Commonwealth Telephone Enterprises, Inc.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes ¨ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No

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. x Yes ¨ No

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes x No

Number of shares of the Registrant’s Stock ($1.00 par value) outstanding at January 31, 2007:

Aggregate market value of Registrant’s voting stock held by non-affiliates at June 30, 2006 computed by reference to the closing price as reported by Nasdaq for Common Stock ($33.16 per share), is as follows:

The market value is based on the value of the Common Stock that was outstanding on June 30, 2006.

“CTE,” “the Company,” “we,” “us” and “our” refer to Commonwealth Telephone Enterprises, Inc.

“Our RLEC” and “CT” refer to Commonwealth Telephone Company, a rural incumbent local exchange carrier and a subsidiary of Commonwealth Telephone Enterprises, Inc.

The segment “CT” includes the results of our RLEC; Commonwealth Long Distance Company (“CLD”), a long-distance reseller; and the portion of our broadband data service that uses digital subscriber line (“DSL”) technology to offer high-speed Internet access, that is in CT’s territory.

“Our CLEC,” “RLEC ‘edge-out’ ” and “CTSI” refer to CTSI, LLC, a competitive local exchange carrier and a subsidiary of Commonwealth Telephone Company.

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act and we intend that such forward-looking statements be subject to these safe harbors. These statements are generally accompanied by words such as “intend,” “anticipate,” “believe,” “estimate,” “expect” or similar statements. Our forward-looking statements involve risks and uncertainties that could significantly affect expected results in the future differently than expressed in any forward-looking statements we have made. These risks and uncertainties include, but are not limited to:

Additional factors that could cause or contribute to such differences are set forth in the section entitled “Risk Factors” and are discussed elsewhere in this report. Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could prove inaccurate; and therefore, we cannot provide any assurance that the results contemplated in such forward-looking statements will be realized. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future events, plans or expectations that we contemplate will be achieved. Furthermore, past performance in operations and share price is not necessarily predictive of future performance.

We are a telecommunications company providing telephony and related services in Pennsylvania markets as a rural incumbent local exchange carrier, or RLEC. We also operate as a competitive local exchange carrier, or CLEC, in three regional Pennsylvania markets that border CT’s markets, which we refer to as our RLEC “edge-out” markets. CT is the nation’s seventh largest non-Bell incumbent local exchange carrier, serving over 309,200 switched access lines as of December 31, 2006. CTSI served over 142,600 competitive switched access lines as of December 31, 2006. For the years ended December 31, 2006 and 2005, we had consolidated revenues of $330.6 million and $333.9 million, respectively.

CT, founded in 1897, operates in a rural, approximately 5,000-square-mile territory with a population of approximately 450,000 people, and a line density of approximately 62 access lines per square mile. Approximately three quarters of CT’s switched access lines serve residential customers. CT generated revenues of $228.9 million and $228.5 million, and operating income of $122.1 million and $111.9 million for the years ended December 31, 2006 and 2005, respectively. CT ranks among the industry leaders in penetration of residential additional lines. CT’s penetration of residential additional lines was 30% at December 31, 2006. Our residential additional line penetration rate is decreasing, partially as a result of our digital subscriber line (“DSL”) success. We continue to counter residential additional line erosion with bundled service offerings, some of which include an additional line as part of the bundle.

CTSI formally began operating in our “edge-out” markets in 1997 and currently provides a full array of competitive voice and data telecommunications services mainly to business customers. CTSI serves the three regional Pennsylvania “edge-out” markets of Wilkes-Barre/Scranton/Hazleton, Harrisburg and Lancaster/

Reading/York. In the “edge-out” markets, CTSI generated revenues of $82.9 million and $86.5 million, and operating income of $9.2 million and $12.9 million for the years ended December 31, 2006 and 2005, respectively.

We also own and operate other telecommunications-related support businesses that all operate in deregulated segments of the telecommunications industry and that support the operations of our two primary operating companies. These businesses are epix^{^®} Internet Services, one of the northeast’s largest rural dial-up Internet service providers with approximately 16,500 dial-up Internet access subscribers as of December 31, 2006; and Commonwealth Communications, a provider of telecommunications equipment and facilities management services. Our “Other” business segment includes these support businesses, as well as our corporate entity. Financial information about our segments is included in Note 3 of Notes to Consolidated Financial Statements on page F-37 to F-38 of this report.

A web site featuring current information regarding Commonwealth Telephone Enterprises, Inc. can be found on the Internet at www.ct-enterprises.com. However, the information on our web site is not part of this annual report. Our periodic and current reports are available on our web site as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission.

On September 17, 2006, CTE entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Citizens Communications Company (“Citizens”) and CF Merger Corp., a wholly-owned subsidiary of Citizens, pursuant to which CF Merger Corp. will merge with and into CTE, with CTE surviving as a wholly-owned subsidiary of Citizens.

Under the terms of the Merger Agreement, Citizens will acquire CTE in a cash-and-stock taxable transaction pursuant to which each outstanding CTE common share will be converted into the right to receive $31.31 in cash, without interest, and 0.768 shares of Citizens’ common stock.

On or about December 22, 2006, CTE distributed to all shareholders of record as of December 19, 2006, a definitive proxy statement/prospectus relating to a special meeting of shareholders, which was held on January 25, 2007 to consider and vote on the adoption of the Merger Agreement. At the special meeting, the shareholders adopted the Merger Agreement.

The completion of the merger is subject to the satisfaction of certain customary closing conditions and on January 26, 2007, the Federal Communications Commission (the “FCC”) approved the transaction. The transaction is pending approval from the Pennsylvania Public Utility Commission (the “Pennsylvania PUC”), which may be received as early as March 1, 2007. If the approval is obtained on March 1, 2007, we would anticipate that the transaction will close on March 8, 2007. There can be no assurance, however, that the required consents or conditions will be obtained or satisfied by March 1, 2007, or at all, and consequently there can be no assurance that the merger will be consummated on March 8, 2007, or at all.

We strive to grow our revenues, control our expenses and deploy our capital in a manner that maximizes our operating income. In order to achieve this goal, we have formulated the following business strategy:

As noted earlier, we have introduced various bundled offerings at CT aimed at increasing take rates on DSL and our long-distance products, as well as slowing erosion in our additional line penetration level and retaining customers. In 2004, we announced our alliance with EchoStar Communications Corporation to provide their DISH Network⁽™⁾ satellite TV service to all households in our current territory. This enabled the Company to offer its customers digital television programming beginning in mid-2005. In April of 2005, we announced that we had signed agreements with two leading game providers: Zone4Play, Inc. and Exent Technologies. In the fourth quarter of 2005, we began offering Internet-based electronic games to our residential customers in the current territories of CT and CTSI, as well as to epix^® customers.

CT offers an array of enhanced services such as caller identification, voice mail and custom calling services, such as call-forwarding, call waiting and three-way calling. These services generally produce higher margins

than basic telephone service. Our RLEC’s network is 100% digitally-switched and all upgrades to provide these additional services to our entire customer base are in place. We have increased our efforts to market enhanced services through bundled offerings to our customers.

During 2005, CT filed and received Pennsylvania Public Utility Commission (“PUC”) approval of an amended plan to revise its price adjustment formula to eliminate the 2% annual offset to inflation, and to provide universal availability of broadband services within CT’s service territory no later than December 31, 2008. Under the amended plan, CT could be required to refund some of its increased revenues to customers if it fails to meet its commitment to deploy broadband services. The alternative regulation plan, under which we operated before this amendment, permitted CT to increase its overall rates for regulated intrastate services annually by an amount equal to inflation minus 2%.

Leverage CT’s Brand, Reputation and Expertise to Further Penetrate CTSI’s Markets

In the CTSI markets, we seek to increase our penetration rate by targeting business customers who have traditionally been underserved by Verizon and by offering competitive service packages that compare favorably to those being offered by Verizon. We believe our strong Commonwealth Telephone brand, reputation and expertise provide us with important competitive advantages in these markets and will allow us to continue to gain new customers and increase our market share at a low marginal operating cost.

We intend to capitalize on an increasing demand for business and residential data services, including demand for high bandwidth connectivity, in all of the markets we serve. We offer dial-up Internet access through epix^® Internet Services and DSL broadband services, as well as high-capacity point-to-point and virtual private network (“VPN”) circuits. We believe there is additional opportunity to increase sales of our data services at a favorable marginal operating cost in all of the markets in which we operate.

We intend to continue to capitalize on our customer service capabilities to provide superior service and customer care. Our RLEC has achieved the lowest level of “justified complaints,” as defined by the PUC, among Pennsylvania’s largest local exchange carriers, as well as the state’s four largest competitive local exchange carriers, in fifteen of the last seventeen years, including the last nine consecutive years. In our CTSI markets, our customer account managers provide personalized customer care to business customers, and our centralized call center operates 24 hours a day, 7 days a week to support our business and residential customers.

Our RLEC, CT, offers local, toll, network access and enhanced services in a rural, mountainous market located primarily in the eastern third of Pennsylvania.

CT utilizes a technologically-advanced, fiber-rich network that is based on 100% digital-switching, integrated DWDM-Sonet transport and host/remote (TR 303 Standards Based) architecture. It was the first telephone company to deploy fiber optics in a toll application and was one of the first local exchange carriers in the nation to deploy a network of all digitally-switched central offices. CT operates its own Signaling System 7, STP based network, which provides efficient call set-up and routing of telephone calls. Throughout its market, CT has 11 digital host switches and about 500 remotes. All of the trunks between the hosts and the remote wire centers are connected with fiber optic cable. Connection to our customers, or the “last mile,” is provided over our RLEC’s copper outside plant. Our network architecture provides for short loop lengths in our copper plant, which allows CT to aggregate customer lines at the remotes for transport, and concentrates costly network intelligence in a small number of host offices. Additionally, our RLEC operates a network control center, which monitors network performance 24 hours a day, 7 days a week and allows us to maintain high network performance standards. CT has undertaken a three-year network upgrade initiative that will deliver broadband to 100% of households and businesses in the CT service area by year-end 2008.

CT has long been recognized as a customer service leader in Pennsylvania. Each year, the Pennsylvania PUC issues a study that measures the customer service results, based on customer complaints, of the state’s five largest local exchange carriers, as well as the state’s four largest competitive local exchange carriers, which include Alltel Pennsylvania, Inc., United Telephone Company of Pennsylvania d/b/a Sprint, Verizon North, Inc. (formerly GTE North, Inc.) and Verizon Pennsylvania, Inc. (formerly Bell Atlantic-Pennsylvania, Inc.), as well as the competitive local exchange carriers AT&T Local; Comcast Phone of Pennsylvania, LLC d/b/a Comcast Digital Phone; MCImetro Access Transmission Services, LLC (MCI Local); and RCN Telecom Services, Inc. (RCN). CT has achieved the lowest level of justified complaints, as defined by the Pennsylvania PUC, among Pennsylvania’s largest local exchange carriers in fifteen of the last seventeen years, including the last nine consecutive years.

CT is subject to regulation by the PUC for intrastate rate-making purposes, which includes rates for basic local services, intraLATA toll services and access services for the origination and termination of in-state long-distance calls. CT has entered into an alternative regulatory plan with the PUC for all of its intrastate operations, under which it has agreed to meet certain broadband service delivery parameters in exchange for a price cap formula, rather than rate of return regulation. Under this plan, as amended, CT is authorized to adjust its overall intrastate rate levels annually by an amount equal to the rate of inflation, and has committed to provide universal availability of broadband services within its service territory no later than December 31, 2008. CT could be required to refund some of its increased revenues to customers if it fails to meet its commitment to deploy broadband services. CT is protected by an exogenous events provision in its plan that allows it to adjust rates to compensate for changes in revenues and/or expenses due to certain state/federal regulatory, legislative changes or other unique changes in the telephone industry that affect revenues or expenses.

Related to the proposed merger with Citizens, the PUC must also approve any issuance of stock, incurrence of long-term debt or acquisition or sale of material utility assets by CT. In addition, the PUC must approve any change in control of either CT or its holding company. The PUC defines a “change in control” as either an acquisition or disposition of the largest single voting interest in a company, if that interest exceeds 20%.

CT is subject to the jurisdiction of the Federal Communications Commission (“FCC”) with respect to interstate rates, services, access charges and other matters, including the prescription of a uniform system of accounts. Interstate services, for the purpose of determining FCC jurisdiction, are communications that originate in one state and terminate in another state or a foreign country, including the use of CT’s local telephone network to originate or terminate such communications. Prices for CT’s interstate services, consisting primarily of subscriber line charges and access charges for interstate toll calls, which accounted for approximately 30.0% of our RLEC’s 2006 revenues, are regulated by the FCC based on “average schedule” formulas. The formulas use the costs of other telephone companies to “simulate” the costs of the average schedule companies. Under the FCC rules, the National Exchange Carrier Association (“NECA”) is required to review these formulas annually. In May 2006, the FCC approved formula changes proposed by NECA that reduced CT’s interstate revenues by approximately $1.2 million ($2.4 million annually) in the second half of 2006. In addition, the FCC also approved a phased-in structural change to the formulas that would reduce CT’s settlements by $0.2 million in 2006, $2.0 million in 2007, $3.9 million in 2008 and $4.2 million thereafter. These structural changes result primarily from changes in the formulas used to estimate common line (or local loop) costs and special circuit settlements. In addition, in December 2006, NECA submitted formula changes to the FCC, which if approved, would result in a reduction in CT’s interstate access revenues of approximately $1.1 million in the second half of 2007, $3.5 million in 2008, $5.1 million in 2009 and $5.4 million thereafter. It is possible that future changes to the formulas or FCC modification of NECA’s proposed phase-in may cause additional changes (either increases or decreases) in CT’s interstate access revenues.

The FCC has an open rulemaking proceeding in which it is considering major changes to its rules governing interstate access charges and other forms of intercarrier compensation. We are unable to predict how any FCC action in this proceeding may affect CT’s revenues. CT also receives funding from the federal Universal Service Fund, under rules established by the FCC. The FCC is considering changes in the universal service mechanism, affecting both the collection and distribution of these funds that could affect CT’s prices and revenues. In addition, the FCC must also approve any sale or “transfer of control” of CT or of its holding company.

Our RLEC has faced very limited competition, except for in-region toll service, during the first decade after the Telecommunications Act (the “Act”) was passed in 1996. Part of the reason for this is that CT maintains a rural exemption from the provisions of the Act, including, but not necessarily limited to, unbundling, colocation and rate discounts, for all of its access lines in Pennsylvania. The rural exemption requires prospective competitors who seek resale discounts, colocation, total element long run incremental cost (TELRIC) pricing and unbundled network elements to go through a formal review by the Pennsylvania PUC before receiving approval. The PUC may grant such approval only if it finds that the competitor’s proposal is not unduly economically burdensome, is technically feasible and is consistent with the universal service provisions of the Act. To date, no carrier has sought such a review by the Pennsylvania PUC. In addition, competition in our markets is somewhat mitigated due to the low population density, rural nature and mountainous topography of our markets.

However, the rural exemption does not preclude competitors from providing telephone services within CT’s service area entirely over their own facilities, or over the facilities of third parties. Further, the Telecommunication Act’s general requirement that telecommunications carriers interconnect networks for the exchange of traffic does apply to CT. As described more fully in Legislative and Regulatory Developments, several facilities-based CLECs have filed applications with the Pennsylvania PUC to provide their service in our RLEC’s service territory.

A variety of other factors contribute to our RLEC’s relative insulation from competition. These factors include its service territory’s high-cost of facilities-based entry due to low population density, the lack of concentration of any large business customers (as its top 10 business customers account for less than 7% of its revenues), its customer service record and level of customer satisfaction, and its favorable regulatory environment.

Competition has, however, been increasing in recent years, due to increased marketing of calling packages by wireless carriers and the entry of new types of voice service providers. We now face competition from national Internet Service Providers (“ISPs”) such as Time Warner (AOL), from cable providers offering a cable modem product, and from providers of voice over Internet services (such as Vonage, Skype and others) that do not require access to CT’s telephone network for their competitive offerings.

In the second half of 1999, we began offering our DSL service. We offer this service in the vast majority of CT’s territory.

Since 1990, Commonwealth Long Distance Company (“CLD”) has conducted the business of providing long-distance telephone services. CLD provides long-distance services to CT’s customers. CLD purchases long-distance minutes on a wholesale basis from third-party providers.

We offer competitive local, toll, network access, long-distance, enhanced services, broadband data services and high-speed Internet access services in three regional “edge-out” markets, which encompass cities and surrounding areas that have total populations between 250,000 and 500,000, as well as a significant concentration of business and industry. The geographic area represented by these three markets is roughly one-third the size of CT’s service territory, or about 1,750 square miles, with a population of approximately 1.4 million and approximately 600 access lines per square mile.

CTSI’s network strategy is to own the majority of the key elements of a local exchange network. These elements include the host switches, the remote switches and the facilities connecting the host switches to the remote switches, including both the fiber optic cable and the transport electronics. In addition, where

economically viable, CTSI builds copper distribution facilities between the remote switch and customer premises. Our network strategy allows us to provide high-quality, reliable service, reduce customer churn and generate attractive margins. CTSI builds, owns and operates digitally-switched, fiber intensive networks that are DSL-capable in each of its three regional edge-out markets. As of December 31, 2006, CTSI had approximately 99% of its access lines connected to its own switches and approximately 52% of its access lines completely on its own network.

CTSI strives to provide its customers with exceptional service and uses customer care procedures that have proven successful for our 110-year-old RLEC. We operate a customer service center, which takes calls 24 hours a day, 7 days a week, to handle all customer requests. We pride ourselves on our responsiveness and personalized service provided by our customer account management team. We are also proficient in other customer service aspects of operating in a CLEC environment and have developed an efficient provisioning interface with the incumbent local exchange carrier. Because we own and operate a significant portion of our own network elements, we are not solely dependent upon the incumbent local exchange carrier for provisioning and maintenance resolution. We deploy leading-edge network management and support systems to support proactive fault and performance management to deliver the highest quality of service to our customers.

We utilize direct sales channels to target potential business, carrier, ISPs and residential customers. Our direct channels include sales teams based in regional offices, which are exclusively focused on selling to potential business customers with more than ten lines. Each team works closely with customer account managers or specialists that focus on retaining and growing accounts after the initial sale. In addition, our inside sales team is focused on residential and business customers with fewer than ten lines.

The Pennsylvania PUC exercises jurisdiction over CTSI’s intrastate telephone services, including basic local exchange service, intrastate access services, and intraLATA toll services. Under the PUC’s current practices, CTSI’s rates and services are generally subject to much less regulatory scrutiny than those of the dominant local telephone company in its markets (i.e., Verizon). Additionally, municipalities and other local government agencies may regulate limited aspects of CTSI’s business, such as its use of rights-of-way.

At the federal level, the FCC has jurisdiction over interstate services, including access charges, as well as long-distance services. CTSI’s rates, terms and conditions of service are filed with the FCC in tariffs and are subject to the FCC’s complaint jurisdiction. The FCC has established rules limiting the rates CTSI and other competitive local exchange carriers can charge for origination and termination of long-distance calls (switched access), and for termination of local calls to ISPs (ISP traffic).

The Act gives CTSI rights to interconnect its network with Verizon, to exchange traffic with Verizon and to obtain unbundled access to elements of Verizon’s network at regulated rates based on Verizon’s forward-looking costs, which may include a reasonable profit. Under this law, Verizon and CTSI may negotiate the prices and other terms and conditions of these arrangements, but in the event of an impasse, the Pennsylvania PUC has authority to arbitrate any disputes. Future rulings by the Pennsylvania PUC, or changes in the FCC rules under which the Pennsylvania PUC resolves these issues, may have a material effect on CTSI’s costs and profitability.

CTSI purchases access to various network elements from Verizon under FCC rules that require the Pennsylvania PUC to determine rates for these elements based upon forward-looking incremental costs. Future FCC and Pennsylvania PUC proceedings could affect the terms on which CTSI obtains access to voice-grade loops and other components of Verizon’s network. We cannot offer any assurance that CTSI will continue to be able to obtain this access on favorable terms.

CTSI competes principally with the services offered by the incumbent local exchange carrier, Verizon. Incumbent local exchange carriers, such as Verizon, have relationships with their customers, have the potential to

subsidize services from their regulated service revenues and benefit from certain favorable state and federal regulations. Verizon is larger and has greater financial resources than CTSI. In light of the passage of the Act and concessions by some of the regional Bell companies, federal and state regulatory initiatives may provide increased business opportunities to CLECs, but incumbent carriers may obtain increased pricing flexibility for their services as competition increases. If, in the future, incumbent carriers are permitted by regulators to lower their rates substantially, engage in significant volume and term discount pricing practices for their customers or charge CLECs significantly higher fees for interconnection to the incumbent carriers’ networks, CTSI’s competitive position would be adversely affected.

