Shareholders shall within ten (10) calendar days after such 60-day period submit such dispute to resolution in accordance with Section 12.11; provided, that the arbitrators so selected pursuant to such provision shall also be certified public accountants licensed or tax lawyers from a nationally recognized law firm and practicing in Illinois.

(g)Tax Elections. No new elections with respect to Taxes or any changes in current elections with respect to Taxes affecting SICC or its Affiliates shall be made by SICC, its Affiliates or the Shareholders after the date of this Agreement without the prior written consent of Buyer which consent shall not be unreasonably withheld. SICC and its Affiliates will forward any material Tax elections affecting such entities to the Buyer prior to Closing.

(h)Transfer Taxes. Shareholders shall pay and be jointly and severally liable for any sales, use, transfer and documentary Taxes and similar recording and filing fees applicable to the transfer of the Shares to Buyer at Closing under the laws of the State of Illinois or North Carolina.

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(i)Tax Carryovers. Buyer may elect, where permitted by law, to carry forward any Tax attribute of SICC arising in any Taxable period that begins on or after the Closing Date that, absent such election, would be carried back to a Taxable period ending on or before the Closing Date; provided, however, that in no event shall the Shareholders have any liability for Taxes under this Agreement as a result of the effect of any such election on any tax period or partial tax period prior to the Closing and, for the purposes of determining the liability of the Shareholders with regard to Taxes under this Agreement, any such election shall be disregarded and treated as if such Tax attribute had been carried back to a Taxable period ending on or before the Closing Date.

(j)Parachute Payment Taxes. [****](13) SICC, the Shareholders and their tax advisors shall make a proposal in writing to Buyer at least five (5) days prior to the Closing Date setting out proposed withholding amount and any proposed calculation of the excise taxes resulting from IRC Section 280G parachute payments and the basis for such determinations, and the amount so determined shall be utilized for such calculation purposes unless Buyer shall, in good faith, question the reasonableness of such calculation amounts, in which event the parties agree to confer promptly to reach agreement on the appropriate and reasonable amount to be so withheld.

ARTICLE 8
CLOSING

8.1Closing Date, Time and Place. Unless this Agreement is earlier terminated in accordance with this Agreement, and unless the parties otherwise agree in writing, the Closing shall take place at such place as agreed to by the parties, at 9:30 a.m., local time, on the last business day of the month after all conditions to Closing set forth in Articles 4 and 5 have been satisfied or waived in writing, other than conditions by the terms of which are to be performed at the Closing (the “Closing Date”). No party to this Agreement may rely on the failure of any condition to its obligations to consummate the transactions contemplated hereby if such failure was caused by such party’s failure to comply with its obligations under this Agreement. Such Closing shall be effective as of 11:59 p.m. on the Closing Date (the “Effective Time”). If the Closing has not taken place by 5:00 p.m. Central Time on the date [****](14) after the date hereof (the “Termination Date”) this Agreement may be terminated as provided in Section 11.1(a); provided, however, that if the Closing has not occurred by such date because the conditions set forth in Sections 4.4 and 5.4 relating to regulatory approvals have not been fulfilled, the Termination Date shall automatically be extended by another sixty (60) days.

(13) Material omitted pursuant to a request for confidential treatment under Rule 24b-2 of the Exchange Act of 1934. Material filed separately with the Securities and Exchange Commission.

(14) Material omitted pursuant to a request for confidential treatment under Rule 24b-2 of the Exchange Act of 1934. Material filed separately with the Securities and Exchange Commission.

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ARTICLE 9
SURVIVAL AND EXPIRATION OF REPRESENTATIONS,
WARRANTIES AND COVENANTS

9.1Survival and Expiration of Representations, Warranties and Covenants.

(a)All representations and warranties made by each of the Buyer, SICC and the Shareholders in or pursuant to this Agreement or in any agreement, Schedule or certificate delivered pursuant hereto shall be deemed to have been made on the date of this Agreement (except as otherwise provided herein) and, if a Closing occurs, as of the Closing.

(b)The representations and warranties contained in this Agreement or in any agreement, Schedule or certificate delivered pursuant hereto shall survive the Closing for fifteen (15) months after the Closing Date and shall expire on the same date that the fifteen (15) month term of the Escrow Agreement ends; provided, however, that:

(i)the representation and warranties contained in Sections 2.1, 2.2, 2.3(a), 2.3(b)(i)(2), 2.3(b)(ii), 2.4, 2.5(a), 2.8(a), 2.13(a), 2.21, 2.32 and 2.27(b) (the “Shareholder Transaction Representations”), 3.1, 3.2, 3.3 and 3.5 shall survive without limitation; and,

(ii)the representations and warranties contained in Section 2.15 shall survive the Closing until the expiration date of the applicable statute of limitations period; and

(iii)the representations and warranties contained in Sections 2.19 and 2.20 shall survive until the expiration of three years after the Closing Date.

(c)Except for Article 10 or as otherwise set out in Section 9.1(b) above, all other covenants and agreements of the parties contained in or made in accordance with the Agreement shall survive Closing in accordance with the terms of such covenant or agreement and shall remain operative and in full force and effect until the expiration date of the statute of limitations period applicable to contractual obligations.

(d)Article 10 shall survive the Closing and shall remain in effect indefinitely. Any claim by a party for indemnification under Article 10 must be submitted to the breaching party in writing prior to the expiration of the applicable survival period specified in Sections 9.1(b) or (c). Notwithstanding any investigation or audit conducted before or after the Closing Date or the decision of any party to complete the Closing, each party shall be entitled to rely upon the representations and warranties set forth herein. The waiver of any condition based on the accuracy of any representation or warranty or on the performance of or compliance with any covenant or obligation, will not affect the right of indemnification, or any other remedy based on such representations, warranties, covenants or obligations. Notwithstanding anything herein to the contrary, any representation, warranty, covenant and agreement that is the subject of a claim asserted in writing together with adequate written detail to evidence the existence of and basis for such claim prior to the expiration of the applicable survival period set forth in Sections 9.1(b) or (c), shall survive with respect to such claim or any dispute with respect thereto until the final resolution thereof.

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ARTICLE 10INDEMNIFICATION

10.1Indemnification by the Shareholders. The Shareholders shall be jointly and severally responsible and liable for, and hereby agree to indemnify, defend and hold harmless the Buyer, SICC and their respective officers, directors, managers, agents, employees, successors and permitted assigns, at all times from and after the Closing, from, against and in respect of all losses, damages, liabilities, deficiencies, Taxes, and expense (“Loss” or “Losses”) resulting from (a) any failure, untruth, inaccuracy or breach of any representation or warranty of the Shareholders or SICC contained in this Agreement or in any agreement, Schedule or certificate delivered pursuant hereto or in connection herewith; (b) any breach or non-fulfillment of any covenant or agreement of SICC or any Shareholder made in this Agreement or in any agreement, Schedule or certificate delivered pursuant hereto or in connection herewith; (c) Taxes for which the Shareholders are responsible in accordance with Article 7 of this Agreement, or any liability of SICC to make payments to or indemnify any other Person with respect to Taxes, for any Taxable period or portion thereof ending on or before the Closing Date; and, (d) all actions, suits, proceedings, claims, demands, assessments, judgments, fines, penalties, amounts properly and reasonably paid in settlement to any third party, and costs and expenses (including reasonable attorneys’ fees and expenses) incident to any of the foregoing. The Shareholders shall not be liable for any indemnity pursuant to this Section 10.1(a) (other than claims with respect to the Shareholder Transaction Representations and claims arising from Section 7.1, which shall not be subject to this limitation) until the aggregate of all Losses incurred by Buyer exceed $500,000, and then the Shareholders shall be liable for all such Losses beginning with the first dollar of such Loss. Notwithstanding the foregoing or any other provision of this Agreement or any Related Document to the contrary, in no event shall the Shareholders, individually or collectively, be liable to Buyer for any claims for indemnity pursuant to this Section 10.1(a) (other than claims with respect to Shareholder Transaction Representations and claims arising from Section 7.1, which shall not be subject to this limitation) related to this Agreement or the transactions contemplated hereby, whether by indemnification or otherwise, for more than the funds held in the Escrow pursuant to Section 1.2.

10.2Indemnification by Buyer. Buyer shall be responsible for, and hereby agrees to indemnify, defend and hold harmless each of the Shareholders and their respective agents, legal representatives, successors and permitted assigns, at all times from and after the Closing, from, against and in respect of all Losses resulting from: (a) any failure, untruth, inaccuracy or breach of any representation or warranty of either Buyer contained in this Agreement or in any agreement, Schedule or certificate delivered pursuant hereto or in connection herewith; (b) any breach or non-fulfillment of any covenant or agreement of either Buyer made in this Agreement or in any agreement, Schedule or certificate delivered pursuant hereto or in connection herewith; and, (c) all actions, suits, proceedings, claims, demands, assessments, judgments, fines, penalties, amounts paid in settlement, costs and expenses (including reasonable attorneys’ fees and expenses) incident to any of the foregoing. Buyer shall not be liable for any indemnity pursuant to this Section 10.2(a) (other than claims with respect to representations in Sections 3.1, 3.2, 3.3 and 3.5 which shall not be subject to this limitation) until the aggregate of all Losses incurred by the Shareholders exceed $500,000, and then Buyer shall be liable for all such Losses beginning with the first dollar of such Loss. Notwithstanding the foregoing or any other provision of this

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Agreement or any Related Document to the contrary, in no event shall Buyer be liable to the Shareholders, individually or collectively, for any claims for indemnity pursuant to this Section 10.2(a) (other than claims with respect to representations in Sections 3.1, 3.2, 3.3 and 3.5 which shall not be subject to this limitation) related to this Agreement or the transactions contemplated hereby, whether by indemnification or otherwise, for an amount greater than the Escrow Amount.

10.3Indemnification Procedure.

(a)Following the Closing, any party claiming indemnification under this Agreement (an “Indemnified Party”) shall give to the party from whom indemnification is sought (the “Indemnifying Party”) prompt written notice (an “Indemnification Notice”) of any claim or event known to it which does or may give rise to a claim by the Indemnified Party against the Indemnifying Party based on this Agreement, stating the nature and basis of said claims or events and the amounts thereof, to the extent known. The failure of an Indemnified Party to give prompt notice hereunder shall not affect rights to indemnification hereunder, except to the extent that the Indemnifying Party is actually prejudiced by such failure. If any such demand arises out of a claim made by any Person that is neither a party to this Agreement nor Affiliated with a party to this Agreement (a “Third Party Claim”), such notice shall also be accompanied by any papers, documents or pleading received by the Indemnified Party related to such Third Party Claim. Within ten days after receipt of an Indemnification Notice, the Indemnifying Party shall notify the Indemnified Party (i) whether the Indemnifying Party disputes its potential liability to the Indemnified Party under this Agreement, and if the Indemnifying Party is the Shareholders this notice shall be in accordance with Section 1.5, and (ii) with respect to a Third Party Claim, whether the Indemnifying Party agrees to defend the Indemnified Party against the Third Party Claim at the Indemnifying Party’s sole cost and expense.

(b)In the case of a Third Party Claim, if the Indemnifying Party timely notifies the Indemnified Party that it does not dispute its potential liability to the Indemnified Party under this Agreement and/or that the Indemnifying Party elects to assume the defense thereof, then the Indemnifying Party shall defend, at its sole cost and expense with counsel reasonably satisfactory to the Indemnified Party, such Third Party Claim by all appropriate proceedings, which proceedings shall be prosecuted diligently by the Indemnifying Party to a final conclusion or settled in accordance with the procedures of this Article 10. The Indemnifying Party shall have full control of such defense and proceedings, at its sole expense and risk. If requested by the Indemnifying Party, the Indemnified Party shall, at the sole cost and expense of the Indemnifying Party, cooperate with the Indemnifying Party in contesting any Third Party Claim. In addition, the Indemnified Party may participate in, but not control, any defense or settlement of any Third Party Claim controlled by the Indemnifying Party, in which case the Indemnified Party shall bear the costs and expenses relating to such participation. Notwithstanding the foregoing, (i) the Indemnified Party shall have the unilateral right to pay or settle such Third Party Claim at any time in which event the Indemnified Party shall be deemed to have waived any right to indemnification therefor by the Indemnifying Party and (ii) if the remedy sought by the claimant with respect to a Third Party Claim is not solely for money damages, and would affect the operation of the business of SICC or its Subsidiaries after the Closing, the Indemnifying Party shall not settle such Third Party Claim without the prior written consent of Buyer, which consent shall not be unreasonably withheld.

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(c)In the case of a Third Party Claim, if the Indemnifying Party does not timely notify the Indemnified Party, and if the Indemnifying Party is the Shareholders this notice shall be in accordance with Section 1.5, or elects not to defend the Indemnified Party, or, having assumed the defense and settlement of such Third Party Claim, fails reasonably to contest such Third Party Claim in good faith, then the Indemnified Party, without waiving its right to indemnification, shall have the right to defend, at the sole cost and expense of the Indemnifying Party, the Third Party Claim. The Indemnified Party shall have full control of such defense and proceedings. The Indemnifying Party shall, at the sole cost and expense of the Indemnifying Party, cooperate with the Indemnified Party in contesting any Third Party Claim and may participate in, but not control, any defense or settlement controlled by the Indemnified Party, in which case the Indemnifying Party shall bear the cost and expenses relating to such participation.

(d)In the case of a claim that is not a Third Party Claim, if the Indemnifying Party does not timely dispute its potential liability, and if the Indemnifying Party is the Shareholders this notice shall be in accordance with Section 1.5, then the claim specified by the Indemnified Party in the Indemnification Notice shall be deemed a liability of the Indemnifying Party hereunder. If the Indemnifying Party does timely dispute such claim, then the claim shall be resolved by negotiation of the parties or pursuant to Section 12.11 hereof.

(e)In the event of any claim for indemnity hereunder, Buyer agrees to give the Shareholders and their respective representatives reasonable access to the books and records and employees of SICC in connection with the matters for which indemnification is sought to the extent such Shareholders reasonably deem necessary in connection with their rights and obligations hereunder.

(f)For purposes of clarification, if in the event of a claim for indemnification for Tax related Losses there exists a conflict between the provisions of this Section 10.3 and Section 7.1(e), the provisions of Section 7.1(e) shall control.

10.4Exclusive Remedy. After the Closing, and except as set forth below, the indemnities set forth in this Article 10 shall be the exclusive remedies of the Buyer and the Shareholders and their respective officers, directors, employees, agents, Affiliates, legal representatives, successors and permitted assigns. The foregoing limitation shall not apply with respect to any claim based on intentional fraud or the break-up fee set forth in Section 11.3, and shall also not preclude any party from seeking any equitable remedy provided for in this Agreement.

10.5Determination of Losses. The Parties shall make appropriate adjustments for tax benefits (or liabilities) and proceeds received from insurance coverage in determining the amount of any claims for purposes of this Article 10. This Section 10.5 shall not require any party to delay the pursuit of indemnification under this Article 10 until resolution of claims against a party’s insurance, provided that no such indemnification shall be finalized without adequate provision for adjustment with respect to such insurance proceeds.

10.6No Punitive Damages. Anything herein to the contrary notwithstanding, no party shall be liable under this Agreement for any punitive or exemplary damages.

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ARTICLE 11
TERMINATION

11.1Termination. This Agreement may be terminated at any time prior to the Closing:

(a)By written notice by the Shareholders, on the one hand, or Buyer, on the other, if the Closing has not occurred by the Termination Date; provided, however, that no party shall be entitled to terminate this Agreement pursuant to this subsection if its breach of this Agreement has prevented the consummation of the transactions contemplated hereby;

(b)By mutual written consent of the parties hereto;

(c)By written notice by the Shareholders, on the one hand, or Buyer, on the other hand, if there has been a material misrepresentation or material breach in the representations and warranties or covenants set forth in this Agreement and: (i) the breaching party fails to cure the breach within ten (10) days after written notice of the breach, which notice shall include a reasonable description of the breach; or (ii) the breach is not susceptible to cure due to the nature of the breach; or,

(d)By written notice by the Shareholders, on the one hand, or Buyer, on the other, in the event of failure of any condition to closing hereunder not within the control of such party, which failure is not cured within five (5) days after written notice of such failure to the party claimed to be in default.

11.2Procedure Upon Termination. If this Agreement is terminated as provided herein:

(a)Return of Records. Each party shall as promptly as practicable redeliver to the party furnishing the same, all data, information and other written material (including all copies thereof) of any other party relating to the transactions contemplated hereby, whether obtained before or after the execution hereof.

(b)Confidentiality. All information received by any party hereto with respect to the business of any other party (other than information which is a matter of public knowledge or which has heretofore been or is hereafter published in any publication for public distribution or filed as public information with any governmental authority) shall not at any time be used by such party, or disclosed to third parties and shall remain subject to the Confidentiality Agreement between ALLTEL Corporation and Daniels on behalf of SICC, SIRP and First Wireless, Inc. dated August 19, 2005.

11.3Effect of Termination; Break-up Fee. In the event of the termination of this Agreement as provided in Section 11.1, this Agreement shall become wholly void and of no further force and effect, except that the provisions of this Section 11.3, and Sections 6.14, 6.16, 6.19,10.6, 11.2 and Article 12 shall survive any termination. Notwithstanding the foregoing, no termination shall relieve any party from liability for any breach by that party of its representations, warranties, covenants or agreements set forth in this Agreement or any Related Agreement, and the aggrieved party shall be entitled to all rights and remedies at law or in equity

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with respect to any such breach; and in the event this Agreement is terminated by the Shareholders pursuant to Section 11.1(c), and notwithstanding any other provision of this Agreement to the contrary, Buyer shall pay to the Shareholders a break-up fee in the amount of [****](15), which amount shall be paid by Buyer within thirty (30) days of the effective date of such termination, and shall accrue interest at the rate of ten percent (10%) per year until paid in full. The parties agree that this amount is not a penalty, but represents the parties’ good faith determination of the damage that SICC will incur in the event of such termination. The parties further agree that the break-up fee set forth in this Section 11.3 shall be the sole and exclusive remedy of the Seller and the Shareholders and their respective officers, directors, employees, agents, Affiliates, legal representatives, successors and permitted assigns in the event this Agreement is terminated by the Shareholders.

ARTICLE 12
GENERAL PROVISIONS

12.1Amendments, Waivers and Consents. For the purposes of this Agreement and all agreements, documents, and instruments executed pursuant hereto, except as otherwise specifically set forth herein or therein, no course of dealing between SICC or the Shareholders, on the one hand, and Buyer, on the other, and no delay on the part of any party hereto in exercising any rights hereunder or thereunder shall operate as a waiver of the rights hereof and thereof. No covenant or other provision hereof or thereof may be waived otherwise than by a written instrument signed by the party so waiving such covenant or other provision. This Agreement may not be modified or amended except by a written instrument executed by the parties; provided, however, that the signatures of any five of the Shareholders shall be sufficient to bind all of the Shareholders thereto.

12.2Governing Law. This Agreement shall be deemed to be a contract made under, and shall be construed in accordance with, the laws of the State of Delaware without giving effect to the conflict of laws principles thereof.

12.3Notices and Demands. Any notice or demand which, by any provision of this Agreement or any Related Documents, except as otherwise provided therein, is required or provided to be given shall be deemed to have been sufficiently given or served and received for all purposes upon the earlier of receipt, or three days after being sent by certified or registered mail, postage and charges prepaid, return receipt requested, or by express delivery providing receipt of delivery, to the following addresses:

(15) Material omitted pursuant to a request for confidential treatment under Rule 24b-2 of the Exchange Act of 1934. Material filed separately with the Securities and Exchange Commission.

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If to Buyer to:

ALLTEL Communications, Inc.

One Allied Drive

Little Rock, AR 72202

Attention:  Executive Vice President and Secretary

Facsimile Number:  501-905-0962

If to SICC or the Shareholders before Closing to:

Southern Illinois Cellular Corp.

417 South 42^nd Street

Mt. Vernon, IL  62864

Attn:  Terry Addington

If to Shareholders after Closing to:

Crosslink Wireless, Inc.

60A Technical Center

Crossville, IL   62827

Attn:  George Rawlinson

Egyptian Communication Services, Inc.

1010 W. Broadway

Steeleville, IL  62288

Attn:  Kevin J. Jacobsen

Hamilton County Communications, Inc.

PO Box Drawer B

Dahlgren, IL   62828

Attn:  Robert Thomason

HTC Holding Co.

Harrisonville Telephone Co.

213 S. Main

Waterloo, IL   62298

Attn:  H.R. Gentsch

MJD Services Corp.

521 E. Morehead Street

Suite 250

Charlotte, NC  28202

Attn:  Tom Griffin

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Shawnee Communications, Inc.

120 W. Lane

Equality, IL   62934

Attn:  James Coyle

Wabash Independent Networks, Inc.

210 S. Church St.

Louisville, IL   62858

Attn:  David Grahn

Tracy J. Nugent

Meyer Capel, A Professional Corporation

306 W. Church Street

P.O. Box 6750

Champaign, Illinois 61826-6750

and to:

Mark Stanley

302 W. Robinson Street

Carmi, IL  62821

or at any other address designated by any party to this Agreement to each of the other parties in writing. Notwithstanding the foregoing, notice to the Shareholder Representative following the Closing shall constitute notice to all Shareholders without regard to whether any Shareholder is copied in accordance with the foregoing provisions, provided, however, Buyer shall use its best efforts to deliver any such notice to each Shareholder at their respective addresses set forth in this Section 12.3.

12.4Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which when so executed and delivered shall be taken to be an original; but such counterparts shall together constitute but one and the same document.

12.5Severability. Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be deemed prohibited if or invalid under such applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, and such prohibition or invalidity shall not invalidate the remainder of such provision or the other provisions or this Agreement.

12.6Complete Agreement. Except insofar as it refers to other agreements and instruments to Related Documents, this Agreement is intended by the parties hereto to be a complete and final expression of their agreement, superseding any prior arrangement or understanding, written or oral with respect to the subject matter. This Agreement may not be contradicted by evidence of any prior or contemporaneous oral agreement.

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12.7Expenses. Unless otherwise provided for in this Agreement, each of Buyer, and the Shareholders shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement. For the purpose of clarification, SICC and its Subsidiaries shall not bear, incur or otherwise be charged with any expenses of the Shareholders in connection with this Agreement.