CTSI also faces, and will continue to face, competition from other current and potential future market entrants, including other CLECs, long-distance companies, cable television companies, electric utilities, microwave carriers, wireless telecommunications providers, Internet providers and private networks built by large end users. The edge-out markets served by CTSI are served by one or more other CLECs including XO Communications, Level 3, One Communications, D&E Communications and others. We expect competition from CLECs and other companies to continue in the future. Comcast has recently acquired assets of Adelphia Cable, another competitor primarily in residential markets we serve, which may increase Comcast’s advantages. Should Comcast shift strategy to focus on the business segment, CTSI would risk loss of market share.

Commonwealth Communications, a provider of telecommunications equipment and facilities management services, designs, installs and manages telephone systems for businesses, hospitals and universities located primarily in Pennsylvania. Commonwealth Communications also undertakes premises distribution systems projects (cabling projects) primarily for hospitals and educational institutions.

epix^® Internet Services (“epix^®”), founded in 1994, is our Internet service provider. epix^® primarily provides dial-up Internet access at a flat rate for residential users and also provides dedicated access for business users and associated services such as web page hosting and design. epix^® provides a competitive Internet product for CT and CTSI and other customers, along with network support, technical support and customer service to our DSL product. epix^® had approximately 16,500 dial-up subscribers as of December 31, 2006.

We employed a total of 1,110 employees as of December 31, 2006. Approximately 37% of our employees are covered under collective bargaining agreements. In March of 2006, Commonwealth Telephone Company bargaining employees ratified a labor contract with the Communications Workers of America that will remain in effect until November 30, 2008. Also, in December 2005, Commonwealth Communications bargaining employees ratified a labor contract between the Company and the Communications Workers of America that will remain in effect until June 29, 2009.

The telecommunications industry is subject to extensive regulation at the federal, state and local levels. The costs of complying with this regulation, delays or failures to receive required regulatory approvals, or the enactment of new, adverse regulatory requirements may have a material adverse effect upon our business. The risks presented by the regulatory environment we face include the following:

The amounts we can charge for most of our services are subject to regulatory restrictions. Our financial results have been adversely affected by recent reductions in access rates and may be further adversely affected by future regulatory decisions.

Approximately 15.3% and 14.1% of our consolidated revenues for the years ended December 31, 2006 and 2005, respectively were from local service fees paid by customers of our RLEC. These fees, and other charges imposed by our RLEC for in-state services, are currently subject to an alternative regulation plan approved by the PUC. We believe that this regulatory arrangement is more favorable to us than traditional rate of return regulation.

Under the alternative regulation plan that is now in effect in Pennsylvania, CT can change its in-state rates, in the aggregate, based on changes in inflation or for events deemed outside of CT’s control that result in reduced revenues or increased expenses. These increases may not be sufficient to cover increases in our costs. CT could be required to refund some of these price increases if it failed to meet its commitment to provide universal availability of broadband services in its service territory by December 31, 2008.

Additionally, approximately 38.9% and 43.2% of our consolidated revenues for the years ended December 31, 2006 and 2005, respectively, came from charges paid to us by other carriers for services CT and CTSI provided in originating and terminating intrastate and interstate toll calls, and terminating local calls received from wireless carriers and other telephone companies. The payments that we receive for these services are regulated by the FCC and the Pennsylvania PUC. The amounts charged by both CT and CTSI for these services have been reduced by recent regulatory decisions.

CT currently receives its interstate access revenues pursuant to average cost schedules established by NECA. Since July 1, 2006, CT’s revenues were adversely affected by changes in these average schedules approved by the FCC. In December 2006, NECA submitted proposed formula changes to the FCC that will adversely affect CT’s interstate access revenue beginning July 1, 2007. If CT should lose its average schedule status, or if NECA should make further changes in its cost schedules or methodology, we could incur a significant loss of interstate access revenue.

We cannot predict whether any additional FCC or Pennsylvania PUC rules will be passed that will result in further reductions in the revenues we receive, although the FCC is currently considering proposals that could significantly change the interstate access charge system. Additionally, these agencies’ current rules may change as a result of judicial review or changes in legislation.

If any of the favorable regulatory provisions from which CT currently benefits were to be unfavorably modified or terminated, we could experience higher costs and lower revenues.

Because of its status as a rural telephone company under the Act, CT is not currently required to comply with the Act’s provisions requiring an incumbent carrier to unbundle its network, provide colocation, provide resale discounts, provide interconnection at rates based on forward-looking incremental costs or other items. If this limitation were to change, more competitors could enter our RLEC markets than we currently expect. CT might have to provide these competitors with access to our facilities at rates lower than what we currently charge our customers for use of those facilities. We could also incur additional administrative and regulatory expenses as a result of such newly imposed requirements. The Pennsylvania PUC has authority under the Act to terminate CT’s rural exemption if it receives a request to do so from another telecommunications carrier. To date, no other carrier has made such a request to the Pennsylvania PUC, but we have no assurance that CT’s rural exemption will remain in effect indefinitely.

Loss of our access to network elements from incumbent telephone companies or an increase in the prices we must pay for such elements would adversely affect CTSI’s business.

Approximately half of CTSI’s customers are served, at least in part, by network elements leased primarily from Verizon. CTSI’s business, therefore, depends in large part on our ability to provide service to our customers by leasing various elements of the incumbent telephone company’s network to provide local service. The Act, and FCC and state commission rulings under the Act, require incumbent telephone companies to lease network elements. If these rules are changed by the FCC or state commissions, or are struck down by the courts, our ability to provide service in a cost-effective manner could be adversely affected. For example, the FCC could remove one or more of the necessary elements that the incumbent telephone company is required to provide to us, or permit substantial increases in the amounts the incumbent company can charge CTSI. If incumbent telephone companies were no longer required to provide unbundled network elements on favorable terms, CTSI’s operating margins would be reduced and it might not be able to effectively compete.

The FCC has made several significant changes in recent years to its rules governing access to unbundled network elements. Under the new rules, Verizon is required to continue to offer access to unbundled voice-grade loops. However, we cannot assure you that these rules will not change in the future. Verizon currently is seeking to be relieved of its obligation to provide access to unbundled loops and other network elements at regulated cost-based prices in the Philadelphia Metropolitan Area. If this petition is granted by the FCC, CTSI could incur substantial increases in the cost to serve customers in this metropolitan area (which is only a small portion of CTSI’s entire service territory).

Risks related to the competitive nature of the telecommunications industry

The telecommunications industry is highly competitive. We face actual or potential competition from many existing and emerging companies, including other incumbent and competitive local telephone companies, long-distance carriers and resellers, wireless service providers, ISPs, satellite companies and cable companies. We may not be able to successfully anticipate and respond to various competitive factors affecting the industry, including regulatory changes that may affect our competitors and us differently, new technologies and services that may be introduced, changes in consumer preferences, demographic trends and discount pricing strategies by competitors. Also, recent consolidation in the telecommunications industry (for example, Verizon and MCI) can result in the rerouting of traffic off of our network to other carriers that could adversely affect our results of operations. The risks to our business from this competition include the following:

Verizon, as the incumbent local carrier in CTSI’s markets, has competitive advantages over us which adversely affect our operating margins.

As the incumbent carrier in CTSI’s markets, Verizon enjoys competitive advantages, including its wireline connection to virtually all of our customers and potential customers, its established brand name and its substantial financial resources. As a competitive local carrier, we are effectively required to discount our services to win potential customers and to pay substantial amounts to Verizon to lease elements of its networks. These factors result in lower operating margins for CTSI, and make us especially vulnerable to any discount pricing policies that Verizon may adopt to exploit its lower-cost structure and greater financial resources. Additionally, Verizon offers in-region long-distance services to its Pennsylvania customers, which allows it to offer attractive service packages to its customers in the markets we serve, including DSL.

We face intense competition in our markets for long-distance, Internet access and other ancillary services that are important to our business and to our growth strategy.

An important part of our business strategy is to sell additional services to local customers in both the CT and CTSI markets. The markets for these ancillary services, however, are extremely competitive, and in some cases, are dominated by companies far larger than our own, with lower costs and greater name recognition, technical and financial resources than ours. Our competitors for these services include, in addition to Verizon, long-distance companies like AT&T, Verizon Business and Sprint, and in the Internet service provider business, discounted service providers, regional ISPs and cable companies such as Comcast, Service Electric and Blue Ridge. In addition, as with most telephone providers today, the low-cost telephony and long-distance products being offered by Vonage and other Voice over Internet Protocol (“VoIP”) providers are starting to have a nominal impact on our residential and business wireline service at this time. Telcove, now part of Level 3, also enjoys a competitive advantage in CT and CTSI territory as a result of winning a contract with the state of Pennsylvania to provide telecommunications and data services to state government agencies, selected Pennsylvania colleges and universities, and other businesses that fall under the Pennsylvania state government contract, that remains in place until 2011. The Level 3 acquisition of Telcove now provides for a broader, national coverage for long-distance, and data products like Ethernet and VoIP. To compete against these established companies, we expect to have to offer both lower prices and superior service to our customers, and we may not be able to do so on profitable terms. Many of these competitors have built or negotiated national network transport, giving them the advantage of lower long-distance cost. If we are unable to maintain a competitive offering of long-distance, Internet access and other ancillary services, we may lose local customers who prefer to obtain a package of services from one telecommunications provider.

Technological developments could increase our costs and cause a decline in demand for our services.

The telecommunications industry is subject to rapid and significant changes in technology. If we do not replace or upgrade technology and equipment that becomes obsolete, we will be unable to compete effectively as we will not be able to meet the needs or expectations of our customers. Additionally, replacing or upgrading our infrastructure in the future could result in significant capital expenditures.

Our wireline telecommunications services are also in competition, or potential competition, with numerous alternative technologies, including, in particular, wireless communications. The wireless telecommunications industry is experiencing significant technological change. Wireless carriers are improving the capacity and quality of digital wireless technology, and are also expected to continue to reduce the prices for their services. These developments could reduce customer demand for our services and the prices that we will be able to charge for these services, particularly in CTSI’s markets where a number of wireless providers are established competitors as well as in certain areas of CT’s territory. We believe that future technological developments are likely to result in further improvements in wireless telecommunications services, as well as in other telecommunications technologies, and are likely to result in increased competition for our various businesses.

VoIP is a service that could cause a decrease in demand for our traditional telephone services, including the demand for additional lines. VoIP is gaining market share among business users who look to Internet telephone systems to cut costs or improve efficiency. It is also possible for residential users to use VoIP as a replacement for a traditional telephone line (for example, by obtaining Internet access over a cable television system).

These new technologies bring non-traditional competitors. Information service providers e.g. data and software companies are emerging telecommunications service providers. We cannot predict which of many possible future technologies, products or services will be significant to our competitive position or what expenditures will be required to develop and provide these technologies, products or services.

Some of our competitors have superior resources that may place us at a cost and price disadvantage.

Some of our current and potential competitors have market presence, technical and marketing capabilities and financial or other resources substantially greater than ours. These competitors may be able to develop and expand their communications and network infrastructures more quickly, adapt more swiftly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily and devote greater resources to the marketing and selling of their products and services than we can. Additionally, the greater brand name recognition of some competitors, such as Verizon, requires us to price CTSI’s services at lower levels in order to win business. Finally, the cost advantages of some competitors may give them the ability to reduce their prices for an extended period of time if they so choose.

Our pending merger with Citizens may be delayed or may not occur at all, which could negatively affect the market price of our common stock and our business and financial results.

Completion of our merger with Citizens is conditioned upon the receipt of certain governmental consents and approvals. These consents and approvals may impose conditions on or require divestitures relating to the divisions, operations or assets of Citizens or CTE. Such conditions or divestitures may jeopardize or delay completion of the merger or may reduce the anticipated benefits of the merger. Further, no assurance can be given that the required consents and approvals will be obtained or that the required conditions to closing will be satisfied. If the merger is not consummated, it could adversely affect the market price of our common stock and our business and financial results.

Whether or not the merger is completed, the pendency of the transaction could cause disruptions in the business of CTE, which could have an adverse effect on our businesses and financial results.

A substantial portion of CTSI’s revenues are derived from Internet service providers, or ISPs. A decline in these ISP customers or their customer base could negatively impact our financial results.

CTSI derives a substantial portion of its revenues directly and indirectly from ISPs. ISPs represented approximately 10.6% and 15.1% of CTSI’s revenues for the years ended December 31, 2006 and 2005, respectively. These high-margin revenues include services provided directly to ISPs, including local dial tone and transport (cap-type) services, and indirect services such as reciprocal compensation, and trunking from Verizon as a result of Verizon’s customers accessing these ISPs. Industry-wide trends towards declining usage of dial-up Internet access threaten the profitability or viability of our ISP customers. If we lose a large customer or a significant number of customers that are providing Internet services, or if a significant number of these customers are unable to pay amounts owed to us, our financial results could be negatively impacted.

Changes in the jurisdictional mix of CTSI’s traffic have adversely affected its results.

CTSI’s revenues from access charges and reciprocal compensation are affected by the mix of traffic delivered to us by other carriers for termination to CTSI’s customers. Over the past several years, CTSI has experienced reductions in the proportion of traffic delivered to it by Verizon that is classified as long-distance, and particularly the proportion of in-state long-distance. Because the reciprocal compensation rates for termination of local calls are significantly lower than access charges for termination of long-distance calls, and the access charges for interstate calls are lower than those for in-state long-distance calls, these changes in traffic mix have reduced CTSI’s overall revenues, and future changes in traffic patterns could cause further adverse effects.

Within the total Internet access market, the market for traditional, narrowband dial-up access services is shrinking. Our traditional dial-up Internet service provided by epix^{^®} Internet Services has been declining since its peak at nearly 50,000 subscribers in 2001. As of December 31, 2006, epix^{^®} had approximately 16,500 dial-up subscribers. Continued decline in these services will adversely affect our results.

Demand for some of our services may be adversely affected by a downturn in the U.S., Pennsylvania or local economies in which we operate.

Demand for some of our services may be adversely affected by a downturn in the U.S., Pennsylvania or local economies in which we operate. As a result, we may experience lower than expected revenues for some of our businesses. If current general economic conditions worsen, the revenues, cash flow and earnings of our company as a whole could be adversely affected.

Our future switched access lines in service will likely be lower than our historical levels, and this decline may adversely affect our results.

Additional line penetration in CT’s markets has been declining. Regulatory actions in the area of intercarrier compensation could result in increases in CT’s monthly per-line charges, which may discourage customers from purchasing or keeping additional lines. In addition, some customers who previously used an additional line for dial-up Internet access choose to cancel their additional line when they upgrade to DSL. To the extent that additional line penetration continues to decline, our ability to generate additional revenues from this source, which has been very important to our results in recent years, will decrease. Residential lines have also declined somewhat due to wireless substitution.

Our growth strategy will require us to invest significant capital in services that may not achieve the desired returns.

We plan to continue to invest capital into services such as DSL. This business is highly competitive (with cable modem being the primary competitor), and we cannot be assured that we will be able to achieve the return on investment that we have historically earned. Additionally, even if we are successful in our efforts to develop this business, its operating results and margins will likely be lower than those of our core lines of business. Moreover, we expect that any success we experience in selling DSL service will, to some extent, be offset by reduced demand for additional lines when customers have been using an additional line for dial-up Internet access.

Any disruption in our services could potentially expose us to a loss of customers or claims for damages.

Because our services are critical to many of our customers’ businesses, any significant interruption in our services could result in a loss of customers or claims by our customers for indirect or consequential damages. Although the standard terms and conditions of our tariffs and customer contracts disclaim our liability for any such damages, a customer could still bring a lawsuit against us claiming lost profits or other consequential damages as the result of a service interruption or other web site or application problems that the customer may ascribe to us. We cannot assure you that a court would enforce any limitations on our liability. In such cases, we could be liable for substantial damage awards.

We depend on third parties, over whom we have no control, to deliver our services.

Because of the interconnected nature of the telecommunications industry, we depend heavily on other local telephone companies, long-distance carriers and numerous other third parties to deliver our services. CTSI is particularly dependent on cooperation from Verizon in order to provide local service to a portion of its customers, slightly less than half of whom are not exclusively served by our network. We do not have a long-term agreement with Verizon to provide us with the network connections we need, and the terms of our relationship with Verizon are subject to change as the result of regulatory agency and court decisions. In addition, we are dependent on easements, franchises and licenses from various private parties such as established telephone companies and other utilities, railroads, long-distance companies, state highway authorities, local governments and transit authorities, for access to aerial pole space, underground conduits and other rights-of-way in order to construct and operate our networks. The failure to maintain the necessary third party arrangements on acceptable terms would have an adverse effect on our ability to conduct our business.

As a holding company, we will require dividends from subsidiaries to meet our cash requirements.

We are a holding company whose principal assets are the shares of capital stock of our subsidiaries, and we do not generate any significant operating revenues of our own. Consequently, we depend on dividends, advances and payments from our subsidiaries (primarily CT) to fund our activities and meet our cash needs, including our debt service requirements. Our subsidiaries are separate and distinct legal entities. The ability of our subsidiaries to make certain payments or advances to us will depend on their operating results and will be subject to existing debt covenants, various business considerations and applicable laws and regulations. Accordingly, we cannot assure you that our subsidiaries will be able to, or be permitted to, make distributions to enable us to make payments in respect to our indebtedness.

The restrictive terms imposed by our current CoBank indebtedness may prevent us from achieving some of our business objectives.

CT’s CoBank indebtedness contains restrictive covenants, which, among other things, requires the maintenance of a specific debt to cash flow ratio at CT.

Our ability to modify or comply with these covenants can be affected by events beyond our control. A breach of any of these covenants could also result in a default even if we are able to pay our debt. A default under these covenants or covenants under other financing arrangements we enter into could result in the acceleration of required payments or the inability to receive financing in the future.

If we sell shares of our common stock the market price of our common stock could decline.

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock, or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Our property consists primarily of central office equipment, telephone lines, telephone instruments and related equipment and land and buildings related to telephone operations. This plant and equipment is maintained in good operating condition by CT and CTSI operations. We own substantially all of our central office buildings, administrative buildings, warehouses and storage facilities. All of the telephone lines are located either on private or public property. Locations on private land are governed by easements or other arrangements. We are not aware of any environmental liabilities which would have a material impact on our financial position or results of operations.

In the normal course of business, there are various legal proceedings outstanding, including both commercial and regulatory litigation. We do not believe these proceedings will have a material adverse effect on our results of operations or financial condition.

On January 24, 2007, we received a civil investigative demand from the Antitrust Division of the U.S. Department of Justice (the “Antitrust Division”) requesting certain information in connection with the Antitrust Division’s investigation of whether we had engaged in conduct restricting competition in local telecommunications services. Pursuant to such request, we have provided the Antitrust Division with certain requested information and we intend to cooperate with the Antitrust Division in this matter. While there can be no assurance as to the outcome of this investigation, we do not believe we have engaged in any improper conduct and we do not believe this investigation will result in any action having a material adverse impact on our financial position, results of operation or cash flows.

A Special Meeting of Shareholders was held on January 25, 2007. The matter submitted to our shareholders was as follows:

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

There were approximately 1,054 registered holders of the Company’s Common Stock on January 31, 2007, based on the records of our transfer agent. Other information required under Item 5 of Part II is set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations included on pages F-1 to F-22 of this report and Notes to Consolidated Financial Statements included on pages F-32 to F-56 of this report. Information relating to the Company’s quarterly Common Stock prices is as follows:

In July of 2003, we sold $300 million principal amount of 3.25% convertible notes due July 15, 2023, unless earlier redeemed, repurchased or converted. On November 7, 2003, in connection with a registration rights agreement relating to the notes, we filed a resale shelf registration statement with the Securities and Exchange Commission.

On June 24, 2005, we launched an exchange offer pursuant to which we offered to exchange up to $300 million of our then outstanding 3.25% convertible notes (the “Old Notes”) for new 2005 Series A 3.25% convertible notes (the “New Notes”) due 2023 in an equal principal amount plus an exchange fee of $2.50 per $1,000 principal amount of existing notes. The New Notes contain terms that provide us with the flexibility to settle conversions of the notes with cash, common stock or a combination of cash and common stock. The Old Notes require us to settle conversions of notes with shares of common stock. The terms of the New Notes maintain full dividend protection for the holders of the notes. The exchange offer closed on August 3, 2005, at which time a total of $63,892,000 principal amount of New Notes were issued in exchange for the same principal amount of Old Notes and an exchange fee of $160,000 was paid.

With respect to the New Notes and the Old Notes, interest is 3.25% per annum on the principal amount, payable semi-annually in arrears in cash on January 15 and July 15 of each year, beginning January 15, 2004. In addition, we will pay contingent interest for any six-month period from January 15 to July 14 and from July 15 to January 14, with the initial six-month period commencing July 15, 2008, if the trading price of the notes for each of the five trading days immediately preceding the first day of the applicable six-month period equals 120% or more of the principal amount of the notes. During any interest period when contingent interest shall be payable, the contingent interest payable per note will equal 0.25% of the average trading price of a note during the five trading days immediately preceding the first day of the applicable six-month interest period.