12.8Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns only. Neither this Agreement nor any of the rights, interests, or obligations hereunder shall be assigned or delegated by any of the parties hereto, either in whole or in part, without the prior written consent of the other parties hereto. Notwithstanding the foregoing, Buyer may assign this Agreement to a subsidiary of Buyer prior to or at the Closing and may also deliver the Purchase Price through such subsidiary; provided, however, that (a) no assignment shall be permitted if such assignment would have a materially adverse impact on either the likelihood or timing of receipt of the FCC’s consent to the assignment of the FCC Authorizations; and (b) assignment shall not relieve Buyer of any of its obligations hereunder. For purposes of this Section 12.8, any delay in excess of seven (7) days shall be deemed a material adverse impact on the timing of receipt of the FCC’s requisite consent.

12.9Accounting; Other Terms. All accounting terms used herein which are not expressly defined in this Agreement shall have the meanings given to them in accordance with GAAP. The term “including” shall mean including without limitation.

12.10Parties. Nothing in this Agreement is intended to confer any rights or remedies under or by reason of this Agreement on any Persons other than the parties hereto and their respective successors and permitted assigns. Without limiting the foregoing, no third Person shall be a beneficiary of any provision of this Agreement.

12.11Arbitration and Dispute Resolution. Any controversy, claim, or dispute relating to the performance of this Agreement (a “Dispute”) shall be resolved in accordance with the procedure specified in this Section 12.11. Either party may serve written notice of any Dispute to the other party. The parties shall meet to attempt to resolve the Dispute within ten (10) days of such notice. Such meeting shall be attended by individuals with decision-making authority who will negotiate in good faith to attempt to reach a resolution of the Dispute prior to pursuing other available remedies. If, within fifteen (15) days after such meeting, the parties have not succeeded in negotiating a resolution of the Dispute, such Dispute shall be resolved through final and binding arbitration conducted by three (3) arbitrators familiar with the telecommunications industry and with no conflicts with any party or material relationship with any party. The arbitration shall be held in Chicago, Illinois in accordance with the then-current Rules of Conciliation and Arbitration of the American Arbitration Association, or such other rules as the parties may agree in writing. Such arbitrators shall be selected by mutual agreement of the parties within ten (10) days of the request for arbitration, or failing such agreement, each party shall select one (1) arbitrator and the two (2) selected arbitrators shall mutually agree upon the selection of a third arbitrator within fifteen (15) days of the request for arbitration. Prior to the commencement of proceedings, each arbitrator will take an oath of impartiality. The parties shall be afforded ninety (90) days to conduct discovery prior to the arbitration. The arbitrators shall have the authority to resolve discovery disputes and to grant provisional or ancillary

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remedies, including equitable remedies. The arbitration proceedings and all testimony, filings, documents and information relating to or presented during the arbitration shall be subject to the confidentiality provisions of this Agreement. A court reporter shall be present at all arbitration proceedings in order to transcribe them and such transcription shall be the official record of such proceedings for purposes of any judicial enforcement or review proceeding. The arbitrators’ decision shall specify the basis for any award and the types of damages awarded. The parties shall bear the cost of such arbitration equally and the prevailing party in any such arbitration and any judicial enforcement or review proceeding shall be entitled to reasonable attorneys’ fees from the non-prevailing party in an amount to be determined by the arbitrators, in addition to any other award ordered by the arbitrators. Judgment on the arbitrator’s decision may be entered in any court of competent jurisdiction.

12.12Consent to Jurisdiction, Service and Venue. For the purpose of enforcing performance of the obligations under this Agreement, or otherwise in connection herewith, the parties hereby consent to the jurisdiction and venue in any federal court located in the State of Illinois or any Illinois state court, and appoints and constitutes the individual specified in Section 12.3 to receive notices for such party as the agent of such party for all service of process in connection with any such matter. Copies of each document so served shall be sent by certified mail to the addresses of the parties as set forth herein. Each party hereby waives the right to contest the jurisdiction and venue of such courts on the ground of inconvenience or otherwise, and further waives any right to bring any action or proceeding against the other party or parties in any court other than those set forth above. The parties hereto irrevocably and unconditionally waive trial by jury in any legal action or proceeding relating to this Agreement or any transaction contemplated hereby or thereby, and for any counterclaim with respect thereto.

12.13Specific Performance. The parties acknowledge that their obligations under this Agreement are unique and that, prior to Closing, remedies at law, including monetary damages, will be inadequate in the event either party should default in the performance of its obligations under this Agreement. Accordingly, in the event of any such breach prior to Closing, the non-defaulting party shall be entitled to a decree of specific performance pursuant to which the defaulting party is ordered to affirmatively carry out its pre-closing obligations under this Agreement. The foregoing shall not be deemed to be or construed as a waiver or election of remedies by either party, both of whom expressly reserve any and all rights and remedies available to it at law or in equity in the event of any breach or default by the other party under this Agreement prior to Closing.

ARTICLE 13
DEFINITIONS

Unless the context specifically requires otherwise, capitalized terms used in this Agreement shall have the meaning specified below:

“Affiliate” means any Person which directly or indirectly controls, is controlled by or is under common control with another Person. The term “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership or voting securities, by contract or otherwise.

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“Agreement” means collectively, this document and any exhibits, schedules and any agreements expressly incorporated herein as the context requires and as the same may be amended, modified, or supplemented from time to time.

“BID” means a five-digit code administered by CIBERNET Corporation that may be used instead of a SID for billing purposes to indicate a specific service area within a SID.

“Cellular Entities” means all Persons (including the Subsidiaries of SICC) engaged in Cellular Service in which SICC or any Affiliate of SICC, either directly or indirectly, owns any capital stock, limited partner interest, general partner interest, membership interest, unit or other equity or similar interest.

“Cellular Interest” means any capital stock, limited partner interest, general partner interest, membership interest, unit or other equity or similar interest in a Cellular Entity owned by SICC or any Affiliate of SICC.

“Closing” means the effectuation of the transactions contemplated hereby.

“Closing Date” means the date set forth in Section 8.1 of this Agreement.

“Closing Date Statement” has the meaning set forth in Section 1.4(b).

“COBRA” means the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, Section 4980B of the Code, Title I Part 6 of ERISA, and any similar state group health plan continuation law, together with all regulations and proposed regulations promulgated thereunder.

“Code” means the Internal Revenue Code of 1986, as amended, and all regulations thereunder.

“Commercial Mobile Service” has the meaning set forth in 47 U.S.C. Section 332(d).

“Consents” means the consents and approvals required to be set forth in Schedule 2.3 in accordance with the terms of Section 2.3.

“Effective Time” has the meaning specified in Section 8.1.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and all regulations thereunder.

“ERISA Affiliate” means any Person that is a member of “controlled group of corporations” with, or is under “common control” with, or is a member of the same “Affiliated service group” with SICC, as defined in Section 414 of the Code.

“Escrow Agent” means JPMorgan Chase Bank, N.A., acting under the Escrow Agreement.

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“Escrow Agreement” means an Escrow Agreement in substantially the form of attached Exhibit A.

“FCC” means the Federal Communications Commission (or any successor agency, commission, bureau, department or other political subdivision of the United States of America).

“FCC License” means any license, permit, approval, registration or authorization granted or issued by the FCC.

“Final Order” means an action by the FCC or the ICC as to which: (a) no request for stay of the action by the FCC or the ICC, as the case may be, is pending, no such stay is in effect, and if any time period is permitted by statute or regulation for filing any request for such a stay, such time period has passed; (b) no petition for rehearing or reconsideration, or application for review, of the action is pending before the FCC or the ICC, as the case may be, and the time permitted for filing any such petition or application has passed; (c) the FCC or the ICC, as the case may be, does not have the action under reconsideration on its own motion and the time in which such reconsideration is permitted has passed; and, (d) no petition for review or appeal to a court, or request for stay to or by a court, of the FCC’s or ICC’s action, as the case may be, is pending or in effect, and the deadline for filing any such appeal or request has passed.

“First Refusal Right” means any right of first refusal, right of first offer, preemptive right, right to consent, put right, call right, tag along right, default or similar right or other adverse claim of any kind or nature whatsoever in favor of any Person with respect to the Shares or any Cellular Interest.

“GAAP” means generally accepted accounting principles for financial reporting in the United States, applied on a basis consistent with the basis on which the SICC Financial Statements were prepared (to the extent such preparation was in accordance with GAAP).

“Governmental Authority” means the FCC, the ICC and any other governmental agency, body or instrumentality having jurisdiction over SICC, its Subsidiaries, a Cellular Entity, Shareholders or any of their Affiliates (whether federal, state or local), but does not include any arbitrator.

“HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the regulations promulgated thereunder.

“Interference Consent” means any agreement or arrangement between a party and any Person, including any present or proposed personal communications system, cellular or microwave system operator or any personal communications system, cellular or microwave licensee, conditional licensee or applicant with respect to co-channel and/or adjacent channel interference, the coordination of adjacent market channel use or other matters concerned with the operation of adjacent markets, allowing interference, restricting station operations, licensing or location, or limiting transmission time.

“ICC” means the Illinois Commerce Commission.

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“Indebtedness” means the total debt (including both short- and long-term debt) of SICC and its Subsidiaries on a consolidated basis calculated in accordance with GAAP, and includes all capital leases.

“Intellectual Property” has the meaning stated in Section 2.7(a).

“Knowledge,” whether or not capitalized, means the actual knowledge of a Party upon reasonable inquiry. With respect to SICC, Knowledge means the actual knowledge of the following Persons after reasonable inquiry: Terry Addington, Tania Seger, Michael Beehn and Michael Jaksich. For purposes of this definition, “reasonable inquiry” mean that the foregoing representatives have, at a minimum, (1) reviewed the relevant statement or representation contained in this Agreement and have consulted with the appropriate individuals (which shall include, without limitation, current directors, officers and employees of SICC and any of its Subsidiaries) as to whether such individuals have knowledge of any fact or circumstance that would make such statement untrue, inaccurate or misleading and (2) if applicable, reviewed such documents as are reasonably necessary in order to assist in determination of whether such statement is untrue, inaccurate or misleading.

“Lien” means:

(a)Any interest in property securing Indebtedness or other obligation owed to, or claim by, a Person other than the owner of the property, whether such interest is based on the common law, statute or contract, and including a security interest arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes;

(b)Reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting property, including First Refusal Rights. For the purposes of this Agreement, SICC shall be deemed to be the owner of any property which it has acquired or holds subject to a conditional sale agreement, financing lease or other arrangement pursuant to which title to the property has been retained by or vested in some other Person for security purposes and such retention or vesting shall be deemed to be a “Lien”; and,

(c)With respect to shares of capital stock or other equity interest, any stockholders or buy/sell agreements, voting trust agreements, buy-back agreements, all proxies or other restrictions on voting, equity or participation rights, including First Refusal Rights.

“Material Intellectual Property” has the meaning stated in Section 2.7(b).

“OSHA” means the Occupational Safety and Health Act of 1978, as amended from time to time.