Holders of Old Notes may convert their notes into shares of our common stock and holders of New Notes may convert their notes with settlement, at our election, in our common stock, cash or a combination of cash and our common stock prior to the close of business on the final maturity date under any of the following circumstances:

We may redeem any of the Old Notes or New Notes beginning July 18, 2008, by giving holders at least 30 days’ notice. We may redeem the notes either in whole or in part at a cash redemption price of 100% of their principal amount, plus accrued and unpaid interest, including contingent interest, if any, and additional interest, if any, to, but excluding, the redemption date.

If a designated event occurs prior to maturity, holders of Old Notes or New Notes may require us to repurchase all or part of their notes at a cash repurchase price equal to 100% of their principal amount, plus accrued and unpaid interest, including contingent interest, if any, and additional interest, if any, to, but excluding, the repurchase date.

Holders of Old Notes or New Notes may require us to repurchase all or part of their notes on July 15 of 2008, 2013 and 2018 at a cash repurchase price equal to 100% of their principal amount, plus accrued and unpaid interest, including contingent interest, if any, and additional interest, if any, to, but excluding, the repurchase date.

On February 16, 2007, the Company notified holders of Old Notes and New Notes, pursuant to applicable provisions of the related Indentures, that during the period beginning on, and including, February 21, 2007 (the date that is fifteen days prior to the “anticipated effective date” of the merger), and ending on the close of business on the Designated Event Repurchase Date (the date that is thirty days after the date of the Designated Event Notice (as such term is defined in the Indentures) of the merger transaction with Citizens), the holders of the Old Notes and New Notes may exercise their conversion rights in accordance with and subject to the provisions of the Old Notes and New Notes and the related Indentures. Pursuant to applicable provisions of the Indentures, the Company will provide to the holders of the Old Notes and New Notes a Designated Event Notice regarding the consummation of the merger on or before the fifteenth day after the consummation of the merger.

If the transaction with Citizens is consummated, each holder of Old Notes and New Notes will have the right to require the Company to repurchase the holder’s notes on the Designated Event Repurchase Date at a cash repurchase price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding the Designated Event Repurchase Date.

Item 5. (c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers

We completed the Stock Repurchase Program in April 2006. No other stock repurchase plan or program was in place during the period. Also, no other stock repurchase plans or programs were terminated prior to expiration.

Information required under Item 6 of Part II is included on page F-23 of this report.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Information required under Item 7 of Part II is included on pages F-1 to F-22 of this report.

Information required under Item 7A of Part II is included on page F-16 of this report. Additional information is contained in Note 15 “Off Balance Sheet Risk and Concentration of Credit Risk” of the Consolidated Financial Statements included on page F-54 of this report.

The Consolidated Financial Statements and supplementary data required under Item 8 of Part II are included on pages F-27 to F-56 of this report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

During the two years preceding December 31, 2006, there has been neither a change of accountants of the Registrant nor any disagreement on any matter of accounting principles, practices or financial statement disclosures.

The management of Commonwealth Telephone Enterprises, Inc. (“the Company”), under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Accounting Officer, conducted an evaluation of the Company’s “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Accounting Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report. See Management’s Report on Internal Control over Financial Reporting on page F-24.

There was no change in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Subject to the next sentence, the information required under Item 10 of Part III of this Form 10-K will be set forth in the definitive proxy statement relating to the Registrant’s Annual Meeting of Shareholders to be filed by the Registrant with the Commission pursuant to Section 14(a) of the Securities Exchange Act of 1934 (the “1934 Act”) and is specifically incorporated herein by reference thereto. However, if the Registrant does not hold a 2007 Annual Meeting of Shareholders or does not distribute a proxy statement in connection therewith on or prior to April 30, 2007, or if the Registrant’s pending merger with Citizens Communications Company described under “Item 1—Business—General” is not consummated on or prior to April 30, 2007, the Registrant will amend this Form 10-K on or prior to April 30, 2007 to include the information required in accordance with General Instruction G(3) to Form 10-K, including the information required under Item 10, if the Registrant is then subject to the reporting requirements of Section 13 or 15(d) of the 1934 Act.

The information required under Item 10 of Part III with respect to the executive officers of the Registrant is set forth at the end of Part I hereof.

The full text of our Code of Ethical Conduct is published on our web site at www.ct-enterprises.com. We intend to disclose future amendments to our Code of Ethical Conduct, and waivers of its provisions granted to executive officers and directors, on our web site within four business days following the date of such amendment or waiver.

Subject to the next sentence, the information required under this Item of Part III of this Form 10-K will be set forth in the definitive proxy statement relating to the Registrant’s Annual Meeting of Shareholders to be filed by the Registrant with the Commission pursuant to Section 14(a) of the 1934 Act and is specifically incorporated herein by reference thereto. However, if the Registrant does not hold a 2007 Annual Meeting of Shareholders or does not distribute a proxy statement in connection therewith on or prior to April 30, 2007, or if the Registrant’s pending merger with Citizens Communications Company described under “Item 1—Business—General” is not consummated on or prior to April 30, 2007, the Registrant will amend this Form 10-K on or prior to April 30,

2007 to include the information required in accordance with General Instruction G(3) to Form 10-K, including the information required under this Item, if the Registrant is then subject to the reporting requirements of Section 13 or 15(d) of the 1934 Act.

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

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Unaudited)

Consolidated Statements of Operations for Years Ended December 31, 2006, 2005 and 2004

Consolidated Statements of Cash Flows for Years Ended December 31, 2006, 2005 and 2004

Consolidated Statements of Changes in Common Shareholders’ Equity for Years Ended December 31, 2006, 2005 and 2004

Condensed Financial Information of the Registrant for Years Ended December 31, 2006, 2005 and 2004 (Schedule I)

Valuation and Qualifying Accounts and Reserves for Years Ended December 31, 2006, 2005 and 2004 (Schedule II)

All other financial statement schedules not listed have been omitted since the required information is included in the Consolidated Financial Statements or the Notes thereto, or is not applicable or required.

Exhibits marked with an asterisk are filed herewith. The remaining exhibits have been filed with the Commission and are incorporated herein by reference.

2.1 Limited Liability Company Operating Agreement of CTSI, LLC dated June 30, 2001 is incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, (Commission File No. 0-11053).

2.2 Agreement and Plan of Merger between CTSI, Inc. and CTSI, LLC dated June 22, 2001 is incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, (Commission File No. 0-11053).

2.3 Limited Liability Company Operating Agreement of CTE Telecom, LLC dated December 2, 2002 is incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, (Commission File No. 0-11053).

2.4 Agreement and Plan of Merger between Commonwealth Long Distance Company and CTE Telecom, LLC dated December 31, 2002 is incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, (Commission File No. 0-11053).

2.5 Agreement and Plan of Merger between epix^{^®} Internet Services, Inc. and CTE Telecom, LLC dated December 31, 2002 is incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, (Commission File No. 0-11053).

2.6 Recapitalization Agreement dated April 24, 2003, by and among Commonwealth Telephone Enterprises, Inc., Level 3 Communications, Inc. and Eldorado Equity Holdings, Inc. is incorporated herein by reference to Exhibit 2.1 to the Company’s Report on Form 8-K as filed with the Commission on April 25, 2003, (Commission File No. 0-11053).

2.7 Agreement and Plan of Merger between Commonwealth Telephone Enterprises, Inc. and Citizens Communications Company dated September 17, 2006 is incorporated herein by reference to Exhibit 2.1 to the Company’s Report on Form 8-K as filed with the Commission on September 18, 2006, (Commission File No. 0-11053).

3.1 Amended and Restated Articles of Incorporation dated September 3, 2003 is herein incorporated by reference to Exhibit 3.12 to the Company’s Form S-1 Registration Statement as filed with the Commission on November 7, 2003, Registration No. 333-110325.

3.2 By-laws of Registrant, as amended and restated as of December 3, 2003 are incorporated herein by reference to Exhibit 3.1 to the Company’s Report on Form 8-K as filed with the Commission on December 3, 2003, (Commission File No. 0-11053).

4.1 Loan Agreement dated as of March 29, 1994, made by and between Commonwealth Telephone Company and the National Bank for Cooperatives is incorporated herein by reference to the Company’s Report on Form 10-Q for the quarter ended March 31, 1994, (Commission File No. 0-11053).

4.2 Line of Credit Agreement dated as of September 30, 1999 by and between Commonwealth Telephone Company as borrower and the CoBank, ACB is incorporated herein by reference to Exhibit 4(b) to the Company’s Report on Form 10-Q for the quarter ended September 30, 1999, (Commission File No. 0-11053).

4.3 Line of Credit Amendment dated as of September 15, 2000 by and between Commonwealth Telephone Company as borrower and the CoBank, ACB is incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000, (Commission File No. 0-11053).

4.4 Amended and Restated Line of Credit Agreement dated April 6, 2001 by and between Commonwealth Telephone Company as borrower and the CoBank, ACB is incorporated herein by reference to Exhibit 4 to the Company’s Report on Form 10-Q for the quarter ended March 31, 2001, (Commission File No. 0-11053).

4.5 Second Amended and Restated Line of Credit Agreement dated June 4, 2002 by and between Commonwealth Telephone Company as borrower and the CoBank, ACB is incorporated herein by reference to Exhibit 4(a) to the Company’s Report on Form 10-Q for the quarter ended June 30, 2002, (Commission File No. 0-11053).

4.6 Letter Agreement dated March 13, 2003 to amend the Loan Agreement dated as of March 29, 1994 and the Second Amended and Restated Line of Credit Agreement dated as of June 4, 2002 between Commonwealth Telephone Company and CoBank, ACB is incorporated herein by reference to Exhibit 4(a) to the Company’s Report on Form 10-Q for the quarter ended March 31, 2003, (Commission File No. 0-11053).

4.7 Agreements Regarding Amendments to Loan Documents dated June 2, 2003 by and between Commonwealth Telephone Company as borrower and CoBank, ACB is incorporated herein by reference to Exhibit 4.1 to the Company’s Report on Form 10-Q for the quarter ended June 30, 2003, (Commission File No. 0-11053).

4.8 Indenture for 3¹/4% Convertible Notes due 2023 dated July 18, 2003 between Commonwealth Telephone Enterprises, Inc. and the Bank of New York, as Trustee is incorporated herein to Exhibit 4.10 to the Company’s Form S-1 Registration Statement as filed with the Commission on November 7, 2003, Registration No. 333-110325.

4.9 Form of 3¹/4% Convertible Notes due 2023 is incorporated herein to Exhibit 4.10 to the Company’s Form S-1 Registration Statement as filed with the Commission on November 7, 2003, Registration No. 333-110325.

4.10 Registration Rights Agreement dated July 18, 2003 by and among Commonwealth Telephone Enterprises, Inc. and Morgan Stanley & Co. Incorporated, Legg Mason Wood Walker, Incorporated and Wachovia Capital Markets, LLC, as Initial Purchasers is incorporated herein by reference to Exhibit 4.11 to the Company’s Form S-1 Registration Statement as filed with the Commission on November 7, 2003, Registration No. 333-110325.

4.11 Amendment to Line of Credit Agreement entered into as of May 20, 2004 by and between Commonwealth Telephone Company and CoBank, ACB is incorporated herein by reference to Exhibit

No. 4.6 to the Company’s Post Effective Amendment No. 4 to Form S-1 on Form S-3 Registration Statement as filed with the Commission on July 26, 2004, Registration No. 333-110325.

4.12 Indenture between Commonwealth Telephone Enterprises, Inc. and The Bank of New York, as Trustee, dated as of August 3, 2005 related to Series A 3¹/4% Convertible Notes due 2023 (including form of 2005 Series A 3¹/4% Convertible Notes due 2023) is incorporated herein to Exhibit 4.1 to the Company’s Report on Form 10-Q for the quarter ended June 30, 2005, (Commission File No. 0-11053).

4.13 Third Amended and Restated Line of Credit Agreement entered into as of May 31, 2005 by and between Commonwealth Telephone Company and CoBank, ACB is incorporated herein by reference to Exhibit No. 10.1 to the Company’s Report on Form 8-K dated May 31, 2005, (Commission File No. 0-11053).

4.14 Fourth Amended and Restated Line of Credit Agreement entered into as of May 29, 2006 by and between Commonwealth Telephone Company and CoBank, ACB is incorporated herein by reference to Exhibit 4.1 to the Company’s Report on Form 10-Q for the quarter ended June 30, 2006, (Commission File No. 0-11053).

10.1 C-TEC Corporation, 1994 Stock Option Plan is incorporated herein by reference to the Company’s Report on Form 10-Q for the quarter ended March 31, 1994, (Commission File No. 0-11053).

10.2 C-TEC Corporation 1994 Stock Option Plan, as amended, is incorporated herein by reference to Form S-8 Registration Statement of Registrant filed with the Commission, Registration No. 33-64563.

10.3 C-TEC Corporation Executive Stock Purchase Plan is incorporated herein by reference to Form S-8 Registration Statement of Registrant filed with the Commission, Registration No. 33-64677.

10.4 Registration Rights Agreement dated October 23, 1998 among Registrant, Walter Scott, Jr., James Q. Crowe and David C. McCourt is incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated October 28, 1998, (Commission File No. 0-11053).

10.5 1997 Non-Management Directors’ Stock Compensation Plan effective February 12, 1997, as amended is incorporated herein by reference to Exhibit 10 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998, (Commission File No. 0-11053).

10.6 Commonwealth Telephone Enterprises, Inc. Executive Stock Purchase Plan as amended and restated, effective December 21, 1998 is incorporated herein by reference to Exhibit 99.1 to the Company’s Report on Form 10-Q for the quarter ended September 30, 1999, (Commission File No. 0-11053).

10.7 1997 Non-Management Directors’ Stock Compensation Plan effective February 12, 1997, as amended and restated, is incorporated herein by reference to Exhibit 10(a) to the Company’s Report on Form 10-Q for the quarter ended March 31, 2000, (Commission File No. 0-11053).

10.8 Registration Rights Agreement dated February 7, 2002, between Registrant and Level 3 Communications, Inc. is incorporated herein by reference to Exhibit 10.13 of Form S-3 Registration Statement of Registrant filed with the Commission, Registration No. 333-82366.

10.9 Consulting Agreement dated March 1, 2002, by and between CTE Services, Inc. and James DePolo d/b/a Westminster Marketing Associates is incorporated herein by reference to Exhibit 10(n) to the Company’s Report on Form 10-K for the year ended December 31, 2001, (Commission File No. 0-11053).

10.10 Amendment No. 1 effective May 15, 2002, to the CTE Equity Incentive Plan (formerly known as the C-TEC Corporation 1996 Equity Incentive Plan) is incorporated herein by reference to Exhibit 10(a) to the Company’s Report on Form 10-Q for the quarter ended June 30, 2002, (Commission File No. 0-11053).

10.11 Commonwealth Telephone Enterprises, Inc. Bonus Plan is incorporated herein by reference to Exhibit 10(b) to the Company’s Report on Form 10-Q for the quarter ended June 30, 2002, (Commission File No. 0-11053).

10.12 Commonwealth Telephone Enterprises, Inc. Executive Stock Purchase Plan as amended and restated, effective September 5, 2002 is incorporated herein by reference to Exhibit 10(a) to the Company’s Report on Form 10-Q for the quarter ended September 30, 2002, (Commission File No. 0-11053).

10.13 Shelf Registration Agreement dated as of November 12, 2002 among Registrant, Level 3 Communications, Inc. and Eldorado Equity Holdings, Inc. is incorporated herein by reference to Exhibit 10.1 of Form S-3 Registration Statement of Registrant filed with the Commission, Registration No. 333-101127.

10.14 Amendment No. 1 to the Registration Rights Agreement dated April 23, 2003, by and among Commonwealth Telephone Enterprises, Inc., Level 3 Communications, Inc. and Eldorado Equity Holdings, Inc. is incorporated herein by reference to Exhibit 10.1 to the Company’s Report on Form 8-K as filed with the Commission on April 25, 2003, (Commission File No. 0-11053).

10.15 Non-Management Directors’ Stock Compensation Plan effective February 25, 2004, is incorporated herein by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q for the quarter ended June 30, 2004, (Commission File No. 0-11053).

10.16 Commonwealth Telephone Enterprises, Inc. Commonwealth Builder 401(k) Plan (As Amended 2004) is incorporated herein by reference to Exhibit 4.3 to Form S-8 Registration Statement of Registrant filed with the Commission, Registration No. 333-117450.

10.17 Agreement and Release dated as of July 20, 2004 entered into by and between Commonwealth Telephone Enterprises, Inc. and James DePolo is incorporated herein by reference to Exhibit No. 10.16 to the Company’s Post Effective Amendment No. 4 to Form S-1 on Form S-3 Registration Statement as filed with the Commission on July 26, 2004, Registration No. 333-110325.

10.18 Amendment No. 2 effective May 18, 2006, to the CTE Equity Incentive Plan (formerly known as the C-TEC Corporation 1996 Equity Incentive Plan) is incorporated herein by reference to Exhibit 10.1 to the Company’s Report on Form 10-Q for the quarter ended June 30, 2006, (Commission File No. 0-11053).

10.19 Commonwealth Telephone Enterprises, Inc. 2006 Bonus Plan is incorporated herein by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q for the quarter ended June 30, 2006, (Commission File No. 0-11053).

10.20 Commonwealth Telephone Enterprises, Inc. Deferred Compensation Plan, effective January 1, 2007, is incorporated herein by reference to Exhibit 10.3 to the Company’s Report on Form 10-Q for the quarter ended June 30, 2006, (Commission File No. 0-11053).

10.21 Letter Agreement dated September 17, 2006 between Commonwealth Telephone Enterprises, Inc. and Michael J. Mahoney is incorporated herein by reference to Exhibit 10.1 to the Company’s Report on Form 10-Q for the quarter ended September 30, 2006, (Commission File No. 0-11053).

10.22 Commonwealth Telephone Enterprises, Inc. Key Employee Severance Plan, effective September 17, 2006, is incorporated herein by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q for the quarter ended September 30, 2006, (Commission File No. 0-11053).

10.23 Commonwealth Telephone Enterprises, Inc. Amended Restricted Stock Units Agreement, effective as of September 29, 2006, is incorporated herein by reference to Exhibit 10.3 to the Company’s Report on Form 10-Q for the quarter ended September 30, 2006, (Commission File No. 0-11053).

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


COMMONWEALTH TELEPHONE ENTERPRISES, INC.

By:		/S/ DONALD P. CAWLEY
		Donald P. Cawley Executive Vice President and Chief Accounting Officer

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

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, and we intend that such forward-looking statements be subject to these safe harbors. These statements are generally accompanied by words such as “intend,” “anticipate,” “believe,” “estimate,” “expect” or similar statements. Our forward-looking statements involve risks and uncertainties that could significantly affect expected results in the future differently than expressed in any forward-looking statements we have made. These risks and uncertainties include, but are not limited to:

Additional factors that could cause or contribute to such differences are set forth in the section entitled “Risk Factors” and are discussed elsewhere in this report. Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, we cannot provide any assurance that the results contemplated in such forward-looking statements will be realized. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future events, plans or expectations that we contemplate will be achieved. Furthermore, past performance in operations and share price is not necessarily predictive of future performance.

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto:

We began operations as Commonwealth Telephone in 1897 with the construction of a telephone line between two rural farms in Pennsylvania. In 1928, a prominent Pennsylvania family acquired Commonwealth Telephone and continued to grow the company through acquisition and internal growth. The company went public in 1952, but the family continued to hold a controlling stake. In the 1980’s, the company expanded beyond wireline telephone into cable, cellular, paging and other telecommunications-related services through acquisition and business development. In 1986, the controlling family implemented a dual class voting structure in order to strengthen its control, with the common stock having one vote per share and Class B common stock having 15 votes per share. In 1993, the controlling family sold its ownership interest to a subsidiary of Peter Kiewit Sons’, Inc., which has since become Level 3 Communications, Inc. (“Level 3”). In 1997, Commonwealth Telephone implemented a spin-off of certain operations into two new public companies, a bundled telecommunications provider (RCN Corporation) and a cable television operator (Cable Michigan, Inc.). At the conclusion of the spin-off, we became the public company that currently exists as Commonwealth Telephone Enterprises, Inc. (“CTE,” “the Company,” “we,” “us” or “our”). In April and December of 2002, Level 3 sold approximately 9,600,000 shares of our common stock in two registered secondary offerings, which resulted in a reduction from approximately 48% of the voting power of our equity securities to approximately 29%. In September 2003, we completed a transaction pursuant to which each outstanding share of our Class B Common Stock was converted into 1.09 shares of our Common Stock (the “Recapitalization Transaction”). Following the

Recapitalization Transaction, the 1,017,061 shares of our Class B Common Stock that Level 3 beneficially owned prior to the Recapitalization Transaction, representing approximately 29% of the voting power of our equity securities, were converted into 1,108,596 shares of our Common Stock, representing approximately 4.6% of the voting power of our equity securities. In January 2004, Level 3 announced that it had closed a privately-negotiated sale of its remaining 1,108,596 shares of our Common Stock to an institutional investor. On September 18, 2006, we and Citizens Communications Company (“Citizens”) announced that we had entered into an agreement for Citizens to acquire CTE in a cash-and-stock, taxable transaction. Each CTE share will be converted into the right to receive $31.31 in cash and 0.768 shares of Citizens’ common stock. The transaction was approved by CTE’s shareholders on January 25, 2007. The transaction is also subject to certain regulatory approvals and on January 26, 2007, the Federal Communications Commission (“FCC”) approved the transaction. The transaction is pending approval by the Pennsylvania Public Utility Commission (“PUC”), which may be received as early as March 1, 2007. If the approval is obtained on March 1, 2007, we would anticipate that the transaction will close on March 8, 2007. There can be no assurance, however, that the required consents or conditions will be obtained or satisfied by March 1, 2007, or at all, and consequently there can be no assurance that the merger will be consummated on March 8, 2007, or at all.