“Permitted Lien” means (i) any Lien for Taxes not yet due or delinquent or being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with GAAP, (ii) any statutory Lien arising in the ordinary course of business by operation of law with respect to a Liability that is not yet due or delinquent, (iii) any

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minor imperfection of title, utility easements and the like, or similar Lien which individually or in the aggregate with other such Liens do not materially interfere with SICC’s use of the assets subject thereto or adversely affect the business or condition of SICC; (iv) Liens disclosed in Schedule 13 attached hereto, (v) Liens securing any executory obligations under any lease that constitutes an operating lease under GAAP; and, (vi) exceptions of record and standard exceptions contained in ALTA title insurance policies or commitments for issuance thereof.

“Person” means any individual, corporation, limited liability companies, partnership, joint venture, trust or unincorporated organization or any government or any agency or political subdivision thereof.

“Postpay Subscribers” means the aggregate number of active mobile telephone numbers in service subscribed to the business of SICC and its Subsidiaries for Commercial Mobile Service (excluding telephone numbers assigned pursuant to prepaid and reseller contracts or arrangements), and not more than 90 days delinquent in paying their account.

“PSAP” means Public Safety Answering Point.

“Related Documents” or “Related Agreements” means any agreement, instrument or document being executed and delivered in connection with the Agreement and the transactions contemplated hereby.

“Resolved Item” has the meaning set forth in Section 1.4(b).

“Roaming Partners” is defined in Section 2.31(a).

“Roaming Revenue” means revenue recognized in accordance with GAAP by SICC or any Subsidiary for Cellular Service provided by them to subscribers of other Commercial Mobile Service providers, including, without limitation, revenues related to air time, toll and other charges applicable thereto.

“SID” means the five-digit code assigned to each market by the FCC for each FCC License.

“Subsidiary” of any Person means any corporation or other entity of which more than 50% of the outstanding voting securities are at the time owned, directly or indirectly, by such Person. With respect to SICC, Subsidiary includes each Cellular Entity other than RSA 6 & 7.

“Straddle Period” means any Taxable period that begins before the Closing Date and ends after the Closing Date.

“Tax” or “Taxes” means any federal, state or local, income, gross receipts, capital stock, franchise, profits, withholding, social security, unemployment, disability, real property, assessment, personal property, stamp, excise, occupation, sales, use, transfer, value added, alternative minimum, estimated or other tax, including any interest, penalty or addition thereto, whether disputed or not.

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“Taxing Authority” means any domestic, federal, national, state, provincial, county or municipal or other local government, any subdivision, agency, commission or authority thereof, exercising any taxing authority or any other authority exercising any Tax regulatory authority.

“Tax Return” means any return, report, estimate or similar statement filed or required to be filed with any Governmental Authority with respect to any Taxes (including any attached schedules or supporting information), including, without limitation, any consolidated, combined and unitary return, information return, claim for refund, amended return and declaration of estimated Tax.

“Third Party Interest” means any capital stock, limited partner interest, general partner interest, membership interest, unit or other equity or similar interest in a Cellular Entity owned by any Person other than the SICC or any Affiliate of SICC.

“Threatened” means a claim, proceeding, dispute, action, or other matter, if any demand or statement has been made (in writing) or any notice has been given (in writing) that would lead a prudent person to conclude that such a claim, proceeding, dispute, action, or other matter is likely to be asserted, commenced, taken, or otherwise pursued in the future.

“Tower(s)” means all communication towers (i) owned, leased or licensed by SICC or any Subsidiary, or for which such entity holds an easement, right of way or other right to use or (ii) used in the business of SICC or any Subsidiary, including, without limitation, those set forth on Schedule 2.30(a).

“Tower Documents” means each of the following with respect to each Tower Site: (i) a fully executed ground lease or, if applicable, a deed, (ii) chain of all applicable assignments or transfers of ground leases or, if applicable, deeds, (iii) a Phase I environmental site assessment report, (iv) a real property boundary survey (including, without limitation, all access and utility easements), (v) a 1A or 2C site survey, (vi) all easements and the chain of applicable assignments or transfers of such easements, (vii) written evidence of full compliance with NEPA, in a form reasonably acceptable to Buyer (including, without limitation, letters from applicable governmental authorities assessing any effects on fish and wildlife and on sites within the jurisdiction of any federal or state historic preservation authority), (viii) title reports, commitments or policies of SICC’s or Subsidiary’s leasehold or fee simple interest, (ix) Tower site plans, Tower drawings, and foundation plans, (x) all lease, license and sublease agreements whereby any third party uses or has the right to use any portion of the Tower Site, and (xi) final zoning approval or determination, conditional use permits, or a letter stating that no zoning was required and the basis thereof.

“Tower Site” has the meaning set forth in Section 2.30.

“Unresolved Item” has the meaning set forth in Section 1.4(b).

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IN WITNESS WHEREOF, the undersigned have executed this Agreement as a sealed instrument as of the day and year first above written.

SOUTHERN ILLINOIS CELLULAR CORP.		ALLTEL COMMUNICATIONS, INC.
By:	/s/ Terry Addington	By:	/s/ Kevin Beebe
Title:	Chief Executive Officer	Title:	Group President – Operations
SHAREHOLDERS:
Crosslink Wireless, Inc.
By:	/s/ George Rawlinson
Title:	President
Egyptian Communication Services, Inc.
By:	/s/ Kevin J. Jacobsen
Title:	Executive Vice President
Hamilton County Communications, Inc.
By:	/s/ Robert Thomason
Title:	General Manager
HTC Holding Co.
By:	/s/ H.R. Gentsch
Title:	President and Chief Executive Officer
MJD Services Corp.
By:	/s/ Eugene B. Johnson
Title:	Chief Executive Officer

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Shawnee Communications, Inc.
By:	/s/ James T. Coyle
Title:	President
Wabash Independent Networks, Inc.
By:	/s/ David R. Grahn
Title:	General Manager/EVP

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EX-14.1

Exhibit 14.1

FAIRPOINT COMMUNICATIONS, INC.
CODE OF BUSINESS CONDUCT AND ETHICS

Introduction

Set forth herein is the Code of Business Conduct and Ethics (the “Code”) adopted by FairPoint Communications, Inc. (the “Company”). This Code summarizes basic guiding principles and standards of conduct to guide all employees, directors and officers of the Company and its subsidiaries and controlled affiliates in meeting our goal to achieve the highest business and personal ethical standards as well as compliance with the laws and regulations that apply to our business. This Code covers a wide range of business practices and procedures, but it does not address every applicable law or respond to every ethical question or concern that may arise. All of our employees, directors and officers must conduct themselves accordingly in every aspect of our business and seek to avoid even the appearance of wrongdoing or improper behavior. Our standard has been, and will continue to be, to advance the highest standards of ethical conduct. We expect the Company’s agents, consultants, contractors, suppliers and representatives to be guided by the principles and standards set forth in this Code.

Our Chief Executive Officer, Chief Financial Officer and other financial and accounting officers must adhere to our Code of Ethics for Financial Professionals which sets forth additional standards in connection with our public disclosures. If you have questions regarding any of the goals, principles, or standards discussed or policies or procedures referred to in this Code or are in doubt about the best course of action to take in a particular situation, you should contact the General Counsel, or follow the guidelines set forth in Section 16 of this Code.

Every director, officer and employee has a duty to adhere to this Code and those who violate the standards in this Code will be subject to disciplinary action which may include suspension or dismissal and/or the reporting of violative conduct to appropriate regulatory and criminal authorities. If you are involved in a situation which you believe may violate or lead to a violation of this Code, follow the guidelines described in Section 16 of this Code.

We are committed to continuously reviewing and updating our policies and procedures. Therefore, this Code is subject to modification. This Code supercedes all other such codes, policies, procedures, instructions, practices, rules or written or verbal representations concerning the subject matter of this Code to the extent they are inconsistent.

Please sign the acknowledgment form attached hereto as Exhibit A, indicating that you have received, read, understand and agree to comply with this Code, and return the form as instructed. The signed acknowledgment form will be located in your personnel file. Each year, as part of the annual review process, officers and other appropriate personnel will be asked to sign an acknowledgment indicating their continued understanding of and compliance with the Code. In addition, periodically, you may be asked to participate in seminars, training meetings and similar activities related to reinforcing your understanding of this Code and its applicability to the Company’s business.

1.Compliance with Laws, Rules and Regulations

Obeying the law, both in letter and in spirit, is the foundation on which this Company’s ethical standards are built. All employees, directors and officers must respect and obey the laws of the cities, states and countries in which we operate and the rules and regulations applicable to the Company’s business. Although not all employees are expected to know the details of these laws, rules and regulations, it is important to know enough to determine when to seek advice from supervisors, managers or other appropriate personnel who should consult with
the Legal Department as necessary or appropriate. Compliance with the law does not obviate the need to act with the highest honest and ethical standards.

To promote compliance with laws, rules, regulations and the policies of the Company, including insider trading rules, other securities laws, and anti-discrimination and anti-harassment laws and policies, the Company has established various compliance policies and procedures and, where appropriate, may conduct information and training sessions.

2.Conflicts of Interest

A “conflict of interest” exists when a person’s personal private interest interferes in any way - or even appears to interfere in any way - with the interests of the Company. A conflict situation can arise when an employee, officer or director takes actions or has interests in connection with or as a result of a material transaction or relationship that may make it difficult for him or her or others to perform work or make decisions objectively and effectively in the Company’s interest. Conflicts of interest may also arise when an employee, officer or director, or members of his or her family, receives improper personal benefits as a result of his or her position in the Company. Conflicts of interest, unless approved in accordance with this Code, as applicable, are prohibited as a matter of Company policy. Examples include the following:

(a)Employment/Outside Employment

In consideration of their employment with the Company, employees are expected to devote their full attention to the business interests of the Company. Employees are prohibited from engaging in any activity that interferes with their performance or responsibilities to the Company or is otherwise in conflict with or prejudicial to the Company. Our policies prohibit any employee from accepting simultaneous employment with a client, credit source, supplier, or competitor, or from taking part in any activity that enhances or supports a competitor’s position. If you have any questions regarding this requirement, you should contact the Legal Department.

(b)Outside Directorships

It is a conflict of interest to serve as a director of any company that competes with the Company. Employees may not serve as a director of another company without first obtaining the approval of the Company’s Chief Executive Officer (the “CEO”). Directors of the Company are required to review with the Company’s Board of Directors and the Company’s Secretary other proposed directorships to confirm that accepting such directorship is consistent with the Company’s Corporate Governance Guidelines.

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(c)Business Interests

If you are considering investing in a client, credit source, supplier or competitor, great care must be taken to ensure that these investments do not compromise your responsibilities to the Company. Many factors should be considered in determining whether a conflict exists, including the size and nature of the investment; your ability to influence the Company’s decisions; your access to confidential information of the Company or of the other company; and the nature of the relationship between the Company and the other company. The Audit Committee of the Company’s Board of Directors must approve in advance any such investment (other than purchases of $50,000 or less of stock of a publicly traded company).

(d)Related Parties

As a general rule, you should avoid conducting business or engaging in a transaction on behalf of the Company with a family member or significant other, or with a company or firm with which you or a family member or significant other is a significant owner or associated or employed in a significant role or position. “Family members” include any person related by blood, adoption or marriage, including grandparents, aunts, uncles, nieces, nephews, cousins, stepchildren, stepparents, and
in-laws. “Significant others” include co-habitants, domestic partners, and persons with whom an employee has (or reasonably expects to have) a consensual romantic, sexual, intimate or dating relationship.