In March of 2006, we announced the ratification of a new labor contract with the Communications Workers of America (CWA). The new contract will remain in effect until November 30, 2008. Approximately 400 employees throughout the Commonwealth Telephone Company’s service area in eastern and north central Pennsylvania are covered by the agreement.

During July of 2006, we achieved Premier Certification from Cisco Systems^®. The Cisco^® Channel Partner program provides CTE’s businesses—Commonwealth Telephone Company; CTSI, LLC; epix^® Internet Services; and Commonwealth Communications—with resource support to achieve expertise in selling, planning, designing, provisioning and maintaining Cisco networking solutions for its current and prospective business customers. To earn Premier Certification, CTE had to meet or surpass the stringent personnel, training, customer satisfaction and post-sales support requirements set forth by Cisco.

On September 11, 2006, we announced that Commonwealth Telephone Enterprises retained Evercore Partners as its financial advisor in connection with a review of strategic opportunities.

On September 18, 2006, we announced that Citizens had entered into an agreement for Citizens to acquire Commonwealth for $41.72 per share, in a cash-and-stock taxable transaction, for a total consideration of $1.16 billion, based on the closing price of Citizens’ common stock on September 15, 2006. Each Commonwealth share will be converted into the right to receive $31.31 in cash and 0.768 shares of Citizens’ common stock. The acquisition has been approved by the Boards of Directors of both Citizens and Commonwealth and by our shareholders at a special meeting of shareholders held on January 25, 2007. The transaction is pending approval by the Pennsylvania PUC, which may be received as early as March 1, 2007. If the approval is obtained on March 1, 2007, we would anticipate that the transaction will close on March 8, 2007. There can be no assurance, however, that the required consents or conditions will be obtained or satisfied by March 1, 2007, or at all, and consequently there can be no assurance that the merger will be consummated on March 8, 2007, or at all.

The combined company will be the 7th largest local telephone exchange company in the U.S., with pro forma annual revenues of approximately $2.4 billion and operations across 23 states. Upon completion of the acquisition, Citizens, which operates under the brand name of Frontier, will have approximately 2.6 million access lines, 400,000 High-Speed Internet subscribers and 6,600 employees.

In December of 2006, Commonwealth Telephone Company learned that it had achieved the lowest justified complaint rate upon the Pennsylvania PUC’s release of its 2005 annual report, “Utility Consumer Activities

Report and Evaluation.” With this achievement, Commonwealth Telephone Company has achieved the lowest level of justified customer complaints for nine consecutive years, and in fifteen of the last seventeen years.

The PUC annual report details the justified complaint rate of Pennsylvania’s five largest local exchange carriers, as well as the state’s four largest competitive local exchange carriers. The PUC’s 2005 annual report compared Commonwealth Telephone Company’s results to Alltel Pennsylvania, Inc., United Telephone Company of Pennsylvania d/b/a Sprint, Verizon North, Inc. (formerly GTE North, Inc.) and Verizon Pennsylvania, Inc. (formerly Bell Atlantic-Pennsylvania, Inc.), as well as the competitive local exchange carriers AT&T Local; Comcast Phone of Pennsylvania, LLC d/b/a Comcast Digital Phone; MCImetro Access Transmission Services, LLC (MCI Local); and RCN Telecom Services, Inc. (RCN).

Prior to the closing of our transaction with Citizens, our primary focus in 2007 will be on the execution of our business plan in the market place. This means defending our customer base, and we plan to do this by delivering value to our customers in our bundled product offerings, including digital subscriber line (“DSL”), and by providing customer service that is second to none. It also means continued focus on our costs and our margins.

Despite these challenges, our operations generate a significant amount of cash flow. Our strategic plan is designed to insure that we identify and capitalize on changing consumer preferences, market trends and technological developments. CT is actively bundling voice and data products to provide our customers with convenient, attractive packages in an effort to minimize churn to cable modem and wireless.

Our two primary operations are Commonwealth Telephone Company (“CT”), which is a rural incumbent local exchange carrier (“RLEC”), and CTSI, LLC (“CTSI”), which we refer to as our RLEC “edge-out” operation, and is a competitive local exchange carrier (“CLEC”). The CT segment includes the results of Commonwealth Long Distance Company (“CLD”), a long-distance reseller; and the portion of our broadband data service that uses DSL technology to offer high-speed Internet access that is in CT’s territory. Our “Other” segment is comprised of telecommunications-related businesses that all operate in the deregulated segments of the telecommunications industry and support the operations of our two primary operating companies. These support businesses are epix^{^®} Internet Services (“epix”), a rural Internet service provider; and Commonwealth Communication, LLC (“CC”), a provider of telecommunications equipment and facilities management services. “Other” also includes our corporate entity.

As of December 31, 2006, CT served over 309,200 switched access lines. In 1997, we formally launched our facilities-based CLEC, CTSI. CTSI operates in three “edge-out” regional Pennsylvania markets that border CT’s markets and that we believe offer attractive market demographics, such as higher population density and a higher concentration of businesses. CTSI served over 142,600 switched access lines as of December 31, 2006, which were mainly business customers.

CT’s revenue is derived primarily from access, local service, enhanced services, local long-distance (intraLATA toll), long-distance service revenue and DSL. Access revenue consists primarily of charges paid by long-distance companies and other telecommunications carriers for access to our network in connection with the completion of long-distance telephone calls. Local service revenue consists of charges for local exchange telephone services, including monthly tariffs for basic local service. Enhanced services revenue is derived from service for special calling features, including, but not limited to, Caller ID and Call Waiting. IntraLATA toll and

long-distance revenues consist of charges for such services paid by CT’s customers. DSL revenue consists of charges for high-speed Internet access provided to CT’s customers.

CTSI’s revenue is derived primarily from access, local service, competitive access, both dedicated and DSL Internet access, intraLATA toll and long-distance service revenue. Access revenue consists primarily of charges paid by long-distance companies and other non-CLEC customers for access to our network in connection with the completion of long-distance telephone and local calls and the delivery of other services. Access revenue also includes recurring trunking revenue and reciprocal compensation. Local service revenue consists of charges for local exchange telephone services, including monthly recurring charges for basic services and special calling features. Competitive access revenue consists of charges for point-to-point connections. Internet access revenue consists of charges for dedicated Internet access provided to CTSI’s customers. DSL revenue consists of charges for high-speed Internet access provided to CTSI’s customers. Long-distance revenue consists of charges for long-distance service paid by CTSI’s customers.

Our “Other” business segment includes the revenue from epix and CC. epix revenue for this segment consists primarily of dial-up Internet access revenue. CC generates revenue primarily from telecommunications projects, including design, installation and maintenance of telephone and data systems for business and public sector customers. Other also includes our corporate entity.

Our operating costs and expenses for each of our segments primarily include access charges and other direct costs of sales, payroll and related benefits, selling and advertising, software and information system services, and general and administrative expenses. Operating costs also include strategic alternatives and depreciation and amortization. CTSI also incurs costs related to leased local loop charges associated with providing last mile access, circuit rentals, engineering costs, colocation expense, terminating access for local calls and long-distance expense. CTSI also incurs long-distance expense associated with purchasing long-distance minutes on a wholesale basis from third party providers. CC also incurs expenses primarily related to equipment and materials used in the course of the installation and provisioning of equipment.

We incur capital expenditures associated with expenditures for infrastructure and network upgrades in CT and CTSI territories. Under the revised Chapter 30 Plan that was approved by the Pennsylvania PUC in 2005, CT committed to provide universal availability of broadband services throughout its territory by December 31, 2008. In addition, at CTSI, capital expenditures associated with access line installations and high capacity services, in order to provide Internet and cellular providers and interexchange carriers (“IXCs”) the ability to connect their networks into the public switched network system, comprise a significant portion of its overall capital spending.

We have included certain segment financial data in the tables below. Operating income (loss) is the primary measure used by our management to assess the performance of each segment.

For the year ended December 31, 2006, our consolidated sales decreased $3,241 and were $330,615 and $333,856 for the years ended December 31, 2006 and 2005, respectively. Lower CTSI sales of $3,614 and lower sales at our Other segment of $66 contributed to the decrease, which was partially offset by an increase in CT sales of $439. Consolidated costs and expenses (excluding depreciation and amortization, strategic alternatives and restructuring reversals) were $169,015 for the year ended December 31, 2006 as compared to $163,914 for the year ended December 31, 2005. Contributing to the increase of $5,101 is an increase in costs at CT of $1,508 and higher costs at Other of $544, partially offset by a decline in costs at CTSI of $1,361. In addition, the year ended December 31, 2005 was positively impacted by reversals of certain accruals that did not recur in 2006 at CT and CTSI for $2,764 and $1,646, respectively. Operating income increased $1,416 primarily from a decline in consolidated depreciation expense of $14,518, partially offset by the decrease in sales, the net increase in costs and certain accrual reversals discussed above, and expenses associated with strategic alternatives of $4,729. The decline in consolidated depreciation expense was due primarily to certain assets becoming fully depreciated and

the lengthening of estimated useful lives of certain classes of assets, based on our extensive review of fixed asset lives undertaken in 2005. Consolidated net income was $84,140 or $3.16 per diluted share for the year ended December 31, 2006 as compared to $70,108 or $2.71 per diluted share for the year ended December 31, 2005. Contributing to the increase in net income of $14,032 is the gain from the dissolution of the Rural Telephone Bank (“RTB”) of $23,623 that we recognized in our second quarter, the increase in operating income discussed above of $1,416, a decrease in interest expense of $190, favorable results at our Yellowbook, USA partnership of $843 and a favorable decrease in other income (expense) of $1,354, partially offset by a decrease in interest and dividend income of $2,654 and a net increase in our provision for income taxes of $10,740.

CT’s sales were $228,903 and $228,464 for the years ended December 31, 2006 and 2005, respectively. The increase of $439 is due primarily to increases in DSL revenue, local revenue, and intraLATA toll and long-distance revenues, partially offset by lower access and inside wire maintenance revenues.

CT’s additional lines continued to decline as our customers switched to our DSL product and other high-speed Internet access alternatives. CT’s primary residential lines declined due in part to wireless substitution. Company lines for epix and CTSI decreased as a result of the industry-wide trend of customers’ migrating from dial-up to broadband services.

DSL revenue increased $4,855 from an increase of 14,292 subscribers. Our continuing marketing efforts and investments in our network to accommodate increased demand have positioned us to capitalize on our customers’ preference for high-speed Internet access.

Local service revenue increased $3,612 for the year ended 2006, as compared to the same period last year, primarily due to two rate increases (each approximately $1.00 per line per month) effective September 2005 and May 2006, partially offset by a decrease in access lines in service.

Combined intraLATA toll and long-distance revenues increased a net $1,274 for the year ended 2006 as compared to 2005. This change is the result of an increase in long-distance subscribers as we continue to promote our long-distance products in our bundles, partially offset by customers selecting alternate lower cost providers.

Interstate access revenue decreased $4,925 for the year ended 2006, as compared to the same period last year from a decline in access lines for $2,069, a decline in minutes of use equating to $640 and the impact of certain access revenue settlements in both 2005 and 2006 for $2,581. These decreases were partially offset by an increase in special access circuit revenue of $398.

State access revenue decreased $5,101 for the year ended 2006 as compared to 2005, primarily as a result of favorable access revenue settlements of $2,044 recognized in 2005 that did not recur in 2006, a decrease of $1,780 from a decrease in minutes of use, a decrease of $1,025 due to a decline in access lines and rate reductions on certain minutes of use equating to $429, partially offset by an increase in revenue from growth in switched access trunking of $342.

Inside wire maintenance revenue decreased $921 for the year ended December 31, 2006 as compared to 2005 due mostly to the decline in additional lines as well as a reduced demand for this service by our customers. The change in the provision for uncollectible revenue of $1,192 was favorably impacted primarily by an increase to the provision recorded in 2005 of $1,006 that did not recur.

CT’s costs and expenses, excluding depreciation and amortization and strategic alternatives (“costs and expenses”), were $83,425 and $79,153 for the years ended December 31, 2006 and 2005, respectively. The increase of $4,272 is due to a sales and use tax reserve reversal recorded in 2005 of $2,764 that did not recur in

2006, increased payroll and benefits costs of $1,043, higher materials expense associated with business sales and DSL of $766, higher network costs primarily due to increased bandwidth utilization associated with our increase in DSL sales of $881, higher pole attachment expense of $562 due to a 2005 favorable true-up and higher rates, increased terminating expense of $416 due to an increase in CLD subscribers, an increase in contracted labor expense associated with large, non-recurring projects of $379 and higher advertising expense of $237. These higher costs were partially offset by lower MIS expense of $1,879 due to the termination of an outsourcing contract in early 2006, and the favorable settlement of a Caller ID dispute in the fourth quarter of 2006 equating to $671.

CT’s depreciation and amortization decreased $14,029 or 37.5% to $23,410 for the year ended December 31, 2006. The change was primarily the result of certain classes of assets becoming fully depreciated of $12,878 and the impact of our periodic review of asset retirement activity, salvage values and fixed asset lives completed in the second quarter 2005, partially offset by a higher base of depreciable plant.

CT’s operating income increased $10,196 or 9.1% for the year ended December 31, 2006 as compared to 2005 from the decrease in depreciation and amortization of $14,029 and the increase in sales of $439, partially offset by the increase in costs and expenses of $4,272.

CTSI’s sales were $82,881 and $86,495 for the years ended December 31, 2006 and 2005, respectively. The decrease in sales of $3,614 is due to lower access revenue of $5,751 and lower local service revenue of $757, partially offset by increased data and DSL revenues of $1,159, an increase in the carrier cost recovery surcharge that was effective June 1, 2006 of $870 and an increase in point-to-point (circuit) revenues of $930.

The decrease in access revenue of $5,751 is due in part to favorable access revenue settlements that occurred in 2005 of $2,608 that did not recur in 2006, a decline in minutes of use equating to $1,120, wireless carriers’ migration to direct transport equating to $360 and a decrease of $396 from the use of a direct-measurement billing approach with Verizon instead of a percent local usage factor. Continued industry-wide trends towards declining usage of dial-up Internet access and of wireline long-distance services, generally, will continue to have a negative impact on CTSI’s access revenues.

Although declining from historical levels, CTSI derives a substantial portion of its revenues directly and indirectly from Internet Service Providers (“ISPs”). ISPs represented approximately 10.6% and 15.1% of CTSI’s revenues (after excluding the effects of the previously mentioned access revenue settlements) for the years ended December 31, 2006 and 2005, respectively. For the year ended December 31, 2006, CTSI recorded approximately $4,198 or 5.1% of its revenues from compensation revenue associated with ISP traffic (access revenue for all jurisdictions, including local reciprocal compensation), as compared to approximately $5,829 or 6.7% for the same period last year. These high-margin revenues include services provided directly to the ISP including local and high-capacity services and indirect services including reciprocal compensation and trunking from Verizon as a result of Verizon’s customers accessing these ISPs. Industry-wide trends toward declining usage of dial-up Internet access threaten the profitability or viability of our ISP customers. If we lose a large customer or a significant number of customers that are providing Internet services, or if a significant number of these customers are unable to pay amounts owed to us, our financial results could be negatively impacted.

Local service revenue decreased $757 for the year ended 2006 as compared to 2005 primarily due to lower revenue per line and a decrease in ISP and residential access lines, partially offset by growth in core business access lines.

Data and DSL revenues increased $1,159 due primarily to an increase in DSL sales equating to $511 and an increase in sales of business data circuits equating to $425.

The increase in point-to-point circuit revenue of $930 is due to ISPs, cellular providers and IXCs using our network to connect their networks into the public switched network system, partially offset by the disconnect of circuits serving a wireless carrier in late 2006. This carrier had accounted for approximately $250 in revenue per month.

CTSI’s costs and expenses were $54,600 and $54,315 for the years ended December 31, 2006 and 2005, respectively, an increase of $285. The year ended 2005 was positively impacted by network costs settlements of $1,646 that did not recur in 2006. Also contributing to the increase in CTSI’s costs and expenses are higher sales commission expense of $797, higher bad debt expense of $438 and increases in DSL expenses due to revenue growth of $190. These increases were partially offset by a decrease in DSL and Internet expenses due to lower negotiated port charges rates of $955, lower MIS expense due to the termination of an outsourcing contract in 2006 of $759 and lower long-distance expense of $577 due to lower negotiated rates and one-time vendor credits. Also, in the fourth quarter of 2006, a Caller ID dispute was favorably settled, equating to $435.

CTSI’s depreciation and amortization expense decreased $236 to $19,035 for the year ended December 31, 2006. The decrease is primarily a result of our lengthening the useful lives of certain classes of assets after completing our periodic review in 2005 of asset retirement activity, salvage values and fixed asset lives equating to $337.

CTSI’s operating income decreased $3,694 for the year ended December 31, 2006 as compared to 2005 from the decrease in sales discussed above of $3,614, the increase in costs and expenses of $285, a favorable restructuring settlement that occurred in 2005 of $31, partially offset by the lower depreciation and amortization expense of $236.

The sales of our Other segment were $18,831 and $18,897 for the years ended December 31, 2006 and 2005, respectively. The decrease of $66 is due to a decrease in epix sales of $1,765, partially offset by an increase in CC sales of $1,699.

epix sales declined to $5,125 in 2006 from $6,890 in 2005. The decrease in epix sales is due to a 5,912 decrease in dial-up subscribers as customers move to our DSL product, other high-speed products, or lower cost dial-up providers.

CC sales increased to $13,706 in 2006 from $12,007 in 2005. The increase is primarily due to higher data communications revenue of $1,458, higher PDS (cabling/inside wire) revenue of $321 and higher revenue from business system upgrades of $707, partially offset by a decrease in new installations of business systems of $661 and system maintenance and other revenues of $126. The operating results of CC are subject to fluctuation due to its less predictable revenue streams, market conditions and the effect of competition on margins.

The costs and expenses of our Other segment were $30,990 for the year ended December 31, 2006 as compared to $30,446 for the year ended December 31, 2005, an increase of 1.8%. CC costs and expenses increased $1,392 to $13,431 for the year ended 2006 as compared to the same period last year, due primarily to the increase in sales and associated cost of goods sold. epix costs and expenses declined 4.3% to $5,472 in 2006 from $5,717 in 2005 as a result of the decrease in epix sales and subscribers. Expenses at our corporate entity were $603 lower due to a decrease in non-cash compensation expense of $2,600 from vested equity-based awards related to the 2005 dividends (including the one-time special dividend) that was charged to expense in 2005 and severance expense incurred in 2005 of $577, partially offset by increased pension expense of $960, higher restricted stock amortization of $719 and compensation cost from stock options of $797.

We have recognized strategic alternatives expenses of $4,729 for the year ended December 31, 2006, related to financial advisory, legal and other fees as well as a pro-rata portion of retention bonuses to be paid in cash to key employees at the completion of the merger with Citizens.

Depreciation and amortization expense at our Other segment decreased $253 for the year ended December 31, 2006 as compared to 2005. The change was primarily the result of a smaller base of depreciable plant due to assets becoming fully depreciated.

The operating loss in Other was ($17,817) for the year ended December 31, 2006 as compared to ($12,731) for the same period last year. The change was mostly due to a higher operating loss at the corporate entity primarily from expenses associated with the Citizens merger of $4,729, decreased operating income at epix of $1,543 as a result of a decline in sales and subscribers and increased operating income at CC of $297 due to the increase in sales.