The Audit Committee must review and approve in advance all material related party transactions or business or professional relationships. All instances involving such potential related party transactions or business or professional relationships must be reported to the Legal Department who will assess the materiality of the transaction or relationship and elevate the matter to the Audit Committee as appropriate. You must not enter into, develop or continue any such material transaction or relationship without obtaining such prior Audit Committee approval. The Company must report all material related party transactions and business or professional relationships under applicable accounting rules and the Securities and Exchange Commission’s (the “SEC”) rules and regulations. Any dealings with a related party must be conducted in such a way as to avoid preferential treatment and assure that the terms obtained by the Company are no less favorable than could be obtained from unrelated parties on an arm’s-length basis.

Conflicts of interest or the material nature of a transaction or relationship may not always be clear-cut; if questions arise, you should consult with the Legal Department before entering into, developing or continuing a transaction that could reasonably be expected to give rise to a conflict of interest.

(e)Other Situations

Because other conflicts of interest may arise, it would be impractical to attempt to list all possible situations. Any employee, officer or director who becomes aware of a conflict of interest or a potential conflict of interest should bring it to the attention of a supervisor, manager or other appropriate personnel or consult the guidelines described in Section 16 of this Code.

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3.Insider Trading

Employees, officers and directors who have access to confidential information are not permitted to use or share that information for stock trading purposes or for any other purpose except the conduct of our business. All non-public information about the Company should be considered confidential information. To use non-public information about the Company or any other company for personal financial benefit or to “tip” others who might make an investment decision on the basis of this information is not only unethical but also illegal. Please refer to the Company’s Insider Trading Policy. The purpose of such policy is to inform you of your legal responsibilities to make clear to you that the misuse of sensitive information is contrary to Company policies and to set forth procedures with respect to trading in the Company’s securities.

4.Public Disclosure

The Company is committed to providing full, fair, accurate, timely and understandable disclosure in the periodic reports and other information it files with or submits to the SEC and in other public communications, such as press releases, earnings conference calls and industry conferences, made by the Company. In meeting such standards for disclosure, the Company’s executive officers and directors shall at all times strive to comply with the Company’s disclosure obligations and, as necessary, appropriately consider and balance the need or desirability for confidentiality with respect to non-public negotiations or other business developments. The Company’s CEO and CFO are responsible for establishing effective disclosure controls and procedures and internal controls over financial reporting within the meaning of applicable SEC rules and regulations. The Company expects the CEO and CFO to take a leadership role in implementing such controls and procedures and to position the Company to comply with its disclosure obligations and otherwise meet the foregoing standards for public disclosure.

No employee, officer or director should interfere with, hinder or obstruct the Company’s efforts to meet the standards for public disclosure set forth above.

5.Corporate Opportunities

Employees, officers and directors are prohibited from exploiting for their own personal gain opportunities that are discovered through the use of corporate property, information or position unless the opportunity is fully disclosed to the Board and the Board declines to pursue such opportunity. No employee, officer or director may use corporate property, information, or position for improper personal gain, and no employee may compete with the Company directly or indirectly. Employees, officers and directors owe a duty to the Company to advance the Company’s legitimate interest when the opportunity to do so arises.

6.Competition and Fair Dealing

We seek to outperform our competition fairly and honestly. We seek competitive advantages through superior performance, never through unethical or illegal business practices. Stealing proprietary information, possessing trade secret information that was obtained without

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the owner’s consent, or inducing such disclosures by past or present employees of other companies is prohibited. Each employee, director and officer should endeavor to respect the rights of and deal fairly with the Company’s customers, suppliers, consultants, competitors and employees. No employee, director or officer should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other intentional unfair-dealing practice.

The purpose of business entertainment and gifts in a commercial setting is to create good will and sound working relationships, not to gain unfair advantage with customers. No gift or entertainment should ever be offered, given, provided or accepted by any Company employee, officer, director, family member of any of the foregoing or agent unless it:

•is not a cash gift,

•is consistent with customary business practices,

•is not excessive in value,

•cannot be construed as a bribe or payoff and does not create an appearance of impropriety, and

•is in compliance with the Company’s policy on gifts and gratuities and does not violate any laws or rules or regulations.

Please discuss with your Human Resources representative any gifts or proposed gifts which you are not certain are appropriate.

7.Discrimination and Harassment

The diversity of the Company’s employees is a tremendous asset. It is the Company’s policy to provide equal employment opportunity for all applicants and employees. The Company does not unlawfully discriminate on the basis of race, color, religion, sex (including pregnancy, childbirth, or related medical conditions), national origin, age, disability, marital status, veteran status, or any other basis prohibited under federal, state or local law. In addition, the Company is committed to providing a workplace free of unlawful harassment. This includes not only sexual harassment, but also harassment on any of the bases set forth above. The Company strongly disapproves of and will not tolerate harassment of employees by managers, supervisors, co-workers or non-employees. Similarly, the Company will not tolerate harassment by its employees of non-employees with whom Company employees have a business, service, or professional relationship. For information about the Company’s policies against discrimination and harassment, please refer to the Company’s Employee Handbook.

All of our employees deserve a positive work environment where they will be respected and we are committed to providing an environment that supports honesty, integrity, respect, trust and responsibility. All of our employees should contribute to the creation and maintenance of such an environment and our executive officers and management and supervisory personnel should take a leadership role in achieving a work environment that meets our diversity standards and is free from the fear of retribution.

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8.Health and Safety

The Company strives to provide each employee with a safe and healthful work environment. Each employee has a responsibility for maintaining a safe and healthy workplace for all employees by following safety and health rules and practices and reporting accidents, injuries and unsafe equipment, practices or conditions.

Violence and threatening behavior are not permitted and the use of illegal drugs or alcohol in the workplace will not be tolerated. Employees should report to work in condition to perform their duties, free from the influence of illegal drugs or alcohol.

9.Record-Keeping

The purpose of this policy is to set forth and convey the Company’s requirements in managing records, including all recorded information regardless of medium or characteristics. Records include paper documents, CDs, DVDs, computer hard disks, email, floppy disks, microfiche, microfilm or all other media. The Company requires honest and accurate recording and reporting of information in order to make responsible business decisions.

Many employees, officers and directors regularly use business expense accounts, which must be documented and recorded accurately. If you are not sure whether a certain expense is legitimate, ask your supervisor or contact the Company’s Controller. Please refer to the Company’s business travel policy for further information regarding business expenses.

The Company’s responsibilities to its shareholders and the investing public require that all of the Company’s books, records, accounts and financial statements must be maintained in reasonable detail, must appropriately reflect the Company’s transactions and must conform both to applicable legal requirements and to the Company’s system of internal controls and generally accepted accounting practices and principles. No one should rationalize or even consider misrepresenting facts or falsifying records. Unrecorded or “off the books” funds or assets should not be maintained unless permitted by applicable law or regulation.

Business records and communications often become public, and we should avoid exaggeration, derogatory remarks, guesswork, or inappropriate characterizations of people and companies that can be misunderstood. This applies equally to e-mail, internal memos, and formal reports. Records should always be retained or destroyed according to the Company’s record retention policies. No record or document shall be destroyed which is the subject of a subpoena or other legal process or if there is a reasonable belief that litigation proceedings or government investigative proceedings are likely to occur and it is anticipated that such record or document is relevant to such proceedings. All employees are expected to comply with all federal, state and industry-specific record retention rules and requirements as well as the Company’s record retention policies.

10.Confidentiality

Employees, directors and officers must maintain the confidentiality of confidential information entrusted to them by the Company or its customers, except when disclosure is authorized by the CEO or CFO or required by laws or regulations. Confidential information includes all non-public information that might be of use to competitors, or harmful

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to the Company or its customers, if disclosed. It also includes information that suppliers and customers have entrusted to us. The obligation to preserve confidential information continues even after employment ends.

The Company and its employees, agents, consultants and contractors must cooperate with appropriate government inquiries and investigations. In this context, however, it is important to protect the legal rights of the Company with respect to its confidential information. All government inquiries and requests for information, documents or investigative interviews (whether in person, by phone, email or written correspondence) must be referred to the General Counsel, who will be responsible for coordinating a response. No financial information may be disclosed without the prior approval of the CEO or CFO.

11.Protection and Proper Use of Company Assets

All employees, directors and officers should endeavor to protect the Company’s property, electronic communications systems, information resources, facilities and equipment and ensure their efficient use. Theft, carelessness, and waste have a direct impact on the Company’s profitability. Any suspected incident of fraud or theft should be immediately reported for investigation pursuant to Section 16 of this Code. Company assets should not be used for non-Company business, although we recognize that incidental personal use may be permitted without adversely affecting the interests of the Company. Personal use of Company assets must always be in accordance with Company policy. You should consult your Human Resources representative for appropriate guidance and permission.

The obligation of employees, directors and officers to protect the Company’s assets includes its proprietary information. Proprietary information includes intellectual property such as trade secrets, patents, trademarks and copyrights, as well as business, marketing and service plans, designs, databases, records, salary information and any unpublished financial data and reports. Unauthorized use or distribution of this information would violate Company policy. It could also be illegal and result in civil or even criminal penalties.

Unauthorized duplication of copyrighted documents or computer software violates the law. You must neither engage in nor tolerate the making or using of unauthorized documents or software copies and must comply will all license and purchase terms regulating the use of any document or software. The Company will provide all documents and software needed to meet legitimate needs.

12.Payments to Government Personnel

The U.S. Foreign Corrupt Practices Act prohibits giving anything of value, directly or indirectly, to officials of foreign governments or foreign political candidates in order to obtain or retain business. It is strictly prohibited to make illegal payments to government officials of any country.

In addition, there are a number of federal and state laws and regulations regarding business gratuities which may be accepted by U.S. or state government personnel. The promise, offer or delivery to an official or employee of the U.S. government or a state government of a gift, favor or other gratuity in violation of these rules would not only violate Company policy but

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could also be a criminal offense. Local governments, as well as foreign governments, may have similar rules. You must consult with the Legal Department prior to making any such gifts.

13.Waivers of the Code of Business Conduct and Ethics

Any waiver of any provision of this Code for executive officers or directors must be approved by the Audit Committee and will be promptly disclosed as required by applicable securities law or stock exchange regulation. With regard to employees who are not executive officers, waivers must be approved by the General Counsel.

14.Reporting any Illegal or Unethical Behavior; No Retaliation

It is your obligation and ethical responsibility to help enforce this Code, and to that end, you should promptly report violations of this Code in accordance with the guidelines set forth in Section 16 of this Code. Employees, directors and officers are encouraged to report to supervisors, managers or his or her Human Resources representative about observed or suspected illegal, improper or unethical behavior and when in doubt about the best course of action in a particular situation. You should know that reprisal, threats, retribution or retaliation against any person who has in good faith reported a violation or a suspected violation of law, this Code or other Company policies, or against any person who is assisting in any investigation or process with respect to such a violation, is both a violation of Company policy and is prohibited by a variety of state and federal civil and criminal laws including the Sarbanes-Oxley Act of 2002. Accordingly, it is the policy of the Company not to allow retaliation for reports of wrongdoing or misconduct by others made in good faith by employees. Employees, directors and officers are expected to cooperate in internal investigations of wrongdoing or misconduct.

15.Accounting Complaints

The Company’s policy is to comply with all applicable financial reporting and accounting regulations. If any director, officer or employee of the Company has unresolved concerns or complaints regarding questionable accounting, internal control or auditing matters of the Company, then he or she is encouraged to submit those concerns or complaints in accordance with the Company’s Complaint Procedures for Accounting and Auditing Matters.

16.Compliance Procedures

We must all work to ensure prompt and consistent action against violations of this Code. However, in some situations it is difficult to know right from wrong. Since we cannot anticipate every situation that will arise, you should keep in mind the following steps as you consider a particular problem or concern.

(a)Make sure you have all the facts. In order to reach the right solutions, we must be as fully informed as possible.

(b)Ask yourself:  What specifically am I being asked to do or ignore?  Does it seem illegal, unethical or improper?  This will enable you to focus on the specific question you

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are faced with, and the alternatives you have. Use your judgment and common sense; if something seems unethical or improper, it may very well be.

(c)Clarify your responsibility and role. In most situations, there is shared responsibility. Are your colleagues informed?  It may help to get others involved and discuss your concerns.

(d)You should report violations of this Code to or otherwise discuss your concerns in this regard with your supervisor or your Human Resources representative. In many cases, your supervisor will be more knowledgeable about the question or concern, and will appreciate being brought into the decision-making process. Remember that it is your supervisor’s responsibility to help solve problems. Supervisors and Human Resources representatives are obligated to report violations of this Code to the General Counsel.

(e)In the case where it may not be appropriate to report a violation to or discuss your concerns with your supervisor or your Human Resources representative, or where you do not feel comfortable approaching your supervisor to report a violation or discuss your concerns, you may report the violation or discuss your concerns with the General Counsel. If you prefer to report violations or your concerns in writing, on an anonymous basis, please address your concerns to our General Counsel at the following address:  FairPoint Communications, Inc., 521 East Morehead Street, Suite 250, Charlotte, NC 28202, Attention: Shirley J. Linn.

(f)You may also report any violations of this Code on an anonymous and confidential basis through the EthicsPoint Hotline link set forth on the intranet and on our website or by calling the EthicsPoint Hotline at 866-294-9318. Your report will be sent to the Company’s Audit Committee and General Counsel on a no-name basis unless you grant permission for your identity to be revealed.

(g)Reports of violations of this Code or other complaints made to the EthicsPoint Hotline or to the persons referenced above will be reviewed by the General Counsel or her designee, who shall either (i) conduct an investigation of the facts and circumstances as she deems appropriate and report her conclusions and remedial actions taken, if any, to the Audit Committee or (ii) report the alleged violation or other complaint to the Audit Committee for further direction. The Chairperson of the Audit Committee will also receive all EthicsPoint Hotline reports directly from EthicsPoint.

(h)Your communications of violations or concerns will be kept confidential to the extent feasible and appropriate, and except as required by law.

(i)All reports of violations of the Code will be promptly investigated and addressed. If you are not satisfied with the response, you may contact the Audit Committee directly.

(j)Always ask first, act later:  If you are unsure of what to do in any situation, seek guidance before you act.

17.Compliance Required

The matters covered in this Code are of the utmost importance to the Company, its shareholders and its business partners, and are essential to the Company’s ability to conduct

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its business in accordance with its stated values. We expect all of our directors, officers, employees, agents, contractors, consultants and representatives to adhere to these rules in carrying out their duties for the Company.

Any individual whose actions are found to violate these policies or any other policies of the Company will be subject to disciplinary action, up to and including immediate termination of employment or business relationship. Where the Company has suffered a loss, it may pursue its legal remedies against the individuals or entities responsible.

18.Administration

No code, including this one, can cover all situations. Similarly, exceptional circumstances may occur which do not fit neatly within the guidelines of this Code or where strict application of this Code may not produce a fair result. Overall administration of this Code including its interpretation and amendment is under the authority of the Audit Committee of the Board.

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EXHIBIT A

ACKNOWLEDGMENT OF RECEIPT OF CODE

OF BUSINESS CONDUCT AND ETHICS

I have received and read the Company’s Code of Business Conduct and Ethics (the “Code”). I understand the standards and policies contained in the Code and understand that there may be additional policies or laws specific to my position as an employee, officer or director of the Company. I further agree to comply with the Code.

If I have questions concerning the meaning or application of the Code, any Company policies, or the legal and regulatory requirements applicable to my position, I know I can consult my supervisor, my Human Resources representative or the Legal Department, knowing that my questions or reports to these sources will be maintained in confidence to the extent feasible and appropriate.

Employee Name

Signature

Date

Please sign and return this form to [                       ].

EX-21

EXHIBIT 21

FAIRPOINT COMMUNICATIONS, INC.
(formerly known as MJD Communications, Inc.)
SUBSIDIARIES

Name	Jurisdiction of Incorporation
ST Enterprises, Ltd.	Kansas
STE/NE Acquisition Corp. (d/b/a Northland
Telephone Co. of Vermont)	Delaware
Sunflower Telephone Company, Inc.	Kansas
Northland Telephone Company of Maine, Inc.	Maine
ST Computer Resources, Inc.	Kansas
ST Long Distance, Inc.	Delaware
MJD Ventures, Inc.	Delaware
Marianna and Scenery Hill Telephone Company	Pennsylvania
Marianna Tel, Inc.	Pennsylvania
Bentleyville Communications Corporation	Pennsylvania
BE Mobile Communications, Incorporated	Pennsylvania
The Columbus Grove Telephone Company	Ohio
Quality One Technologies, Inc.	Ohio
C-R Communications, Inc.	Illinois
C-R Telephone Company	Illinois
C-R Long Distance, Inc.	Illinois
Taconic Telephone Corp.	New York
Taconic Cellular Corp.	New York
Taconic Technology Corp.	New York
Taconic TelCom Corp.	New York
Taconet Wireless Corp.	New York
Ellensburg Telephone Company	Washington
Elltel Long Distance Corp.	Delaware
Sidney Telephone Company	Maine
Utilities, Inc.	Maine
Standish Telephone Company	Maine
China Telephone Company	Maine
Maine Telephone Company	Maine
UI Long Distance, Inc.	Maine
UI Communications, Inc.	Maine
UI Telecom, Inc.	Maine
Telephone Service Company	Maine
Chouteau Telephone Company	Oklahoma
Chautauqua and Erie Telephone Corporation	New York
Chautauqua & Erie Communications, Inc.
(d/b/a C& E Teleadvantage)	New York
Chautauqua & Erie Network, Inc.	New York
C & E Communications, Ltd.	New York

The Orwell Telephone Company	Ohio
Orwell Communications, Inc.	Ohio
GTC Communications, Inc. (f/k/a TPG Communications, Inc.)	Delaware
St. Joe Communications, Inc.	Florida
GTC, Inc.	Florida
GTC Finance Corporation (f/k/a TPGC Finance
Corporation)	Delaware
Peoples Mutual Telephone Company	Virginia
Peoples Mutual Services Company	Virginia
Peoples Mutual Long Distance Company	Virginia
Fremont Telcom Co.	Idaho
Fremont Broadband, LLC	Delaware
Fretel Communications, LLC	Idaho
Comerco, Inc.	Washington
YCOM Networks, Inc.	Washington
Berkshire Telephone Corporation	New York
Berkshire Cable Corp.	New York
Berkshire Net, Inc.	New York
Berkshire Cellular, Inc.	New York
Berkshire New York Access, Inc.	New York
Community Service Telephone Co.	Maine
Commtel Communications Inc.	Maine
MJD Services Corp.	Delaware
Bluestem Telephone Company	Delaware
Big Sandy Telecom, Inc.	Delaware
FairPoint Communications Missouri, Inc.	Missouri
Odin Telephone Exchange, Inc.	Illinois
Columbine Telecom Company (f/k/a Columbine Acquisition Corp.)	Delaware
Ravenswood Communications, Inc.	Illinois
The El Paso Telephone Company	Illinois
El Paso Long Distance Company	Illinois
Yates City Telephone Company	Illinois
FairPoint Carrier Services, Inc.	Delaware
(f/k/a FairPoint Communications Solutions Corp., f/k/a FairPoint Communications Corp.)
FairPoint Communications Solutions Corp.—New York	Delaware
FairPoint Communications Solutions Corp.—Virginia	Virginia
FairPoint Broadband, Inc.	Delaware
MJD Capital Corp.	South Dakota

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors
FairPoint Communications, Inc.:

We consent to the incorporation by reference in the registration statements on Form S-8 (No. 333-122809) and on Form S-3 (Nos. 333-127759 and 333-127760) of FairPoint Communications, Inc., and in the related prospectuses, of our report dated March 13, 2006 with respect to the consolidated balance sheets of FairPoint Communications, Inc. and subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity (deficit), comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2005, which report appears in the December 31, 2005 annual report on Form 10-K of FairPoint Communications, Inc. Our report refers to the Company’s adoption of Statement of Financial Accounting Standards (SFAS) No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, effective July 1, 2003.

/s/ KPMG LLP

Omaha, Nebraska
March 13, 2006

EX-23.2

EXHIBIT 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements No. 333-122809 on Form S-8, and Nos. 333-127759 and 333-127760 on Form S-3 of FairPoint Communications, Inc. of our report relating to the financial statements of Orange County-Poughkeepsie Limited Partnership as of December 31, 2005 and 2004 and for each of the three years in the period ended December 31, 2005, dated March 13, 2006, (which report expresses an unqualified opinion and includes an explanatory paragraph regarding affiliate revenues) appearing in this Annual Report on Form 10-K of FairPoint Communications, Inc. for the year ended December 31, 2005.

/s/ Deloitte & Touche LLP

New York, New York
March 13, 2006

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Eugene B. Johnson, certify that:

1.I have reviewed this annual report on Form 10-K of FairPoint Communications, Inc. (the “Company”);

2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report;

4.The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”) rule 13a-15(e) and 15d-15(e)) for the Company and we have:

(i)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report was being prepared;

(ii)evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report; and

(iii)disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5.The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of Company’s board of directors (or persons performing the equivalent function):

(i)all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonable likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(ii)any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls over financial reporting.

Date: March 13, 2006

/s/ Eugene B. Johnson

Eugene B. Johnson

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, John P. Crowley, certify that:

1.I have reviewed this annual report on Form 10-K of FairPoint Communications, Inc. (the “Company”);

2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report;

4.The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”) rule 13a ¾15(e) and 15d-15(e)) for the Company and we have:

(i)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report was being prepared;

(ii)evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report; and

(iii)disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5.The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of Company’s board of directors (or persons performing the equivalent function):

(i)all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonable likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(ii)any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls over financial reporting.