In connection with the Citizens merger, we have incurred costs of $4,729 in 2006 related to financial advisory, legal and other fees as well as a pro-rata portion of the retention bonuses we expect to pay in cash to our employees at the completion of the merger. We are obligated to pay Evercore Group L.L.C. (“Evercore”) approximately $11,000, $250 of which was paid to Evercore upon its being retained by us, approximately $2,800 of which was paid to Evercore when we entered into the merger agreement with Citizens and the remainder of which (approximately $8,000) will become payable to Evercore if the merger is successfully completed, which may be as early as March 8, 2007. The amount of the final Evercore advisory fee to be paid may be adjusted depending on the closing price of the Citizens common stock on the closing date of the merger and on the amount of our indebtedness on the closing date of the merger.

Interest and dividend income was $5,721 for the year ended December 31, 2006 as compared to $8,375 for the year ended December 31, 2005. The decrease of $2,654 or 31.7% is primarily due to the dissolution of the RTB and the loss of the annual RTB dividend of $2,100, and lower interest income of $2,898 due to lower average cash balances, offset by higher interest rates equating to $2,340.

Interest expense includes interest on our convertible notes, interest on CT’s revolving credit facility with CoBank, ACB (“CoBank”) and amortization of debt issuance costs. We employed an interest rate swap, which expired on April 4, 2006, on $35,000 of floating rate debt to hedge against interest rate exposure. Interest expense was $13,894 and $14,084 for the years ended December 31, 2006 and 2005, respectively. The decrease of $190 is due primarily to interest related to certain income tax payments made in 2005 that did not recur in 2006.

In accordance with the terms of our prior mortgage notes and security agreements that we redeemed in 1993, we were required to purchase common stock of the RTB equal to 5% of the amount borrowed. Such class of stock was entitled to cash dividends. As part of the 2006 Agricultural Appropriations Bill, the Bush administration established a process and the terms by which to implement dissolution of the RTB, whereby stockholders would receive a cash payout for their stock. Our original cash investment in the RTB was approximately $6,409. In addition, we had received stock dividends with a face value of approximately $23,623

in accordance with the provisions of our previous financing arrangement with the RTB. On April 11, 2006, we received in cash $30,033 that represented our original cash investment and accumulated stock dividends, resulting in a gain of $23,623.

Other income (expense), net was $458 for the year ended December 31, 2006 as compared to ($896) for the year ended December 31, 2005. The net change of $1,354 is primarily a result of costs incurred in 2005 of $1,499 associated with implementation of our initial and quarterly dividend and convertible debt exchange offer.

Our effective income tax rates were 36.9% and 35.5% for the years ended December 31, 2006 and 2005, respectively. On July 8, 2006, the state of Pennsylvania enacted a change in its tax law that increased the annual state Net Operating Loss (“NOL”) deduction and accelerated the phase out of the Pennsylvania Capital Stock Tax. Under the old tax legislation, the NOL usage was limited to $2,000 per year. The new legislation, effective for tax years beginning after December 31, 2006, increases the NOL limitation to the greater of 12.5% of Pennsylvania taxable income or $3,000. For the year ended December 31, 2006, we have recorded a benefit to deferred income tax expense of $4,332 related to this Pennsylvania state income tax law change. We estimate that, excluding this change in the Pennsylvania state income tax law, our effective income tax rate in 2006 would have been approximately 40.2% (after giving effect to certain strategic alternative costs that are capitalized for tax). In 2005, we undertook an extensive, detailed review of all deferred tax items and supporting schedules of net book versus net tax values. This review resulted in a net deferred income tax benefit of approximately $3,154 related to prior years (2004 and prior) that we recorded in the fourth quarter of 2005. Excluding these corrections, we estimate that our effective tax rate for 2005 would have been approximately 38.4%. We anticipate our 2007 income tax rate to be approximately 39%, however this estimate may change (either increase or decrease) as a result of our adoption of FASB Interpretation No. 48, “Uncertain Tax Positions” that we will implement in the first quarter of 2007. Also, the aggregate dollar amount and the tax treatment of certain expenses associated with the Citizens merger may cause this estimate to change. For an analysis of the change in income taxes, see Note 12 to the consolidated financial statements.

For the year ended December 31, 2005, our consolidated sales decreased $1,955 and were $333,856 and $335,811 for the years ended December 31, 2005 and 2004, respectively. Lower sales at Other of $5,680 contributed to the decrease, offset by an increase in CTSI sales of $2,927 and an increase in CT sales of $798. Consolidated costs and expenses increased $4,725 primarily due to non-cash compensation expense of $4,155 resulting from the dividends. This compensation is in the form of dividend equivalent units related to vested deferred restricted stock units; amortization of unvested restricted stock units; vested deferred Executive Stock Purchase Plan share units; amortization of unvested Executive Stock Purchase Plan share units; and unvested 401(k) shares. This charge was partially offset by a favorable sales and use tax settlement of $2,764. Operating income increased $5,634 as a result of decreased consolidated depreciation expense of $13,082 related to our periodic review of asset retirement activity, salvage values and fixed asset lives, and certain classes of assets becoming fully depreciated, partially offset by the decrease in sales and increase in operating expenses discussed above, and a positive settlement in 2004 of $799 associated with our 2000 restructuring charge as compared to $31 in 2005. Consolidated net income was $70,108 or $2.71 per diluted share for the year ended December 31, 2005. Consolidated net income was $62,031 or $2.60 per diluted share for the year ended December 31, 2004. Contributing to the increase in net income is the increase in operating income, an increase in interest income primarily from higher interest rates and a decrease in interest expense primarily due to our repayment of debt, partially offset by an increase in other expenses primarily due to the special and quarterly dividend and exchange offer costs, and an increase in the provision for income taxes.

CT’s sales were $228,464 and $227,666 for the years ended December 31, 2005 and 2004, respectively. The sales increase of $798 or 0.4% is primarily due to increases in intraLATA toll and long-distance revenues and DSL revenue, partially offset by lower local and inside wire maintenance revenues.

CT’s additional lines declined as customers switched to DSL and other high-speed Internet access alternatives. Primary residential lines declined due in part to wireless substitution. Company lines decreased as a result of the industry wide trend of epix customers’ migrating to broadband services.

IntraLATA toll and long-distance revenues increased a combined total of $1,997. The change is due to an increase in CLD revenues of $3,912 as we continue to promote our long-distance product in our bundles. The increase at CLD was partially offset primarily by customers selecting alternate lower cost service providers, including CLD and calling packages offered by several non-wireline providers in certain areas of CT’s territory, decreasing revenue by $1,878. Interstate access revenue decreased $1,450 resulting from a decline in access lines of $1,597, a decline in minutes of use of $771 and certain revenue settlements that occurred in 2004 of $572. These decreases were partially offset by an increase in the National Exchange Carrier Association (“NECA”) average schedule settlements of $963 (average schedule formulas are updated annually in July) and an increase in special access circuit revenue of $804. State access revenue increased $1,357 from increased state access settlement revenues of $2,526 and a favorable effect of $1,196 resulting from a certain access revenue settlement due to a jurisdictional shift in traffic to a high access rate. These increases were partially offset by a decrease of $997 due to a decrease in minutes of use, a decrease of $483 due to a reduction in access lines and wireless interconnection rate reductions of $446. Local service revenue decreased $216 primarily as a result of a decrease in access lines and the loss of an Internet service provider from our network, partially offset by a line rate increase of approximately $1.00 per average line per month effective September 2005. Other revenue decreased $779 as a result of a decrease in inside wire maintenance revenue of $1,002, an increase in the provision for bad debt of $1,006 and a lower message volume for billing and collection of $492. These decreases were partially offset by an increase in DSL revenue of $1,819 from an increase in subscribers, partially offset by a price reduction.

CT’s costs and expenses, excluding depreciation and amortization, (“costs and expenses”) were $79,153 and $79,219 for the years ended December 31, 2005 and 2004, respectively. Costs and expenses decreased $66 or 0.1% due to a reversal of a sales and use tax accrual of $2,764 in connection with the completion of a state audit focused on the taxability of wholesale purchases of Internet services, lower advertising expense of $683 and lower terminating access expense of $673 due to CT’s lower intraLATA toll minutes. These lower costs were partially offset by higher material expense of $733 primarily from DSL modems and higher payroll and benefits from salary increases, increases in insurance premiums and overtime.

Depreciation and amortization expense decreased $10,608 or 22.1% for the year ended December 31, 2005. The change was the result of certain assets becoming fully depreciated and lengthening the estimated useful lives of certain asset classes after completing our periodic review in the second quarter of 2005 of asset retirement activity, salvage values and fixed asset lives.

CT’s operating income increased $11,472 or 11.4% to $111,872 for the year ended December 31, 2005. The increase was a result of the items discussed above.

CTSI’s sales were $86,495 and $83,568 for the years ended December 31, 2005 and 2004, respectively. The increase of $2,927 primarily represents an increase in access revenue of $1,479, and increases in customer point-to-point circuit revenues of $1,013 and data revenues of $727, partially offset by a decrease in long-distance revenue of $288.

Access revenues increased due to a favorable effect of $2,608 resulting from certain access revenue settlements, an increase of $515 resulting from the FCC ruling that no longer enforces the cap on the number of minutes for which compensation on local telephone calls that terminate to ISPs can be collected and an increase in circuits of $765. These increases were partially offset by the FCC rate ceilings, as further described in the Legislative and Regulatory section, which have reduced the revenues CTSI receives from interstate access charges. CTSI’s revenues from access charges and reciprocal compensation are also affected by the mix of traffic delivered to it by other carriers for termination to CTSI customers. In addition, continued industry-wide trends towards declining usage of dial-up Internet access and of wireline long-distance services generally, will continue to have a negative impact on access revenues.

CTSI recorded approximately $5,829 or 6.7% of its revenues from compensation revenue associated with ISP traffic as compared to $6,335 or 7.6% for 2004. Effective October 8, 2004, the FCC no longer enforces the cap on the number of minutes for which compensation can be collected, but continues to limit the rate that can be charged. At current traffic levels, this FCC decision has resulted in an increase in the amount of reciprocal compensation received by CTSI, although the order may be subject to court appeals, and we cannot predict the outcome of any such proceeding.

CTSI derives a substantial portion of its revenues directly and indirectly from ISPs. ISPs represented approximately 15.1% and 17.1% of CTSI’s revenues (after excluding the effect of the previously mentioned access revenue settlements) for the years ended December 31, 2005 and 2004, respectively. These high-margin revenues include services provided directly to the ISP including local and high-capacity services and indirect services including reciprocal compensation and trunking from Verizon as a result of Verizon’s customers accessing these ISPs. Industry-wide trends toward declining usage of dial-up Internet access threaten the profitability or viability of our ISP customers. If we lose a large customer or a significant number of customers that are providing Internet services, or if a significant number of these customers are unable to pay amounts owed to us, our financial results could be negatively impacted.

The increase in point-to-point circuit revenue is due to Internet and cellular providers and IXCs using our network to connect their networks into the public switched network system. Data revenues increased due to subscriber growth. Long-distance revenue decreased due to a decrease in minutes of use and a decrease in the average blended rate per minute.

Costs and expenses were $54,315 and $53,809 for the years ended December 31, 2005 and 2004, respectively. The increase of $506 is primarily due to an increase in high capacity circuit expense of $683, an increase in DSL and Internet expense of $611 due to an increase in customers and increased network circuit costs of $410. These increases were partially offset by a reduction in the long-distance termination rate of $458, reductions in rates for unbundled loops of $441 and lower headcount in telemarketing and sales of $327. Also, favorable effects of $1,646 resulting from certain network costs settlements were partially offset by a reserve reversal in 2004 linked to network cost settlements of $1,701.

Depreciation and amortization expense decreased $934 or 4.6% to $19,271 as a result of lengthening the estimated useful lives of certain asset classes after completing our periodic review of asset retirement activity, salvage values and fixed asset lives. The change was also the result of certain assets becoming fully depreciated. Restructuring reversals associated with our 2000 restructuring charge were $768 lower for the year ended December 31, 2005 as compared to the year ended December 31, 2004.

CTSI’s operating income increased $2,587 or 25.0% to $12,940 for the year ended December 31, 2005. The increase was a result of the items discussed above.

Other sales were $18,897 and $24,577 for the years ended December 31, 2005 and 2004, respectively. The decrease of $5,680 or 23.1% is due to a decrease in CC and epix sales.

CC sales decreased $3,013 or 20.1% to $12,007 primarily due to a decrease in new installations of business systems due to sales personnel turnover and lower revenues from communications facilities management services. The operating results of CC are subject to fluctuations due to its less predictable revenue streams, market conditions and the effect of competition on margins. epix sales decreased $2,667 or 27.9% to $6,890 due to a decrease in dial-up subscribers as customers move to DSL, other high-speed products or lower-cost providers and a price reduction implemented in May 2005.

Costs and expenses in Other were $30,446 and $26,161 for the years ended December 31, 2005 and 2004, respectively. Expenses at the corporate entity increased primarily due to non-cash compensation expense of $4,155 resulting from the dividends, reversal of certain health care accruals of $1,513 in 2004 and increased restricted stock amortization of $935. This increase was partially offset by decreased costs and expenses at CC of $1,554 to $12,039 for the year ended December 31, 2005. This change was primarily due to the decrease in sales and associated cost of goods sold. epix expenses decreased $1,048 primarily as a result of lower transport costs due to a price reduction, line disconnects and lower advertising expense.

Depreciation and amortization expense decreased $1,540 or 56.6% to $1,182. The change was due to a smaller base of depreciable plant and certain assets, primarily at epix, becoming fully depreciated.

The operating loss in Other was ($12,731) for the year ended December 31, 2005 as compared to ($4,306) for the year ended December 31, 2004. The change was a result of the items discussed above.

In December 2000, we announced that we would exit CTSI’s five expansion markets launched over the preceding two years. Related to this strategy, we recorded an estimated restructuring charge of $99,713 (pre-tax) and $64,813 (after-tax), or ($2.79) (after-tax) per common share (including effects of anti-dilutive options). At December 31, 2005, there is no remaining liability. See Note 5 to the Consolidated Financial Statements for additional information.

Interest and dividend income was $8,375 for the year ended December 31, 2005 as compared to $5,773 for the year ended December 31, 2004. The increase of $2,602 or 45.1% is primarily the result of higher interest rates, partially offset by lower average cash balances.

Interest expense includes interest on our convertible notes, interest on CT’s revolving credit facility with CoBank and amortization of debt issuance costs. We employed an interest rate swap on $35,000 of floating rate debt to hedge against interest rate exposure. Interest expense was $14,084 for the year ended December 31, 2005 as compared to $16,800 for the year ended December 31, 2004. The decrease of $2,716 or 16.2% is primarily a result of repayment of high cost debt in 2004 and the resulting lower loan balances.

Our effective tax rates were 35.5% and 37.6% for the years ended December 31, 2005 and 2004, respectively. The lower rate in 2005 is due to a detailed review of all deferred tax items and supporting schedules

of net book versus net tax values that we performed in 2005. This review resulted in a net deferred tax benefit of approximately $3,154 ($2,239 impact to the fourth quarter) related to prior years that we recorded in the fourth quarter of 2005. We estimate that, excluding these corrections, our effective tax rate would have been approximately 38.4%. This adjustment did not have a material effect on the current or any prior period’s financial statements. For an analysis of the change in income taxes, see Note 12 to the Consolidated Financial Statements.

Cash and temporary cash investments were $126,932 at December 31, 2006, as compared to $104,968 at December 31, 2005. We consider all highly liquid investments with an original maturity of three months or less to be temporary cash investments. Temporary cash investments are investments in high quality, diversified money market mutual funds. We monitor fund performance of money market mutual funds available to us on a quarterly basis to maximize returns and insure investment quality. Our working capital ratio was 1.84 to 1 at December 31, 2006, as compared to 1.52 to 1 at December 31, 2005. The net increase is due to an increase in cash primarily from the proceeds received on dissolution of the RTB and cash generated by operations, partially offset by our dividend payments, share repurchases and capital expenditures.

On July 18, 2003, we sold $300,000 of 3.25% convertible notes due 2023. On June 24, 2005, we launched an exchange offer pursuant to which we offered to exchange up to $300,000 of our then outstanding 3.25% convertible notes (the “Old Notes”) for new 2005 Series A 3.25% convertible notes (the “New Notes”) due 2023 in an equal principal amount plus an exchange fee of $2.50 per $1,000 principal amount of existing notes. The New Notes contain terms that provide us with the flexibility to settle conversion of the notes with cash, common stock or a combination of cash and common stock. The Old Notes require us to settle conversions of notes with shares of common stock. The change to the terms of the notes allows us to reduce the dilutive effect on our common stock that would be caused by future conversion of the convertible notes. The terms of the New Notes maintain full dividend protection for the holders of the notes. The exchange offer closed on August 3, 2005, at which time a total of $63,892 principal amount of New Notes were issued in exchange for the same principal amount of Old Notes and an exchange fee of $160 was paid.

On June 30, 2005, we paid a special dividend of $13.00 per share and a $0.50 per share dividend for the quarter ended June 30, 2005 in the amount of $294,138. In addition, we announced the intention to provide an ongoing annual dividend of $2.00 per share, to be paid quarterly. A $0.50 per share dividend was paid for each of the quarters ended September 30, 2005 and December 31, 2005, and for each of the four quarters in the year ending 2006. Cash dividends paid in 2006 were $42,532.

On February 22, 2007, our Board of Directors declared a dividend of $0.50 per share for the first quarter of 2007. The quarterly dividend will be paid on March 30, 2007 to shareholders of record at the close of business on March 9, 2007. This dividend will not be paid to our current shareholders in the event the proposed acquisition of CTE by Citizens closes on or prior to March 9, 2007.

An amended $135,000 revolving line of credit agreement with CoBank was entered into on May 29, 2006, which extended the availability of credit to May 2007 and increased the amount available to us by $50,000. The aggregate amount outstanding on this commitment was $35,000 and $35,000 at December 31, 2006 and 2005, respectively. This agreement contains restrictive covenants, which, among other things, requires the maintenance of a specific debt to cash flow ratio at CT. We may refinance all or a portion of this line of credit when it becomes due in May 2007. As of December 31, 2006, we were in compliance with our CoBank debt covenants.

Our financing arrangements with CoBank entitle us to receive annual patronage dividends from CoBank. Approximately 80% of the patronage dividends are received in cash, with the balance in CoBank equity. Patronage dividends in the form of equity received to date have a future value totaling approximately $6.3 million. We will receive cash in exchange for a portion of this equity once the value of the equity reaches certain targeted levels, which are calculated based upon the amount outstanding on our CoBank loan. We will recognize the CoBank equity dividend as it is received in cash, which we currently anticipate will not begin before 2008. The cash dividends received of $280 and $293 for the years ended December 31, 2006 and 2005, respectively, are included in interest and dividend income.

We announced a $100 million Stock Repurchase Program on November 13, 2003 and a $50 million addition to the program on February 10, 2004. The Stock Repurchase Program was completed in the second quarter of 2006. The program generated total share repurchases of 3,995,149 shares with an average purchase price of $37.546 per share for a total cost of approximately $150,000.

For the year ended December 31, 2006, our net cash provided by operating activities was $108,190, comprised of net income of $84,140, non-cash depreciation and amortization of $43,374, other non-cash items and working capital changes of $4,299, offset by the gain on the RTB dissolution of $23,623, the proceeds of which are reflected in investing activities. Net cash used in investing activities of $14,270 consisted primarily of additions to property, plant and equipment of $47,155, partially offset by the proceeds of the RTB dissolution of $30,033. Net cash used in financing activities of $71,956 consisted primarily of dividends paid of $42,532 and share repurchases of $31,456, partially offset by proceeds of stock option exercises of $2,179.

In accordance with the terms of our prior mortgage notes and security agreements which we redeemed in 1993, we were required to purchase common stock of the RTB equal to approximately 5% of the amount borrowed. Such class of stock was entitled to cash dividends. As part of the 2006 Agricultural Appropriations Bill, the Bush administration established a process and terms to implement dissolution of the RTB, whereby stockholders would obtain a cash payout for their stock. Our original cash investment in the RTB was approximately $6,409. In addition, we had received stock dividends with a face value of approximately $23,623 in accordance with the provisions of our previous financing arrangement with the RTB. On April 11, 2006, we received $30,033 in cash that represented our original cash investment and accumulated stock dividends.

We have contractual obligations and commercial commitments made in the ordinary course of business. The commercial obligations, financings and commitments made by us are customary transactions, similar to those of other comparable telecommunications providers.

The tables set forth below contain information with regard to disclosures about contractual obligations and commercial commitments. These disclosures are also included in the Notes to the Consolidated Financial Statements and cross-referenced in the tables below.

The following table discloses aggregate information about our contractual obligations as of December 31, 2006, and the periods in which payments are due:

We are exposed to interest rate risk primarily through our borrowing activities. There is inherent rollover risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of both future interest rates and our future financing requirements.