Date: March 13, 2006

/s/ John P. Crowley

John P. Crowley

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of FairPoint Communications, Inc. (the “Company”) for the year ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Eugene B. Johnson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1.The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Eugene B. Johnson

Eugene B. Johnson

Chief Executive Officer

March 13, 2006

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of FairPoint Communications, Inc. (the “Company”) for the year ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John P. Crowley, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1.The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ John P. Crowley

John P. Crowley

Chief  Financial Officer

March 13, 2006

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-99.1

Exhibit 99.1

Orange County - Poughkeepsie
Limited Partnership

Report of Independent Registered Public Accounting Firm

Financial Statements

Years Ended December 31, 2005, 2004 and 2003

ORANGE COUNTY -

POUGHKEEPSIE LIMITED PARTNERSHIP

TABLE OF CONTENTS

		Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		1
	Balance Sheets	2
	December 31, 2005 and 2004
	Statements of Operations	3
	For the years ended December 31, 2005, 2004 and 2003
	Statements of Changes in Partners’ Capital	4
	For the years ended December 31, 2005, 2004 and 2003
	Statements of Cash Flows	5
	For the years ended December 31, 2005, 2004 and 2003
	Notes to Financial Statements	6-13

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Partners of Orange County-Poughkeepsie Limited Partnership:

We have audited the accompanying consolidated balance sheets of Orange County-Poughkeepsie Limited Partnership (the “Partnership”), a majority owned partnership of Cellco Partnership d/b/a Verizon Wireless, as of December 31, 2005 and 2004, and the related consolidated statements of operations, changes in partners’ capital, and cash flows for each of the three years in the period ended December 31, 2005.  These financial statements are the responsibility of the Partnership’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Partnership as of December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Notes 2 and 4 to the financial statements, approximately 98% of the Partnership’s revenue in each of the three years in the period ended December 31, 2005 is affiliate revenue.

/s/ Deloitte & Touche LLP

New York, New York
March 13, 2006

2

ORANGE COUNTY - POUGHKEEPSIE LIMITED PARTNERSHIP

BALANCE SHEETS

DECEMBER 31, 2005 AND 2004

(Dollars in Thousands)

	2005		2004
ASSETS
CURRENT ASSETS:
Accounts receivable, net of allowance of $0 and $0	$	254	$	244
Unbilled affiliate revenue	1,599		1,249
Due from general partner	7,802		—
Prepaid expenses and other current assets	157		52
Total current assets	9,812		1,545
PROPERTY, PLANT AND EQUIPMENT - Net	37,516		34,525
TOTAL ASSETS	$	47,328	$	36,070
LIABILITIES AND PARTNERS’ CAPITAL
CURRENT LIABILITIES:
Accounts payable and accrued liabilities	$	171	$	436
Advance billings	261		144
Due to general partner	—		3,102
Total current liabilities	432		3,682
COMMITMENTS AND CONTINGENCIES (NOTES 5 and 7)
PARTNERS’ CAPITAL	46,896		32,388
TOTAL LIABILITIES AND PARTNERS’ CAPITAL	$	47,328	$	36,070

See notes to financial statements.

3

ORANGE COUNTY - POUGHKEEPSIE LIMITED PARTNERSHIP

STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

(Dollars in Thousands)

	2005		2004		2003
OPERATING REVENUE (NOTES 2 and 4):
Service revenues	$	180,508	$	163,367	$	144,643
OPERATING COSTS AND EXPENSES (NOTE 4):
Cost of service (excluding depreciation and amortization related to network assets included below)	25,292		16,854		17,248
General and administrative	2,142		2,242		2,123
Depreciation and amortization	6,347		5,521		5,179
Net loss (gain) on sale of property, plant and equipment	1		60		(3		)
Total operating costs and expenses	33,782		24,677		24,547
OPERATING INCOME	146,726		138,690		120,096
INTEREST AND OTHER INCOME - Net	782		980		1,472
NET INCOME	$	147,508	$	139,670	$	121,568
Allocation of Net Income:
Limited partners	$	22,126	$	20,950	$	18,236
General partners	125,382		118,720		103,332

See notes to financial statements.

4

ORANGE COUNTY - POUGHKEEPSIE LIMITED PARTNERSHIP

STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL

YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

(Dollars in Thousands)

	General Partner			Limited Partners
							Warwick
	Verizon			Taconic			Valley			Total
	Wireless			Telephone			Telephone			Partners’
	of the East LP			Corporation			Company			Capital
BALANCE, JANUARY 1, 2003	$	53,678		$	4,736		$	4,736		$	63,150
Net income	103,332			9,118			9,118			121,568
Distribution to partners	(114,750		)	(10,125		)	(10,125		)	(135,000		)
BALANCE, DECEMBER 31, 2003	42,260			3,729			3,729			49,718
Net income	118,720			10,475			10,475			139,670
Distribution to partners	(133,450		)	(11,775		)	(11,775		)	(157,000		)
BALANCE, DECEMBER 31, 2004	27,530			2,429			2,429			32,388
Net income	125,382			11,063			11,063			147,508
Distribution to partners	(113,050		)	(9,975		)	(9,975		)	(133,000		)
BALANCE, DECEMBER 31, 2005	$	39,862		$	3,517		$	3,517		$	46,896

See notes to financial statements.

5

ORANGE COUNTY - POUGHKEEPSIE LIMITED PARTNERSHIP

STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

(Dollars in Thousands)

	2005			2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	147,508		$	139,670		$	121,568
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for losses on accounts receivable	—			—			30
Depreciation and amortization	6,347			5,521			5,179
Net loss / (gain) on sale of property, plant and equipment	1			60			(3		)
Changes in certain assets and liabilities:
Accounts receivable	(10		)	(171		)	14
Unbilled revenue	(350		)	(383		)	259
Prepaid expenses and other current assets	(105		)	(3		)	(13		)
Accounts payable and accrued liabilities	(5		)	88			(887		)
Advance billings and other current liabilities	117			(166		)	63
Net cash provided by operating activities	153,503			144,616			126,210
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, including purchases from affiliates, net	(9,599		)	(10,484		)	(5,325		)
Change in due from General Partner	(7,802		)	19,766			14,115
Net cash used in / (provided by) investing activities	(17,401		)	9,282			8,790
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in due to General Partner	(3,102		)	3,102			—
Distribution to partners	(133,000		)	(157,000		)	(135,000		)
Net cash used in financing activities	(136,102		)	(153,898		)	(135,000		)
INCREASE IN CASH	—			—			—
CASH, BEGINNING OF YEAR	—			—			—
CASH, END OF YEAR	$	—		$	—		$	—

See notes to financial statements.

6

ORANGE COUNTY - POUGHKEEPSIE LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

(Dollars in Thousands)

1.ORGANIZATION AND MANAGEMENT

Orange County - Poughkeepsie Limited Partnership - Orange County - Poughkeepsie LimitedPartnership (the “Partnership”) was formed in 1987. The principal activity of the Partnership is providing wholesale cellular service to resellers who operate principally in the Orange County and Poughkeepsie, New York metropolitan service areas.

The partners and their respective ownership percentages as of December 31, 2005, 2004 and 2003 are as follows:

Managing and general partner:
Verizon Wireless of the East LP*	85.0	%
Limited partners:
Taconic Telephone Corporation (“Taconic”)	7.5	%
Warwick Valley Telephone Company (“Warwick”)	7.5	%

*  Verizon Wireless of the East LP (the “General Partner”) is a partnership between Verizon Wireless of Georgia LLC and Verizon Wireless Acquisition South LLC, which hold a controlling interest, and Price Communications which has a preferred interest. Verizon Wireless of the East LP is a partnership which is consolidated by Cellco Partnership (d/b/a Verizon Wireless) (“Cellco”).

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are used for, but not limited to, the accounting for: allocations, allowance for uncollectible accounts receivable, unbilled revenue, fair value of financial instruments, depreciation and amortization, useful lives and impairment of assets, accrued expenses, taxes, and contingencies. Estimates and assumptions are periodically reviewed and the effects of any material revisions are reflected in the financial statements in the period that they are determined to be necessary.

Revenue Recognition - The Partnership earns revenue by providing access to the network (access revenue) and for usage of the network (airtime/usage revenue), which includes roaming and long distance revenue. In general, access revenue is billed one month in advance and is recognized when earned; the unearned portion is classified in advance billings. Airtime/usage revenue, roaming revenue and long distance revenue are recognized when service is rendered and included in unbilled revenue until billed. The roaming rates charged by the Partnership to Cellco do not necessarily reflect current market rates.

7

The Partnership will continue to re-evaluate the rates on a periodic basis (see Note 4). The Partnership’s revenue recognition policies are in accordance with the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements and Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition.

Approximately 98% of the Partnership’s 2005, 2004 and 2003 revenue is affiliate revenue due to the fact that Cellco is the Partnership’s primary reseller. The wholesale rates charged to Cellco do not necessarily reflect current market rates. The Partnership continues to re-evaluate the rates and expects these rates to be reduced in the future consistent with market trends and the terms of the limited partnership agreement (See Note 4).

Cellular service revenues resulting from a cellsite agreement with Cellco are recognized based upon an allocation of airtime minutes (See Note 4).

Operating Costs and Expenses - Operating costs and expenses include costs and expenses incurred directly by the Partnership, as well as an allocation of certain administrative and operating costs incurred by the General Partner or its affiliates on behalf of the Partnership. Services performed on behalf of the Partnership are provided by employees of Cellco. These employees are not employees of the Partnership and therefore, operating expenses include direct and allocated charges of salary and employee benefit costs for the services provided to the Partnership. The Partnership believes such allocations, principally based on the Partnership’s percentage of total customers, customer gross additions, or minutes-of-use, are reasonable.

Property, Plant and Equipment - Property, plant and equipment primarily represents costs incurred to construct and expand capacity and network coverage on Mobile Telephone Switching Offices (“MTSOs”) and cell sites. The cost of property, plant and equipment is depreciated over its estimated useful life using the straight-line method of accounting. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the related lease. Major improvements to existing plant and equipment are capitalized. Routine maintenance and repairs that do not extend the life of the plant and equipment are charged to expense as incurred.

Upon the sale or retirement of property, plant and equipment, the cost and related accumulated depreciation or amortization is eliminated from the accounts and any related gain or loss is reflected in the Statements of Operations.

Network engineering costs incurred during the construction phase of the Partnership’s network and real estate properties under development are capitalized as part of property, plant and equipment and recorded as construction in progress until the projects are completed and placed into service.

FCC Licenses - The Federal Communications Commission (“FCC”) issues licenses that authorize cellular carriers to provide service in specific cellular geographic service areas. The FCC grants licenses for terms of up to ten years. In 1993 the FCC adopted specific standards to apply to cellular renewals, concluding it will reward a license renewal to a cellular licensee that meets certain standards of past performance. Historically, the FCC has granted license renewals routinely. All wireless licenses issued by the FCC that authorize the Partnership to provide cellular services are recorded on the books of Cellco. The current term of the Partnership’s FCC licenses expire in January 2008. Cellco believes it will be able to meet all requirements necessary to secure renewal of the Partnership’s wireless licenses.

Valuation of Assets – Long-lived assets, including property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.

8

The impairment loss, if determined to be necessary, would be measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset.

As discussed above, the FCC license under which the Partnership operates is recorded on the books of Cellco. Cellco does not charge the Partnership for the use of any FCC license recorded on its books. However, Cellco believes that under the Partnership agreement it has the right to allocate, based on a reasonable methodology, any impairment loss recognized by Cellco for all licenses included in Cellco’s national footprint. Accordingly, the FCC licenses, including the license under which the Partnership operates, recorded on the books of Cellco are evaluated for impairment by Cellco, under the guidance set forth in Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.”