We measure the fair value of the convertible debt based upon current market prices or by obtaining quotes from dealers. The fair value of bank debt is estimated using discounted cash flow calculations. The table that follows summarizes the fair values of our fixed and variable rate debt. The table also provides a sensitivity analysis of the estimated fair values of these financial instruments assuming 100-basis-point upward and downward shifts in the weighted average interest rate.

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Certain estimates require more subjectivity or judgment than others. We review the critical accounting estimates, judgments and degrees of

subjectivity inherent in these estimates with the Company’s Audit Committee. These critical accounting estimates are:

Related parties include members of the Board of Directors and their related companies, including Level 3 Communications, Inc. Three of our directors are also directors of Level 3 and our Chairman, Walter Scott, Jr., is also the Chairman of Level 3. Level 3 does not hold any equity ownership interest in the Company at this time. Related party revenues and expenses represent the telephony service provided and the fees paid to these related companies arising from the ordinary course of business.

Mr. John R. Birk, a member of our Board of Directors, is also a member of the board of directors and chairman of a company affiliated with EVR. Evercore is an indirect subsidiary of EVR. Except as may result indirectly from his ownership of EVR shares, Mr. Birk will not receive any compensation from EVR or its affiliates in connection with our engagement of Evercore.

Prices for CT’s (our RLEC) local and in-state long-distance services are regulated by the Pennsylvania PUC. These prices are currently set under an alternative regulation (Chapter 30) plan approved by the PUC. Under this plan, as amended, CT is authorized to adjust its overall intrastate rate levels annually by an amount equal to the rate of inflation, and has committed to provide universal availability of broadband services within its service territory no later than December 31, 2008. CT could be required to refund some of its increased revenues to customers if it fails to meet its commitment to deploy broadband services. Also, CT is protected by an exogenous events provision that allows CT to adjust rates to compensate for changes in revenues and/or expenses due to certain state/federal regulatory, legislative changes or other unique changes in the telephone industry.

Pursuant to the Chapter 30 plan, CT raised certain rates to recover approximately $4,100 on an annualized basis effective May 16, 2006.

The PUC is currently considering changes in intrastate switched access rates and Universal Service Funding (“USF”) reform for independent local exchange carriers in Pennsylvania. This proceeding, which was begun in December 2004, primarily addresses the rates that CT charges to long-distance carriers for in-state toll calls that originate or terminate on CT’s local telephone lines. In previous PUC orders, reductions in in-state access charges have been offset by revenue-neutral increases in our monthly local service rates. CT also receives funding from the state USF, which could be affected by the PUC’s investigation. In August 2005, the PUC issued an order deferring this investigation for twelve months or until the FCC concludes its investigation of intercarrier compensation, whichever occurs earlier. In November 2006, the PUC extended the deferral for another twelve months. At this time, we cannot predict either the timing or the outcome of the PUC’s proceeding.

Prices for CT’s interstate services, consisting primarily of subscriber line charges and access charges for interstate toll calls, which accounted for approximately 30.0% of our RLEC’s 2006 revenues, are regulated by the FCC based on “average schedule” formulas. The purpose of the average schedule formulas is to estimate the costs of smaller telephone companies, like CT, without requiring them to perform expensive cost studies. The formulas use the costs of other telephone companies to “simulate” the costs of the average schedule companies. Under the FCC rules, NECA is required to review these formulas annually. In May 2006, the FCC approved formula changes proposed by NECA that reduced CT’s interstate revenues by approximately $1.2 million ($2.4 million annually) in the second half of 2006. In addition, the FCC also approved a phased-in structural change to the formulas that would reduce CT’s settlements by $0.2 million in 2006, $2.0 million in 2007, $3.9 million in 2008 and $4.2 million thereafter. These structural changes result primarily from changes in the formulas used to estimate common line (or local loop) costs and special circuit settlements. In addition, in December 2006, NECA submitted formula changes to the FCC, which if approved, would result in a reduction in CT’s interstate access revenues of approximately $1.1 million in the second half of 2007, $3.5 million in 2008, $5.1 million in 2009 and $5.4 million thereafter. It is possible that future changes to the formulas or FCC modification of NECA’s proposed phase-in may cause additional changes (either increases or decreases) in CT’s interstate access revenues.

CT also receives funding from the federal USF, under formulas adopted by the FCC. Effective with recent formulas adopted by the FCC, CT is entitled to receive approximately $12.5 million in interstate common line support (ICLS) annually. Changes in the federal USF formulas could have a material effect on CT’s revenues. The FCC currently is considering changes to the USF funding mechanism, but at this time we are unable to predict either the timing or the impact of any changes it may adopt.

The FCC is considering adopting proposed rules that would allow telephone companies such as CT to convert to a form of incentive regulation for interstate services similar in some respects to CT’s alternative regulation plan in Pennsylvania. We are unable to predict the timing or outcome of this proposed rulemaking at this time.

Since 2001, the FCC has been considering proposed changes to its rules to unify several existing systems of intercarrier compensation (intrastate access, interstate access, reciprocal compensation, EAS settlements, etc.) into a single coherent structure. The FCC has recently solicited comments from the public on a variety of proposed approaches to reforming intercarrier compensation. Some of these proposals, if adopted, would also affect CT’s intrastate access charges, and the amount of USF funding it receives. We have endorsed an industry consensus proposal, known as the Missoula Plan, for phasing in changes to these compensation rules over a four-year period. The FCC has solicited public comments on this proposal but has not yet taken action on it. Since CT currently derives a significant portion of its revenues from intercarrier compensation, changes in these rules may have material effects on our revenues and earnings. However, any FCC ruling is likely to address the concerns of rural carriers like CT such as the ability to raise other rates to offset reductions in intercarrier compensation, a transition period and/or increased universal service funding. Until the FCC adopts a specific proposal, it is impossible to predict how changes in this area may affect CT.

CT, CTSI and CLD are required to make contributions to the federal USF, based on their end-user revenues for interstate and international telecommunications services. Each of these companies currently passes through the cost of these contributions to its end-user customers, either as a surcharge or as part of the price of its services. In June 2006, the FCC adopted some interim changes to its contribution formulas that are expected to moderate somewhat the burden of these contributions on CT’s and CTSI’s customers, but the agency is still considering other proposals for more extensive changes in the contribution system. The FCC has not yet acted on these proposals and it is not clear whether it will adopt any of these proposals. Based on the foregoing, the application and effect of the USF requirements (and comparable state contribution requirements) on the telecommunications industry cannot be definitively ascertained at this time.

Pursuant to the “rural exemption” provision of Section 251(f)(1) of the Telecommunications Act of 1996 (“the Act”), CT is currently exempted from offering colocation, unbundled network elements (UNEs), wholesale discounts and other requirements of the Act that pertain to Regional Bell Operating Companies (RBOCs) and non-rural incumbent LECs. The rural exemption does not preclude competitors from providing telephone services within CT’s service area entirely over their own facilities. However, it requires prospective competitors who seek to interconnect with our network in order to resell services or lease unbundled network elements to go through a formal review by the Pennsylvania PUC before receiving approval. The Pennsylvania PUC may grant such approval only if it finds that the competitor’s proposal is not unduly economically burdensome, is technically feasible and is consistent with the Universal Service provisions of the Act. To date, no carrier has sought such a review by the Pennsylvania PUC.

On May 27, 2005, Core Communications, Inc. (“Core”) filed an Application with the PUC for “Approval of Authority to Offer, Render, Furnish or Supply Telecommunications Services to the Public in the Commonwealth of Pennsylvania” for the purpose of expanding its local service authority to include the service territory of CT. On July 18, 2005, as part of a group comprised of several Pennsylvania Telephone Association member companies, CT filed a Protest and Motion to Dismiss with the PUC. On February 21, 2006, a hearing on the Core application was held before an administrative law judge. On November 30, 2006, the PUC issued an order approving Core’s application.

On May 4, 2005, Sprint Communications Company L.P. (“Sprint”) filed an Application with the PUC for “Approval of Authority to Offer, Render, Furnish or Supply Telecommunications Services to the Public in the Commonwealth of Pennsylvania” for the purpose of expanding its local service authority to include the service territory of CT. On June 6, 2005, CT filed a Protest and Motion to Dismiss with the PUC. On January 18, 2006, a hearing on the Sprint application was held before an administrative law judge. Subsequently, both parties have resolved the protest.

On May 1, 2006, RCN Telecom Services, Inc. filed an application with the PUC for “Approval of the Right to begin to Offer, Render, Furnish or Supply Competitive Local Exchange Carrier Services to the Public in the Service Territory of CT.” On June 12, 2006, CT filed a protest with the PUC. Subsequently, both parties have resolved the protest.

On June 13, 2006, Blue Ridge Digital Phone Company filed an application with the PUC to provide telecommunications services in the service territory of CT. On August 7, 2006, CT filed a protest with the PUC. Subsequently, both parties have resolved the protest.

The Act’s general requirement that telecommunications carriers interconnect networks for the exchange of traffic does apply to CT. CT has received several requests for network interconnection for the exchange of traffic between its network and the networks of other facilities-based telecommunications providers, and has entered into interconnection and reciprocal compensation agreements with several national wireless carriers and other competitive carriers providing for exchange of traffic between its network and theirs.

Pursuant to FCC requirements, CT has implemented local number portability, which enables customers to keep their number when switching between carriers, without regard to whether the new carrier is a wireline or wireless service provider. The implementation of wireless number portability could negatively impact our operations, as customers become able to transfer their residential or business telephone number to a wireless telephone. In this regard, the FCC is considering shortening the time interval allowed for porting to occur. At this time, no decision has been made by the FCC.

The FCC allows telecommunications carriers to recover over five years their carrier-specific costs of implementing local number portability. The order allows for such cost recovery in the form of a surcharge from customers to whom number portability is available. CT implemented this cost recovery mechanism in 2004 to offset its costs of implementing number portability.

CTSI’s prices are subject to regulation by the FCC and the PUC although, as a competitive provider, its rates are typically subject to much less scrutiny than those of CT, or those of Verizon as the dominant local telephone service provider. CTSI’s costs are also affected by regulatory decisions because CTSI relies in part on facilities and services purchased from incumbent telephone companies (primarily Verizon), including interconnection for the exchange of local traffic with other companies in providing its services. CTSI has separate month-to-month interconnection and resale agreements with Verizon covering its former Bell Atlantic and former GTE operating areas in Pennsylvania.

The FCC has made several significant changes in recent years to its rules requiring incumbent carriers like Verizon to offer unbundled access to network elements at rates based on forward-looking incremental costs to competing carriers like CTSI, most recently in February 2005. Under the new rules, Verizon is required to continue to offer access at these rates to unbundled voice-grade loops. Verizon is not, however, required to permit unbundled access to newly-constructed fiber optic facilities serving primarily residential premises. Verizon also is no longer required to offer unbundled local switching at cost-based rates, but CTSI did not use that element significantly. Verizon is also required to provide some other network elements (including high-capacity loops and transport facilities) at cost-based rates in many, but not all, of the markets it serves, but CTSI does not rely extensively on these elements.

During 2003, the FCC gave notice of a proposed rulemaking in which it is considering changing the formula used by state commissions, including the Pennsylvania PUC, to determine rates for access to Verizon network elements and for interconnection to Verizon’s network. The FCC has taken no action to date on this proposal, and it is unknown at this time whether the FCC will change its pricing rules or what effects any such changes will have on CTSI’s costs.

Under the Act, the Pennsylvania PUC has authority to arbitrate any disputes over the terms and conditions of interconnection between CTSI and Verizon, and the prices of various unbundled network elements CTSI purchases from Verizon. The PUC has taken a number of actions over the past several years affecting the prices for network elements, as well as the terms and conditions under which these elements are provided. The PUC operates within a framework of national rules adopted by the FCC governing network element unbundling. Future decisions by the PUC and the FCC regarding these interconnection and unbundling obligations may have a material effect on CTSI’s costs and profitability.

Also, the Act authorizes the FCC to forbear from enforcing requirements of the law if it finds that these requirements are no longer necessary to protect the public interest. Pursuant to this provision, in September 2006, Verizon petitioned the FCC to forbear from requiring it to unbundle local voice-grade loops in six markets, including the Philadelphia Metropolitan Area (which includes a small portion of CTSI’s service territory). If the FCC grants this petition, Verizon would no longer be required to offer these loops at cost-based rates, although it would still be required under other provisions of law to make the loop facilities available to CTSI at some price. The FCC is required to act on this petition no later than December 2007, but we are unable to predict what action it may take or how a grant of Verizon’s petition might affect CTSI’s costs of operations in the Philadelphia Metropolitan Area.

The FCC has adopted rules limiting the amounts that CTSI can charge other carriers for access to its network for originating and terminating interstate calls (access charges).

A Pennsylvania statute (Chapter 30) adopted in 2004 provides that carriers such as CTSI may not charge intrastate access rates higher than those charged by Verizon, unless CTSI’s costs are higher than Verizon’s. CTSI’s intrastate access rates currently are higher than Verizon’s. We believe that this rate difference is cost-justified, but the PUC has not reviewed CTSI’s costs in a formal proceeding. To date, no CLEC has sought such

a review of costs by the PUC; an adverse decision on this issue could cause a reduction in CTSI’s intrastate revenues. On January 30, 2007, Verizon filed a formal complaint with the PUC claiming CTSI’s intrastate access rates are higher than the ILEC (Verizon) in the corresponding service area. To date, the PUC has taken no action on this complaint and we cannot predict the outcome of this action.

The FCC also has limited the right of competitive local carriers, such as CTSI, to collect reciprocal compensation on local telephone calls that terminate to ISPs. Under these rules, the amount of compensation payable to CTSI on terminated calls above a 3 to 1 ratio, (which are presumed to be ISP calls) generally is limited to $0.0007 per minute. In 2002, the U.S. Court of Appeals for the D.C. Circuit remanded the order in which the FCC adopted these rules, on the grounds that the FCC did not provide proper statutory authority for its order. The Court did not vacate the rules, however, and so the current compensation scheme will remain in effect pending the remand. To date, the FCC has taken no action in response to the Court’s remand.

Although declining from historical levels, CTSI derives a substantial portion of its revenues from ISPs. We expect that this reliance will continue in the foreseeable future. ISPs represented approximately 10.6% and 15.1% of CTSI’s revenues for the years ended December 31, 2006 and 2005, respectively. These revenues include services provided directly to the ISP such as local and transport services and indirect services such as reciprocal compensation, and trunking from Verizon as a result of Verizon’s customers calling these ISPs. Industry-wide trends towards declining usage of dial-up Internet access threaten the profitability or viability of our ISP customers. If we lose a large customer or a significant number of customers that are providing dial-up Internet services, or if a significant portion of these customers are unable to pay amounts owed to us, our financial results could be negatively impacted.

The FCC rate ceilings have resulted in continued reductions in the revenues CTSI receives from interstate access charges and reciprocal compensation, both in dollar amount and as a percentage of total annual revenues. CTSI’s revenues from access charges and reciprocal compensation are also affected by the mix of traffic delivered to it by other carriers for termination to CTSI customers. For the year ended December 31, 2006, CTSI recorded approximately $4,198 or 5.1% of its revenues from compensation revenue associated with ISP traffic (access revenue for all jurisdictions, including local reciprocal compensation). This compares to approximately $5,829 or 6.7% for the same period in the previous year. Of these amounts, local reciprocal compensation associated with ISP traffic was $2,652 or 0.8% and $3,331 or 1.0% of our total consolidated revenues for the years ended December 31, 2006 and 2005, respectively. Revenues from interstate access charges represented approximately 0.3% and 0.3% of our consolidated revenues, for the years ended December 31, 2006 and 2005, respectively. In addition, industry-wide trends towards declining usage of dial-up Internet access and of wireline long-distance services generally, may continue to have a negative impact on these revenues.

CTSI may also be affected by any changes in FCC rules governing intercarrier compensation, as discussed above with respect to CT.

CTSI has received several requests for network interconnection for the exchange of traffic between its network and the networks of other facilities-based telecommunications providers, and has entered into interconnection and reciprocal compensation agreements with several national wireless carriers providing for exchange of traffic between its network and theirs.

CTSI may also be affected by the introduction of wireless number portability, for the same reasons discussed above with respect to CT. CTSI is permitted by applicable rules to recover the cost of implementing number portability from its end users.

Management is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2006. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 based upon criteria in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment, management determined that the Company’s internal control over financial reporting was effective as of December 31, 2006 based on the criteria in Internal Control—Integrated Framework issued by COSO.

Our management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

We have completed integrated audits of Commonwealth Telephone Enterprises, Inc.’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) of this Form 10-K present fairly, in all material respects, the financial position of Commonwealth Telephone Enterprises, Inc. and its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a)(2) of this Form 10-K present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements 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, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 11 to the Consolidated Financial Statements, the Company changed the manner in which it accounts for pension and other postretirement benefits in 2006.

Also, in our opinion, management’s assessment, included in “Management’s Report on Internal Control Over Financial Reporting” appearing under Item 15(a)(1) of this Form 10-K, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting

includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Consolidated Financial Statements of Commonwealth Telephone Enterprises, Inc. (“CTE,” “the Company,” “we,” “us” or “our”) include the accounts of its wholly-owned subsidiaries, Commonwealth Telephone Company (“CT”), a rural incumbent local exchange carrier (“RLEC”); CTSI, LLC (“CTSI”), our RLEC “edge-out” operation and a competitive local exchange carrier (“CLEC”); and other operations (“Other”). The CT segment includes the results of Commonwealth Long Distance Company (“CLD”), a reseller of long-distance services and the portion of our digital subscriber line (“DSL”) product offering in CT’s franchise area. Other includes Commonwealth Communication, LLC (“CC”), a provider of telecommunications equipment and facilities management services; epix^® Internet Services (“epix”), which provides dial-up Internet services; and our corporate entity. All significant intercompany accounts and transactions are eliminated.

For comparative purposes, certain prior period amounts have been reclassified to conform to the current year presentation.

Merger Agreement with Citizens Communications Company—On September 18, 2006, Commonwealth Telephone Enterprises, Inc. and Citizens Communications Company (“Citizens”) announced that they have entered into an agreement for Citizens to acquire CTE in a cash-and-stock taxable transaction. Based on the closing price of Citizens’ common stock on September 15, 2006, the merger consideration has an implied value of $41.72 per share and an implied total consideration of $1.16 billion. Each CTE share will be converted into the right to receive $31.31 in cash and 0.768 shares of Citizens’ common stock. The acquisition has been approved by the Boards of Directors of both Citizens and CTE and by our shareholders at a special meeting of shareholders held on January 25, 2007. The completion of the merger is also subject to the satisfaction of certain customary closing conditions and on January 26, 2007, the Federal Communications Commission approved the transaction. The transaction is pending approval from the Pennsylvania Public Utility Commission, which may be received as early as March 1, 2007. If the approval is obtained on March 1, 2007, we would anticipate that the transaction will close on March 8, 2007. There can be no assurance, however, that the required consents or conditions will be obtained or satisfied by March 1, 2007, or at all, and consequently there can be no assurance that the merger will be consummated on March 8, 2007, or at all. The transaction will be a taxable transaction for U.S. federal tax purposes and therefore shareholders will not receive any portion of the consideration on a tax-free basis.

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. On an ongoing basis, we evaluate our estimates. Actual results could differ from these estimates under different assumptions or conditions.

Revenue Recognition—Local telephone service revenue is recorded based on tariffed rates. Telephone network access and long-distance service revenues are derived from access charges, toll rates and settlement arrangements. CT’s interstate access charges are subject to a pooling process with the National Exchange Carrier Association. Final interstate revenues are based on nationwide average costs applied to certain demand quantities.

Long-distance telephone service revenues are recorded based on minutes of traffic processed, tariffed rates or contracted fees.

Revenue from local telephone, Internet access and long-distance telephone services is earned and recorded when the services are provided.

Unbilled revenue represents revenue that has been earned, but has not yet been billed.

Access revenue consists primarily of charges paid by long-distance companies and other telecommunications carriers for access to our network in connection with the completion of long-distance telephone calls. If the Company determines that a portion of the amounts billed may not be realizable due to uncertainty surrounding the jurisdiction or rate applied to the billing, we defer recognition of this specific revenue because the carrier has the ability to dispute the billing within a certain timeframe depending on the jurisdiction. Upon expiration of the statute of limitations, these revenues are no longer subject to claim or refund and therefore the Company records the recognition of this revenue.

Our revenues are also affected by the terms of our various carrier agreements by which certain interstate traffic is subject to a percent interstate usage (“PIU”) factor and certain intrastate traffic is subject to a percent local usage (“PLU”) factor. These factors may be updated based on actual traffic patterns. Revisions to the PIU and PLU factors could have an impact (positive or negative) on our results of operations due to a shift of traffic to different jurisdictional rates.

We defer and amortize CT, CTSI and epix installation revenue as well as associated incremental service installation costs, not in excess of installation revenue, over their respective estimated customer lives that are estimated to be 7 years, 3.2 years and 1.5 years, respectively. We carry in the Consolidated Balance Sheets deferred credits of $6,090 and $6,154 as of December 31, 2006 and 2005, respectively, in other liabilities representing the unamortized portion of installation revenue. Additionally, we have deferred charges of $6,090 and $6,154 as of December 31, 2006 and 2005, respectively, in other assets representing the unamortized portion of installation costs.

Contracts of CC are accounted for on the percentage-of-completion method. Estimated sales and earnings are recognized as equipment is installed or contract services rendered, with estimated losses, if any, charged to income in the period the losses are identified.

Estimating Valuation Allowances—We must make estimates of the uncollectability of our accounts receivables. We specifically analyze accounts receivable and historic bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.

Advertising Expense—Advertising costs are expensed as incurred. Advertising expense charged to operations was $3,218, $3,080 and $3,212 in 2006, 2005 and 2004, respectively.

Stock-Based Compensation—Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R) (“FAS 123(R)”), “Share-Based Payment.” Prior to January 1, 2006, we applied the intrinsic value method of Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” (“APB 25”) and the Financial Accounting Standards Board Interpretation No. 44 “Accounting for Certain Transactions Involving Stock Compensation” (“FIN 44”) in accounting for our stock plans. We had adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”). We have adopted the modified prospective application transition method without restatement of prior interim periods. Prior to our adoption of FAS 123(R), benefits of tax deductions in excess of recognized compensation costs were reported as operating cash flows in the Statements of Cash Flows. FAS 123(R) requires excess tax benefits, if any, be reported as a financing cash inflow rather than as a reduction of taxes paid. Information related to stock-based compensation for the years ended 2006, 2005 and 2004 is more fully described in Note 10 to the Consolidated Financial Statements.

Earnings Per Share—Basic earnings per share amounts are based on net income divided by the weighted average number of shares of common stock outstanding during each year.

Diluted earnings per share are based on net income divided by the weighted average number of shares of common stock outstanding during each year after giving effect to dilutive common stock equivalents. Options that could potentially dilute basic earnings per share in the future because the options’ exercise prices were greater than the average market price of our common stock and were not included in the computation of diluted earnings per share, were approximately 4,760, 3,508 and 25,441 for the years ended December 31, 2006, 2005 and 2004, respectively.

In September 2004, the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board reached a consensus on “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share” (“EITF 04-8”). EITF 04-8 requires that contingently convertible debt be included in diluted earnings per share computations regardless of whether the market price trigger has been met. EITF 04-8 is effective for reporting periods ending after December 15, 2004. Prior period diluted earnings per share amounts were restated to conform to this consensus.

At the conversion rate in effect at December 31, 2006, our convertible debt is convertible into 7,711,650 shares of our common stock. At the conversion price in effect at December 31, 2005, our convertible debt was convertible into 7,285,200 shares of our common stock.

The following table is a reconciliation of the numerators and denominators of the basic and diluted per share computations for net income:

Cash and Temporary Cash Investments—For purposes of reporting cash flows, we consider all highly liquid investments purchased with an original maturity of three months or less to be temporary cash investments. Temporary cash investments are stated at cost, which approximates market value. At times, our cash balances and temporary cash investments exceed FDIC insurance limits.

Property, Plant and Equipment and Depreciation—Property, plant and equipment reflects the original cost of acquisition or construction, including payroll and related costs such as taxes, pensions and other fringe benefits, certain general administrative costs and assets held under capital lease. Major replacements and betterments are capitalized. Repairs of all property, plant and equipment are charged to expense as incurred.

Depreciation on telephone plant is based on the estimated remaining lives of the various classes of depreciable property and straight-line composite rates. The average rates were approximately 4.56%, 6.32% and

8.05% in 2006, 2005 and 2004, respectively. At the time telephone plant is retired, the original cost less salvage is charged to accumulated depreciation. All other property, plant and equipment gain or loss is recognized on retirements and dispositions.

Late in the second quarter of 2005, we completed our periodic review of asset retirement activity, salvage values and fixed asset lives at our CT and CTSI segments. This review involved a detailed analysis of assets in our network and incorporated our expectations for expansion and customer demand for new technology. Also, the second quarter of 2005 review incorporated the results of the Chapter 30 Plan amendment that was approved by the Pennsylvania Public Utility Commission (“PUC”) in March 2005, which prescribed the broadband capability we are required to provide to our customers by December 31, 2008, and which clarified our expectations with regard to future capital deployment requirements in CT’s territory. Specifically, the revised Chapter 30 Plan allows us to build upon, in large part, our current network, which we believe justifies a longer useful life for such assets. As a result of this review, we revised the useful lives of certain classes of assets, primarily digital electronic switching equipment, digital circuit transmission and computers and software. The impact of these changes was a lengthening of useful lives that had the effect of reducing depreciation by $2,443 and $7,248 (after-tax) or $0.08 and $0.25 per diluted share for the twelve months ended December 31, 2006 and 2005, respectively.

In March 2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations—an Interpretation of FASB Statement No. 143.” FIN 47 clarifies that an entity is required to recognize the liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN 47 clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This Interpretation is effective no later than the end of fiscal years ending after December 15, 2005. The application of this Interpretation did not have a material effect on our results of operations or financial condition.

Leasehold Improvements—Leasehold improvements are amortized over the lesser of the leasehold improvement’s useful life or the term of the underlying lease (including renewals that are deemed to be reasonably assured) at the date the leasehold improvement is purchased.

Derivative Instruments—We utilized an interest rate swap agreement (that expired in April 2006) to reduce our exposure to interest rate fluctuations on our floating rate debt. The swap agreement was a contract to exchange floating rate for fixed interest payments periodically over the life of the agreement without exchange of the underlying notional amount. Amounts to be paid or received under the interest rate swap agreement were accrued and recognized over the life of the swap agreement as an adjustment to interest expense.

The fair value of the interest rate swap is recorded in other liabilities on our Consolidated Balance Sheets. The effective portion of interest rate swap gains or losses is initially reported as a component of other comprehensive loss and subsequently reclassified into earnings as an adjustment to interest expense. The ineffective portion, if any, is reported as other income (expense). The fair values of the interest rate swaps at January 1, 2004 were ($3,830). For the year ended December 31, 2004, we recorded an adjustment of $2,554 to adjust the fair value of the swaps to ($1,276). For the year ended December 31, 2005, we recorded an adjustment of $1,082 to adjust the fair value of the swaps to ($194). The interest rate swap matured on April 4, 2006, and for the year ended December 31, 2006, we recorded an adjustment of $194 to adjust the fair value of the swap to $0. The adjustment of $127, net of taxes of $67 in 2006, the adjustment of $703, net of taxes of $379 in 2005, and the adjustment of $1,660, net of taxes of $894 in 2004, are reported as unrealized gains (losses) on derivative instruments in accumulated other comprehensive income (loss).

The interest rate swaps were highly effective in achieving the offset of changes in cash flows of the underlying debt. We calculated the excess in the present value of the cumulative change in cash flows relating to the floating leg of the swaps as compared to the present value of the cumulative changes in interest cash outflows

on the debt to measure ineffectiveness. For the years ended December 31, 2006, 2005 and 2004, the ineffectiveness charged to earnings was $0.

Other Assets—Other assets principally include the unamortized portion of installation costs, costs incurred to obtain financing and pension intangible.

Income Taxes—We report income for federal income tax purposes on a consolidated basis. We report income for state income tax purposes on a legal entity basis. We use an asset and liability approach for financial accounting and reporting for income taxes. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between financial reporting basis and tax basis of assets and liabilities. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized.

Accounting for Impairments—Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, we estimate the net future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected net future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss for long-lived assets would be based on the excess of the carrying value of the asset over the fair value. Fair value would be determined using the anticipated cash flows discounted at a rate commensurate with the risk involved.

Recent Accounting Pronouncements—In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes.” FIN 48 is an interpretation of FASB Statement No. 109 “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in tax returns. Additionally, FIN 48 provides guidance on the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The new guidance is effective for fiscal years beginning after December 15, 2006. We are in the process of determining the effect the adoption of FIN 48 will have on our financial statements.

In September 2006, the FASB issued SFAS No. 157, (“SFAS 157”) “Fair Value Measurements.” SFAS 157 establishes a common definition for fair value to be applied to US GAAP guidance requiring use of fair value, establishes a framework for measuring fair value and expands disclosure about such fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We are in the process of determining the effect, if any, the adoption of SFAS 157 will have on our financial statements.

In June 2006, the FASB’s Emerging Issues Task Force reached a consensus on EITF Issue No. 06-3 (“EITF 06-3”) “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” The Task Force reached a consensus that the scope of this Issue includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer. The presentation of taxes on either a gross or a net basis is an accounting policy decision that should be disclosed pursuant to Opinion No. 22. For any taxes reported on a gross basis, a company should disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant. The new guidance is effective for financial reports for interim and annual periods beginning after December 15, 2006. We believe that the adoption of EITF 06-3 will not have a material effect on our results of operations or financial condition.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 does not affect any existing accounting literature that requires

certain assets and liabilities to be carried at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We do not expect our adoption of this new standard to have a material impact on our financial position, results of operations or cash flows.

We operate in two principal business segments: Commonwealth Telephone Company (“CT”), a rural incumbent local exchange carrier (“RLEC”); and CTSI, LLC (“CTSI”), our RLEC “edge-out” operation, which formally commenced operations in 1997.

The CT segment includes the results of CLD, a reseller of long-distance services, and the portion of the digital subscriber line (“DSL”) product offering in CT’s franchise area. CT provides local and long-distance telephone service and DSL service to residential and business customers in a 19-county service territory in rural eastern and central Pennsylvania. CT also provides network access and billing/collection services to interexchange carriers and sells telecommunications products and services.

CTSI, which operates in three edge-out regional Pennsylvania markets that border CT’s territory, is a competitive local exchange carrier offering bundled local and long-distance telephone, DSL and enhanced services.

The Other segment includes the results of Commonwealth Communication, LLC (“CC”), a provider of telecommunications equipment and facilities management services; epix^® Internet Services (“epix”), which provides dial-up Internet service; and CTE’s corporate entity.

No single external customer contributes ten percent or more of CTE’s consolidated revenues.

Operating income (loss) is the primary measure used by our management to assess the performance of each segment.

The following table shows a reconciliation of operating income for the reportable business segments to income before taxes:

In connection with the Citizens merger, we have incurred costs of $4,729 in 2006 related to financial advisory, legal and other fees as well as a pro-rata portion of the retention bonuses we expect to pay in cash to our employees at the completion of the merger. We are obligated to pay Evercore Group L.L.C. (“Evercore”) approximately $11,000, $250 of which was paid to Evercore upon its being retained by us, approximately $2,800 of which was paid to Evercore when we entered into the merger agreement with Citizens and the remainder of which (approximately $8,000) will become payable to Evercore if the merger is successfully completed, which is anticipated to be as early as March 8, 2007. The amount of the final Evercore advisory fee to be paid may be adjusted depending on the closing price of the Citizens common stock on the closing date of the merger and on the amount of our indebtedness on the closing date of the merger.

In order to enhance CTSI’s near-term cash flow and reduce CTSI’s capital requirements, in December 2000 we announced our intention to exit five CTSI expansion markets: suburban Philadelphia, PA; Binghamton, NY; Syracuse, NY; Charleston/Huntington, WV; and Youngstown, OH. Related to this, we recorded an estimated restructuring charge of $99,713 ($64,813 after-tax), or ($2.79) (after-tax) per common share (including effects of anti-dilutive options).

Payments were $0, $376 and $136 for the years ended December 31, 2006, 2005 and 2004, respectively. Reversals (net of provisions) were $0, ($32) and $332 for the years ended December 31, 2006, 2005 and 2004, respectively. In addition, assets that we had previously written off were sold, returning a gain of $63 in 2005 and $245 in 2004. In 2004, we reversed $222 of our reserve associated with disposal costs of exit market inventory. As of December 31, 2006 and 2005, the balance in accrued restructuring expense was $0.

Depreciation and amortization expense was $43,374, $57,892 and $70,974 for the years ended December 31, 2006, 2005 and 2004, respectively.

In accordance with the terms of our prior mortgage notes and security agreements, which we redeemed in 1993, we were required to purchase common stock of the Rural Telephone Bank (“RTB”) equal to approximately 5% of the amount borrowed. Such class of stock was entitled to cash dividends, which are included in interest and dividend income and were approximately ($375), $1,700 and $1,800 for the years ended December 31, 2006, 2005 and 2004, respectively. As part of the 2006 Agriculture Appropriations Bill, the current Administration established a process and terms to implement a dissolution of the RTB, whereby stockholders would obtain a cash payout for their stock. Our original cash investment in the RTB was approximately $6,409. In addition, we have received stock dividends with a face value of approximately $23,623 in accordance with the provisions of our previous financing arrangement with the RTB. On April 11, 2006, we received $30,033 that represents our original cash investment and accumulated stock dividends. Our gain on the RTB dissolution is $23,623.

Our financing arrangements with CoBank, ACB (“CoBank”) entitle us to receive annual patronage dividends from CoBank. For 2006, approximately 80% of the patronage dividends are received in cash, with the balance in CoBank equity. For 2005, approximately 60% of the patronage dividends were received in cash. The cash portion is included in interest and dividend income and was $280, $293 and $197 for the years ended 2006, 2005 and 2004, respectively. Patronage dividends in the form of equity received to date have a future value totaling approximately $6.3 million. We will receive cash in exchange for a portion of this equity once the value of the equity reaches certain targeted levels, which are calculated based upon the amount outstanding on our CoBank loan. We will recognize the CoBank equity dividend as it is received in cash, which we currently anticipate will not begin before 2008.

CTE owns a 50% interest in the Yellow Book, USA, L.P. Partnership (“Yellow Book”), accounted for under the equity method. Yellow Book provides directory publishing services, including yellow page advertising sales for eight telephone directories.

The Yellow Book, USA, L.P. Partnership accounts for its yellow page advertising revenue based on the delivery method, which recognizes revenue based on the directories delivered (to subscribers) as a percentage of the total directories (initial and secondary) estimated to be delivered.

a. Long-term debt—Long-term debt and capital lease obligations outstanding are as follows:

In July of 2003, we sold $300,000 principal amount of 3.25% convertible notes due 2023. On June 24, 2005, we launched an exchange offer pursuant to which we offered to exchange up to $300,000 of our then outstanding 3.25% convertible notes (the “Old Notes”) for new 2005 Series A 3.25% convertible notes (the “New Notes”) due 2023 in an equal principal amount plus an exchange fee of $2.50 per $1,000 principal amount of existing notes. The New Notes contain terms that provide us with the flexibility to settle conversion of the notes with cash, common stock or a combination of cash and common stock. The Old Notes require us to settle conversions of notes with shares of common stock. The change to the terms of the notes allows us to reduce the dilutive effect on our common stock that would be caused by future conversion of the convertible notes. The terms of the New Notes maintain full dividend protection for the holders of the notes. The exchange offer closed on August 3, 2005, at which time a total of $63,892 principal amount of New Notes were issued in exchange for the same principal amount of Old Notes and an exchange fee of $160 was paid.

We have applied the guidance provided in EITF Issue No. 96-19 “Debtor’s Accounting for a Modification or Exchange of Debt Instruments” and EITF Issue No. 05-7 “Accounting for Modifications to Conversion Options Embedded in Debt Securities and Related Issues” in accounting for the exchange offer. In this regard, we have determined that the exchange offer did not result in a substantial modification of terms and was not treated as an extinguishment of debt. Per the guidance, fees paid by the Company of $160 to Holders will be amortized to the first put date, July 15, 2008, and costs incurred with third parties of approximately $421 directly related to the exchange have been expensed as incurred.

The settlement terms of the Company’s 3.25% convertible notes were evaluated against the guidance in EITF Issue 01-6 “The Meaning of Indexed to a Company’s Own Stock” within the meaning of paragraph 11(a) of FASB Statement No. 133. As a result of this evaluation, the Company determined that the contingent interest portion and the trading price condition feature do not pass the requirements of paragraph 11(a) because they are dual-indexed to the trading price of the Company’s common stock and debt fair values. The contingent interest feature and the trading price condition feature are bifurcated and separated from the debt host contract and accounted for as a derivative instrument in accordance with the provisions in FASB Statement No. 133. Based on fair value estimates determined with the assistance of a third party, we have determined that the impact of these embedded derivatives was not material for the years ended December 31, 2006, 2005 and 2004.

b. Short-term debt—An amended $135,000 revolving line of credit agreement with CoBank was entered into on May 29, 2006, with a $35,000 balance outstanding. The line of credit is at interest rates that are based on a LIBOR rate or floating rate option. Interest payments are payable monthly. This agreement contains restrictive covenants, which, among other things, require the maintenance of a specified debt to cash flow ratio at CT. For all periods presented, we were in compliance with our covenants. As of December 31, 2006 the weighted average interest rate was 5.98% on borrowings of $35,000. The revolving line of credit agreement provides for the availability of credit to May 27, 2007. We may refinance all or a portion of this line of credit when it becomes due.

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R) (“FAS 123(R)”), “Share-Based Payment.” Prior to January 1, 2006, we applied the intrinsic value method of Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” (“APB 25”) and the

Financial Accounting Standards Board Interpretation No. 44 “Accounting for Certain Transactions Involving Stock Compensation” (“FIN 44”) in accounting for our stock plans. We had adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”). We have adopted the modified prospective application transition method without restatement of prior interim periods. Prior to our adoption of FAS 123(R), benefits of tax deductions in excess of recognized compensation costs were reported as operating cash flows in the Statements of Cash Flows. FAS 123(R) requires excess tax benefits, if any, be reported as a financing cash inflow rather than as a reduction of taxes paid. As a result of the adoption of FAS 123(R), our income before income taxes and net income for the year ended December 31, 2006 is $797 and $496 lower, respectively, than under our previous accounting method for share-based payments. Upon adoption of FAS 123(R), we recorded $77 cumulative effect of a change in accounting principle as a result of our change in policy from recognizing forfeitures as they occur to one where we recognize expense based on our expectation of the awards that will vest over the requisite service period. This amount was recorded in other income (expense) in the accompanying Consolidated Statements of Operations.

For stock options granted prior to the adoption of FAS 123(R), pro forma amounts based on the options’ fair value, net of tax, at the grant dates for CTE Equity Incentive Plan awards under the fair value method of SFAS No. 123 for the years ended 2005, 2004 and 2003 are:

Our Equity Incentive Plan, as amended in 2006, has 1,857,000 shares of common stock authorized for the issuance of awards. Awards granted under the Plan may include incentive stock options, stock appreciation rights, performance share units, restricted stock, phantom stock units and other stock-based awards. All unvested awards will vest immediately upon change in control. Stock options currently granted under the Plan vest in increments of 20% commencing one year from the date of the grant and expire ten years from the date of the grant. For all options granted, the exercise price is equal to the market price of the common stock at the date of the grant. There were no options granted in 2006, 2005 and 2004; as a result, no Black-Scholes valuation was required. During the years ended December 31, 2006 and 2005, 81,264 and 650,574 options were exercised, respectively, yielding cash proceeds of $2,179 and $23,678 and an income tax benefit of $225 and $3,430, respectively. Shares issued upon the exercise of the stock options in 2006 were from treasury shares.

In connection with the payment of the special and initial quarterly dividends on June 30, 2005, the exercise price and number of all outstanding options were adjusted such that each option had the same value to the holder after the dividend as it had before the dividend. In accordance with FASB Interpretation No. 44 “Accounting for Certain Transactions Involving Stock Compensation” and EITF 00-23 “Issues Related to the Accounting for Stock Compensation under APB No. 25 and FIN 44,” there is no accounting consequence for changes made to the exercise price and the number of shares of a fixed stock option or award as a direct result of the June 2005 dividends due to the fact that the transaction was an equity restructuring.

Restricted stock awards (either in the form of restricted shares or units) currently granted under the Plan vest in increments of 25% commencing one year from the date of the grant. The compensation cost to be recognized is based on the fair market value at the date of the grant multiplied by the number of units issued, after giving effect to a forfeiture assumption. Restricted share units do not give the holder any rights as a shareholder or record owner of any shares of common stock, although they are eligible to receive dividend equivalent units in an amount equal to any dividends of common stock. For restricted stock units, we recognize compensation cost on a straight-line basis over the four-year vesting period. Vested restricted shares were issued from treasury shares.

In 2006, performance restricted share units were granted, with the total number of units to be issued based on the relationship of 2006 business results to a pre-determined target. Based on the outcome of our 2006 results, 82,588 units will be issued in early 2007, and these units will then be subject to a three-year service vesting, with one-third of the award vesting each year. Throughout 2006, we have estimated the number of units that will be issued and recognized compensation cost using the graded vesting approach over the four year requisite service period. Performance share units are not entitled to receive dividend equivalent units until they are issued. On September 16, 2006, in conjunction with the merger agreement with Citizens, the Compensation Committee modified the pre-determined target with the effect of lowering the target levels specified in those awards. Approximately 70 employees were affected by the modification and the incremental compensation cost of approximately $56 resulting from the modification was recognized in the third quarter of 2006.