The FCC licenses are treated as an indefinite life intangible asset on the books of Cellco under the provisions of SFAS No. 142 and are not amortized, but rather are tested for impairment annually or between annual dates, if events or circumstances warrant. All of the licenses in Cellco’s nationwide footprint are tested in the aggregate for impairment under SFAS No. 142. When testing the carrying value of the wireless licenses in 2004 and 2003 for impairment, Cellco determined the fair value of the aggregated wireless licenses by subtracting from enterprise discounted cash flows (net of debt) the fair value of all of the other net tangible and intangible assets of Cellco, including previously unrecognized intangible assets. This approach is generally referred to as the residual method. In addition, the fair value of the aggregated wireless licenses was then subjected to a reasonableness analysis using public information of comparable wireless carriers. If the fair value of the aggregated wireless licenses as determined above was less than the aggregated carrying amount of the licenses, an impairment would have been recognized by Cellco and then may have been allocated to the Partnership. During 2004 and 2003, tests for impairment were performed with no impairment recognized.

On September 29, 2004, the SEC issued a Staff Announcement No. D-108, “Use of the Residual Method to Value Acquired Assets other than Goodwill.” This Staff Announcement requires SEC registrants to adopt a direct value method of assigning value to intangible assets, including wireless licenses, acquired in a business combination under SFAS No. 141, “Business Combinations,” effective for all business combinations completed after September 29, 2004. Further, all intangible assets, including wireless licenses, valued under the residual method prior to this adoption are required to be tested for impairment using a direct value method no later than the beginning of 2005. Any impairment of intangible assets recognized upon application of a direct value method by entities previously applying the residual method should be reported as a cumulative effect of a change in accounting principle. Under this Staff Announcement, the reclassification of recorded balances from wireless licenses to goodwill prior to the adoption of this Staff Announcement is prohibited.

Cellco evaluated its wireless licenses for potential impairment using a direct value methodology as of January 1, 2005 and December 15, 2005 in accordance with SEC Staff Announcement No. D-108. The valuation and analyses prepared in connection with the adoption of a direct value method and subsequent revaluation resulted in no adjustment to the carrying value of Cellco’s wireless licenses and, accordingly, had no effect on its financial statements. Future tests for impairment will be performed at least annually and more often if events or circumstances warrant.

Concentrations - - To the extent the Partnership’s customer receivables become delinquent, collection activities commence. The General Partner accounts for 83.8% and 80.4% of the accounts receivable balance at December 31, 2005, and 2004 respectively. The Partnership maintains an allowance for losses, as necessary, based on the expected collectibility of accounts receivable.

Approximately 98% of the Partnership’s 2005, 2004 and 2003 revenue is affiliate revenue.

The General Partner relies on local and long-distance telephone companies, some of whom are related parties, and other companies to provide certain communication services. Although management believes

9

alternative telecommunications facilities could be found in a timely manner, any disruption of these services could potentially have an adverse impact on the Partnership’s operating results.

Although the General Partner attempts to maintain multiple vendors for equipment, which are important components of its operations, they are currently acquired from only a few sources. Certain of these products are in turn utilized by the Partnership and are important components of the Partnership’s operations. If the suppliers are unable to meet the General Partner’s needs as it builds out its network infrastructure and sells service, delays and increased costs in the expansion of the Partnership’s network infrastructure or losses of potential customers could result, which would adversely affect operating results.

Financial Instruments - The Partnership’s trade receivables and payables are short-term in nature, and accordingly, their carrying value approximates fair value.

Income Taxes - The Partnership is not a taxable entity for Federal and state income tax purposes. Any taxable income or loss is apportioned to the partners based on their respective partnership interests and is reported by them individually.

Segments – The Partnership has one reportable business segment and operates domestically only. The Partnership’s products and services are materially comprised of wireless telecommunications services.

Due to/from General Partner - Due to/from General Partner principally represents the Partnership’s cash position. The General Partner manages all cash, investing and financing activities of the Partnership. As such, the change in Due from General Partners is reflected as an investing activity in the Statements of Cash Flows while the change in Due to General Partner is reflected as a financing activity. The Partnership reclassified its 2004 and 2003 Statements of Cash Flows to conform to the 2005 presentation. Additionally, administrative and operating costs incurred by the General Partner on behalf of the Partnership are charged to the Partnership through this account. Interest expense/income is based on the average monthly outstanding balance in this account and is calculated by applying Cellco’s average cost of borrowing from Verizon Global Funding, a wholly owned subsidiary of Verizon Communications. The cost of borrowing was approximately 4.8%, 5.9%, and 5.0% for the years ended December 31, 2005, 2004 and 2003, respectively. Included in Interest and Other Income, Net is net interest income related to the Due from General Partner balance of $782, $980 and $1,472 for the years ended December 31, 2005, 2004 and 2003, respectively.

Recently Issued Accounting Pronouncements - In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations – an interpretation of SFAS No. 143.” This interpretation clarifies that the term “conditional asset retirement obligation” refers to a legal obligation to perform a future asset retirement when uncertainty exists about the timing and/or method of settlement of the obligation. Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists, as defined by the interpretation. An entity is required to recognize a liability for the fair value of the obligation if the fair value of the liability can be reasonably estimated. The Partnership adopted the interpretation on December 31, 2005. The adoption of this interpretation of SFAS No. 143 did not have a material impact on the Partnership’s financial statements.

Distributions – The Partnership is required to make distributions to its partners on a quarterly basis based upon the Partnership’s operating results, cash availability and financing needs as determined by the General Partner at the date of the distribution.

10

3.PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net, consists of the following as of December 31, 2005 and 2004:

	Useful Lives	2005			2004
Buildings	10-40 years	$	13,408		$	11,223
Wireless plant equipment	3-15 years	58,087			51,940
Furniture, fixtures and equipment	2-5 years	303			361
Leasehold Improvements	5 years	2,149			1,725
		73,947			65,249
Less accumulated depreciation		(36,431		)	(30,724		)
Property, plant and equipment, net		$	37,516		$	34,525

Capitalized network engineering costs of $406 and $245 were recorded during the years ended December 31, 2005 and 2004, respectively. Construction-in-progress included in certain of the classifications shown above, principally wireless plant equipment, amounted to $2,368 and $1,767 at December 31, 2005 and 2004, respectively. Depreciation expense for the years ended December 31, 2005, 2004 and 2003 was $6,347, $5,521 and $5,179, respectively.

4.TRANSACTIONS WITH AFFILIATES

Significant transactions with affiliates (Cellco and its related entities), including allocations and direct charges, are summarized as follows for the years ended December 31, 2005, 2004 and 2003:

	2005		2004		2003
Revenue:
Operating revenues (b)	$	176,310	$	158,571	$	138,796
Cellsite allocated revenues (c)	1,377		1,506		2,963
Cost of Service:
Direct telecommunication charges (a)	6,355		1,697		274
Long distance charges	8,208		5,580		4,971
Allocation of cost of service (a)	3,364		3,360		3,315
Allocation of switch usage cost (a)	5,519		4,705		7,256
Selling, General and Administrative:
Allocation of certain general and administrative expenses (a)	1,672		2,198		1,797

(a) Expenses were allocated based on the Partnership’s percentage of total customers, customer gross additions or minutes-of-use where applicable. The Partnership believes the allocations are reasonable.

(b) Affiliate operating revenues primarily represent revenues generated from transactions with Cellco, the Partnership’s primary reseller. The wholesale rates charged to Cellco do not necessarily reflect current market rates. The Partnership continues to re-evaluate the rates and expects these rates to be reduced in the future consistent with market trends and the terms of the limited partnership agreement.

(c) Cellsite allocated revenues, based on the Partnership’s percentage of minutes of use, result from the Partnership sharing a cell site with the Catskills RSA Limited Partnership, an affiliate entity.

All affiliate transactions captured above are based on actual amounts directly incurred by Cellco on behalf of the Partnership and/or allocations from Cellco. Revenues and expenses were allocated based on the Partnership’s percentage of total customers, gross customer additions or minutes of use where

11

applicable. The General Partner believes the allocations are reasonable. The affiliate transactions are not necessarily conducted at arm’s length.

The Partnership had net purchases of plant, property, and equipment with affiliates of $4,738, $7,245 and $3,935 in 2005, 2004 and 2003, respectively.

5.COMMITMENTS

The General Partner, on behalf of the Partnership, and the Partnership itself have entered into operating leases for facilities and equipment used in its operations. Lease contracts include renewal options that include rent expense adjustments based on the Consumer Price Index as well as annual and end-of-lease term adjustments. Rent expense is recorded on a straight-line basis. The noncancellable lease term used to calculate the amount of the straight-line rent expense is generally determined to be the initial lease term, including any optional renewal terms that are reasonably assured. Leasehold improvements related to these operating leases are amortized over the shorter of their estimated useful lives or the noncancellable lease term. For the years ended December 31, 2005, 2004 and 2003, the Partnership recognized a total of $1,845, $1,446 and $1,234, respectively, as rent expense related to payments under these operating leases, which was included in cost of service and general and administrative expenses in the accompanying Statements of Operations.

Aggregate future minimum rental commitments under noncancelable operating leases, excluding renewal options that are not reasonably assured, for the years shown are as follows:

Years	Amount
2006	$	1,612
2007	1,468
2008	1,370
2009	798
2010	186
2011 and thereafter	372
Total minimum payments	$	5,806

From time to time the General Partner enters into purchase commitments, primarily for network equipment, on behalf of the Partnership.

6.VALUATION AND QUALIFYING ACCOUNTS

	Balance at		Additions		Write-offs			Balance at
	Beginning		Charged to		Net of			End
	of the Year		Operations		Recoveries			of the Year
Accounts Receivable Allowances:
2005	$	—	$	—	$	—		$	—
2004	$	20	$	—	$	(20	)	$	—
2003	1		49		(30		)	20

7.CONTINGENCIES

Cellco is subject to various lawsuits and other claims including class actions, product liability, patent infringement, antitrust, partnership disputes, and claims involving relations with resellers and agents.

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Cellco is also defending lawsuits filed against itself and other participants in the wireless industry alleging various adverse effects as a result of wireless phone usage. Various consumer class action lawsuits allege that Cellco breached contracts with consumers, violated certain state consumer protection laws and other statutes and defrauded customers through concealed or misleading billing practices. Certain of these lawsuits and other claims may impact the Partnership. These litigation matters may involve indemnification obligations by third parties and/or affiliated parties covering all or part of any potential damage awards against Cellco and the Partnership and/or insurance coverage. Attorney Generals in a number of states also are investigating certain sales, marketing and advertising practices. All of the above matters are subject to many uncertainties, and outcomes are not predictable with assurance.

The Partnership may be allocated a portion of the damages that may result upon adjudication of these matters if the claimants prevail in their actions. Consequently, the ultimate liability with respect to these matters at December 31, 2005 cannot be ascertained. The potential effect, if any, on the financial condition and results of operations of the Partnership, in the period in which these matters are resolved, may be material.

In addition to the aforementioned matters, Cellco is subject to various other legal actions and claims in the normal course of business. While Cellco’s legal counsel cannot give assurance as to the outcome of each of these matters, in management’s opinion, based on the advice of such legal counsel, the ultimate liability with respect to any of these actions, or all of them combined, will not materially affect the financial statements of the Partnership.

******

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