Prior to the adoption of FAS 123(R), we recognized compensation cost for restricted stock over the four-year vesting period (the “nominal vesting period approach”). For any employee that retires before the end of the vesting period, we would have recognized any unamortized compensation cost at the date of retirement. With the adoption of FAS 123(R), compensation cost is recognized immediately for awards granted to retirement eligible employees or over the period from the grant date to the date retirement eligibility is achieved (the “non-substantive vesting period approach”). If we had applied the non-substantive vesting period approach in prior periods, the change in compensation cost would not have been material.

Our Non-Management Directors’ Stock Compensation Plan provides for the grant of up to 250,000 shares of common stock to members of our Board of Directors who are not, as of the date of any award, CTE employees. Awards granted under this Plan may include nonqualified stock options, outperformance stock options, stock appreciation rights, performance share units, restricted stock, phantom stock units and other stock-based awards. The options are immediately exercisable and shall remain exercisable until the earlier of ten years from the date of grant and a period of one year from the date upon which the participant ceases to be a non-management director. Restricted stock awards (either in the form of restricted shares or units) vest fully commencing one year from the date of the grant. Restricted share units do not give the holder any rights as a shareholder or record owner of any shares of common stock, although they are eligible to receive dividend equivalent units in an amount equal to any dividends on common stock.

Pursuant to the Non-Management Directors’ Stock Compensation Plan, each non-employee director receives an annual grant of restricted stock, in an amount determined by the Corporate Governance Committee, on the date of the Annual Meeting of Shareholders. The fair value of the restricted stock units is recognized as compensation cost over the one-year vesting period.

We also have a nonqualified stock purchase plan for certain key executives (the “Executive Stock Purchase Plan” or “ESPP”). Under the ESPP, participants may purchase shares of common stock in an amount between 1% and 20% of their annual base compensation and between 1% and 100% of their annual bonus compensation, provided, however, that in no event shall the participant’s total contribution exceed 20% of their combined base and annual bonus compensation, as defined by the ESPP. Participants’ accounts are credited with the number of share units derived by dividing the amount of the participant’s contribution by the average price of a share of common stock at the time such contribution is made. The share units credited to a participant’s account do not give such participant any rights as a shareholder or record owner of any shares of common stock. Participants will be credited with share units equal to the value of any dividend on common stock. Amounts representing

share units that have been credited to a participant’s account will be distributed to the participant following the earlier of the participant’s termination of employment or three calendar years following the date on which the share units were initially credited to the participant’s account. It is anticipated that, at the time of distribution, a participant will receive one share of common stock for each share unit being distributed.

Following the crediting of each share unit to a participant’s account, we will issue a matching share of common stock held in escrow in the participant’s name. Each matching share is subject to forfeiture as provided in the ESPP. A participant will be deemed to be the holder of, and may exercise all the rights of a record owner of, the matching shares issued to such participant while such matching shares are held in escrow. The matching shares vest three years from the date of the contribution.

At December 31, 2006, there were 126,875 ESPP shares arising from participants’ contributions and 126,875 matching shares. The number of shares vested, including matching shares, at December 31, 2006 was 173,440. We recognize the cost of the matching shares over the vesting period. Expense recognized in 2006, 2005 and 2004, was $1,315, $1,261 and $857, respectively. Matching shares are included in weighted average shares outstanding for purposes of computing earnings per share.

Our dividend equivalent units, which were previously charged as compensation expense under APB 25, are considered to be forfeitable under FAS 123(R) in that the vesting of the dividend equivalent units are tied to the underlying equity award. Therefore, our dividend equivalent units granted during the current year on unvested awards are charged to retained earnings over the remaining vesting period of the underlying award. Dividend equivalent units granted during the current year on vested and deferred equity awards are charged to retained earnings immediately as granted.

For the years ended December 31, 2006, 2005 and 2004, we recognized non-cash pre-tax compensation expense of $9,274 ($5,777 net of tax), $9,840 ($6,130 net of tax) and $4,685 ($2,919 net of tax), respectively, related to restricted stock units, stock options and our ESPP. As of December 31, 2006, $11,873, $92 and $1,349 related to restricted stock units, stock options and ESPP, respectively, is expected to be recognized over a weighted average period of approximately 2.2 years for restricted stock, 0.2 years for stock options and 1.7 years for ESPP. As of December 31, 2005, $14,949, $919 and $1,765 related to restricted stock units, stock options and ESPP, respectively, is expected to be recognized over weighted average periods of approximately 2.6 years for restricted stock, 0.9 years for stock options and 1.7 years for ESPP.

The total fair value of stock options vested was $1,724, $3,096 and $4,389 for the years ended December 31, 2006, 2005 and 2004, respectively.

The aggregate intrinsic value represents the total pretax intrinsic value (the difference between the closing stock price on December 31, 2006, and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2006. This amount changes based on the fair market value of our stock. Total intrinsic value of options exercised was $708, $9,130 and $2,910 for the years ended December 31, 2006, 2005 and 2004, respectively.

The weighted average grant date fair value for the restricted stock granted in 2005 and 2004 was $47.60 and $41.44, respectively. The total fair value of restricted stock awards vested was $7,035, $3,559 and $3,172 for the years ended December 31, 2006, 2005 and 2004, respectively.

On the closing date of the merger with Citizens, the stock-based compensation plans will terminate and all unvested awards will vest immediately with the change in control. Amounts under these plans will be paid in cash to participants at that time.

The table below contains information pertaining to equity compensation plans approved and not approved by security holders:

Substantially all of our employees are included in a non-contributory defined benefit pension plan. The plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended. Upon retirement, employees are provided a monthly pension based on length of service and compensation.

The Company adopted SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS 158”) as of December 31, 2006. SFAS 158 requires that employers recognize on a prospective basis the funded status of their defined benefit pension and other postretirement plans on their Consolidated Balance Sheets and recognize changes in that funded status through Other Comprehensive Income in the year in which the changes occur. Upon adoption of SFAS 158, we recognized the underfunded status of our defined benefit pension plan and non-pension postretirement benefit plans as liabilities in our Consolidated Balance Sheets. The funded status is measured as the difference between the fair value of the plan assets and the projected benefit obligation. The Company measures defined benefit pension plan obligations as of December 31, and SFAS 158 will not affect the Company’s existing valuation practices.

Gains or losses, prior service costs or credits, and transition assets that have not been included in net periodic benefit costs as of December 31, 2006, will be recognized, net of tax, as components of the ending balance of Accumulated Other Comprehensive Income (“AOCI”). Subsequent to adoption, we will recognize the gains or losses and prior service costs or credits, net of tax, that arise during the period but are not recognized in net periodic benefit costs as a component of AOCI. Those amounts will be adjusted as they are subsequently recognized in net periodic benefit costs. Measurement of net periodic benefit costs has not changed as a result of adopting SFAS 158.

Plan assets include cash, equity, fixed income securities and pooled funds under management by a financial institution. The allocation of plan assets at December 31, 2006 and 2005 is:

The expected long-term rate of return assumption is based on the actual historical rates of return of published indices that are used to measure the plan’s target asset allocation. The historical rates are then discounted to consider fluctuations in the historical rates as well as potential changes in the investment

environment. The investment strategy for plan assets is to maintain a broadly diversified portfolio designed to achieve an average long-term rate of return of 8.5% effective with the 2006 plan year. Assets are strategically allocated between equity and fixed income securities in order to achieve a diversification level that mitigates wide swings in investment returns. Asset allocation target ranges are evaluated at least every three years with the assistance of an external consulting firm. Actual asset allocations are monitored quarterly and rebalancing actions are executed at least quarterly, if required.

The majority of the plan assets are invested in equity securities because equity portfolios have historically provided higher returns than debt portfolios over the long-term and are expected to do so in the future. Correspondingly, equity investments also carry greater risks than debt investments. The risk of loss in the plan’s equity assets is mitigated by investing in a broad range of equity types including large-cap and small-cap stock funds, and international equity funds.

The following table sets forth the defined benefit pension plan’s obligations and funded status:

The following table details expected benefit payments for the years 2007 through 2016:

In the fourth quarter of 2005, in accordance with SFAS No. 87, “Employers’ Accounting for Pensions,” we recorded a minimum pension liability of $7,054 representing the difference between the accumulated benefit obligation and the fair value of the Plan assets at December 31, 2005. Also, a pension intangible equal to the unrecognized prior service cost of $3,679 was recognized. A charge to other comprehensive income (loss) in the amount of $3,675 ($2,288 after-tax) represents the excess of additional minimum pension liability (“AML”) over unrecognized prior service cost.

The estimated net loss and prior service cost for the defined benefit pension plan that will be amortized from AOCI into net periodic benefit cost during 2007 are $30 and $580, respectively.

The following reflects the financial impact to various balance sheet accounts resulting from the recording of the AML adjustment and adoption of SFAS 158 in 2006 for the defined benefit pension plan:

The accumulated benefit obligation was $94,877 and $93,410 at December 31, 2006 and 2005, respectively.

The following assumptions were used in the determination of the net benefit cost:

The following assumptions were used in the determination of the benefit obligation:

The discount rate was determined by using the constant rate result of discounting the plan’s expected future benefit payments on December 31 using the Citigroup Pension Curve and Liability Index. The expected return on plan assets is based on our asset allocation mix and our historical return, taking into account current market conditions and our best estimate of future economic conditions.

Our policy with respect to funding the plan is to fund at least the minimum required by ERISA, and not more than the amount deductible for tax purposes. No contributions were required to be made to the plan in 2006 or 2005, and no contributions are required in 2007. We made a required minimum contribution to the plan of $2,070 in the third quarter of 2004 for the 2003 plan year with cash generated from operations.

For former employees included in the VRP that took place in 2001 and 2002, we provide medical benefits until age 65. For employees retiring prior to 1993, we provide certain postretirement medical benefits. We also provide nominal postretirement life insurance benefits to all vested retirees.

We estimate the 2007 net, periodic postretirement benefit cost to be approximately $15 for the VRP and $33 for the postretirement plan.

The following table sets forth the plans’ funded status and amounts recognized in our Consolidated Balance Sheets:

The following table details expected benefit payments for the years 2007 through 2016:

Amounts recognized in the Consolidated Balance Sheets for VRP and postretirement benefits consist of:

The accrued VRP and the postretirement benefit liabilities were included in other liabilities in the accompanying Consolidated Balance Sheets for 2005. The amounts recognized at December 31, 2005 for VRP and postretirement benefits were $533 and $1,739, respectively.

Amounts recognized in AOCI consist of a net gain of $891 as of December 31, 2006. The estimated net gains for the VRP and postretirement benefit plan that will be amortized from AOCI into net periodic postretirement benefits during 2007 are $27 and $75, respectively.

The following reflects the financial impact to various balance sheet accounts resulting from the adoption of SFAS 158 in 2006:

The discount rate used in determining the accumulated VRP and postretirement benefit obligations was 5.75% in 2006 and 5.50% in 2005.

Our portion of the monthly premium for retirees included in the VRP and postretirement benefit obligation is limited, and any increase in medical costs is absorbed by the retiree. As such, a negative trend in healthcare costs will have no effect on the accumulated postretirement benefit obligation or the net periodic postretirement benefit cost.

We also have a nonqualified supplemental pension plan covering certain former employees which provides for incremental pension payments from us to the extent that income tax regulations limit the amount payable from our defined benefit pension plan. The projected benefit obligation relating to this unfunded plan was approximately $1,163, $1,213 and $1,097 at December 31, 2006, 2005 and 2004, respectively. Pension expense for the plan was $66 in 2006, $67 in 2005 and $67 in 2004. An amount of $147 ($92 after-tax) was recorded to AOCI in 2006, resulting from the adoption of SFAS 158. This represented net losses which will be amortized to net periodic benefit costs in subsequent years.

We provide certain postemployment benefits to former or inactive employees who are not retirees. These benefits are primarily short-term disability salary continuance. We accrue the cost of postemployment benefits over employees’ service lives. We use the services of an enrolled actuary to calculate the expense. The net periodic cost for postemployment benefits was $353 in 2006, $371 in 2005 and $324 in 2004.

We sponsor a 401(k) savings plan covering substantially all employees. For employees who are not covered by collective bargaining agreements, we contribute to the 401(k) plan based on a specified percentage of employee contributions. Contributions charged to expense were $1,116, $1,030 and $1,020 in 2006, 2005 and 2004, respectively.

The provision for income taxes is reflected in the Consolidated Statements of Operations as follows:

The following is a reconciliation of income taxes at the applicable U.S. federal statutory rate with income taxes recorded by us:

Pennsylvania taxable income or $3,000. For the year ended December 31, 2006, we have recorded a benefit to deferred income tax expense of $4,332 related to this Pennsylvania state income tax law change.

Temporary differences and carryforwards that give rise to a significant portion of deferred tax assets and liabilities are as follows:

In our opinion, based on the future reversal of existing taxable temporary differences, primarily depreciation and expectations of future operating results, after consideration of the valuation allowance, we will more likely than not be able to realize substantially all of our deferred tax assets.

The net change in the valuation allowance for deferred tax assets during 2006 was an increase of $3,558. The net change is due primarily to an analysis of the anticipated realization of the deferred tax assets related to state NOL carryforwards under existing state tax law.

As of December 31, 2006, we have cumulative state NOLs of $221,544 that can be utilized through 2026. The change in the Pennsylvania tax law increased the NOLs available to us by approximately $152,529. The determination of the state NOL carryforward is dependent upon the subsidiaries’ taxable income or loss, apportionment percentages and other respective state laws, which can change from year to year and impact the utilization of such carryforward.

In 2005, we performed a detailed review of all deferred tax items and supporting schedules of net book versus net tax values. This review resulted in a net deferred tax benefit of approximately $3,154 ($2,239 impact to the fourth quarter) related to prior years that we recorded in the fourth quarter of 2005.

a. Total rental expense, including pole and conduit rentals, was $7,543, $7,960 and $7,916 in 2006, 2005 and 2004, respectively. At December 31, 2006, rental commitments under noncancelable leases, excluding annual pole and conduit rental commitments of approximately $4,903 that are expected to continue indefinitely, are as follows:

b. Effective July 2, 2004, we extended our agreement for the provision to us of data processing services including the general management of our data processing operations through December 31, 2005 (that was subsequently extended through January 31, 2006). The annual commitment, excluding annual increases based on increases in the Consumer Price Index (CPI), was $7,479 in 2005. In the second half of 2005, the Company decided not to renew the agreement when it expired. These data processing services were brought in-house starting February 1, 2006.

c. In May 2001, CT entered into a fifteen-year, two-month agreement for the rental of a building in an area of a city qualifying for certain tax incentives offered by the state of Pennsylvania. The annual commitment through year ten is $1,163. Annual rent for the last five years is subject to changes in the CPI. In addition, CT also entered into a lease agreement for the rental of parking spaces for employees of the building, for a similar term. The annual commitment, excluding increases in the last five years based on increases in the CPI, is $168.

d. We had various purchase commitments at December 31, 2006 related to our 2007 capital budget. CTE’s capital expenditures have averaged $44,850 over the three years ended December 31, 2006.

In the normal course of business, there are various legal proceedings outstanding, including both commercial and regulatory litigation. In our opinion, these proceedings will not have a material adverse effect on our results of operations, financial condition or cash flows.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

a. Cash and temporary cash investments—The carrying amount approximates fair value because of the short maturity of these instruments.

b. Long-term investments—Long-term investments consist primarily of investments accounted for under the equity method for which disclosure of fair value is not required.

c. Debt—The fair value of bank debt was estimated using discounted cash flow calculations. The fair value of the convertible debt is based on quoted market prices or by obtaining quotes from dealers. The fair value of floating rate debt is considered to be equal to carrying value since the debt reprices at least every six months and we believe that our credit risk has not materially changed from the time the floating rate debt was borrowed.

d. Interest rate swap—In 2005, the fair value was calculated by the counterparty using appropriate valuation methodologies. The fair value of the interest rate swap is recorded in other liabilities on our Consolidated

Balance Sheets. For the year ended December 31, 2004, we recorded an adjustment of $2,554 ($1,660 net of tax), to adjust the fair value of the swaps to ($1,276). For the year ended December 31, 2005, we recorded an adjustment of $1,082 ($703 net of tax), to adjust the fair value of the swap to ($194). The interest rate swap matured April 4, 2006. For the year ended December 31, 2006, we recorded an adjustment of $194 ($127 net of tax), to adjust the fair value of the swap to $0.

Certain financial instruments potentially subject us to concentrations of credit risk. These financial instruments consist primarily of trade receivables and cash and temporary cash investments.

We place our cash and temporary cash investments with high credit quality financial institutions and limit the amount of credit exposure to any one financial institution. We also periodically evaluate the credit worthiness of the institutions with which we invest. We do, however, maintain unsecured cash and temporary cash investment balances in excess of federally insured limits. We limit our exposure by diversifying among counterparties and investment categories to achieve a targeted mix of interest-bearing assets while maximizing after-tax returns.

Our trade receivables reflect a customer base primarily centered in eastern and central Pennsylvania. We assess the financial strength of our customers by performing credit evaluations and requiring deposits based on the results of these evaluations; as a result, credit risk is limited. Internet service providers represented approximately 10.6% and 15.1% of CTSI’s revenues for the years ended December 31, 2006 and 2005, respectively. No single customer contributed more than 5% of its revenues.

We have authorized 85,000,000 shares of $1 par value CTE Common Stock at December 31, 2006, 2005 and 2004. At December 31, 2002, we had authorized 15,000,000 shares of $1 par value CTE Class B Common Stock. On September 3, 2003, shareholders approved a proposal to reclassify and convert each outstanding share of CTE Class B Common Stock into 1.09 shares of CTE Common Stock. We now have only one class of common stock.

In November of 2003, our Board of Directors authorized a Stock Repurchase Program of up to $100 million of CTE Common Stock, which was subsequently increased to $150 million. The Stock Repurchase Program was completed during the second quarter of 2006. As of December 31, 2006, we had repurchased 3,995,149 shares at a cost of approximately $150 million.

During 2006, a $0.50 per share dividend was paid for the quarters ended March 30, June 30, September 30 and December 31, for which $10,902, $10,527, $10,546 and $10,557 was paid in cash, respectively. During 2005, a $0.50 per share dividend was paid for the quarters ended September 30 and December 31, for which $10,823 and $10,916 was paid in cash, respectively. On May 2, 2005, our Board of Directors declared a special dividend of $13.00 per share and a $0.50 per share dividend for the quarter ended June 30, 2005 for which $294,138 was paid.

In connection with the payment of the special and initial quarterly dividends in 2005, the exercise price and number of all outstanding options were adjusted such that each option had the same value to the holder after the dividend as it had before the dividend. The conversion rate on our outstanding 3.25% convertible notes due 2023 was also adjusted to reflect all of the dividends based on the terms of the convertible notes. At the conversion price in effect at December 31, 2006, our convertible debt is convertible into 7,711,650 shares of our common stock.

At December 31, 2006, we had accounts receivable from related parties of $0 and accounts payable to related parties of $0.


Pennsylvania		23-2093008
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


For	Against	Abstain
16,878,708	174,429	115,452


Name		Age
Michael J. Mahoney		56
President and CEO as well as Director of CTE since July 2000; Telecommunications consultant from October 1999 to July 2000; Director of CTE (formerly C-TEC Corporation) from June 1995 to October 1999; President and Chief Operating Officer of C-TEC Corporation from February 1994 to September 1997; and Director, President and Chief Operating Officer of RCN Corporation from September 1997 to October 1999.
Eileen O’Neill Odum		52
Executive Vice President and Chief Operating Officer of CTE since July 2004; President—National Operations, the domestic wireline telecom group of Verizon Communications, Inc., from 2000 to 2004; Region President—Northwest, of GTE Corporation’s domestic wireline telephone operations from 1994 to 2000; Assistant Vice President of Business Sales and Services of GTE Telephone Operations from 1992 to 1994; Vice President/General Manager—Texas Region of GTE Mobilnet from 1990 to 1992; and Vice President of Marketing of GTE Mobilnet from 1988 to 1990.
Donald P. Cawley		48
Executive Vice President of CTE since September 2003; Senior Vice President of CTE from June 2000 to September 2003; Chief Accounting Officer of CTE since May 1999; Vice President and Controller of CTE from September 1997 to June 2000; Vice President and Controller of Commonwealth Telephone Company from February 1996 to September 1997; and Controller of Commonwealth Telephone Company from March 1992 to February 1996.
Kevin M. O’Hare		46
Group Vice President of Strategic Development of CTE since January 2006; Founder, President and Chief Executive Officer of Lightship Telecom from March 1998 to May 2005; President and Chief Executive Officer of US WATS, Inc., from December 1996 to November 1997; Executive Vice President of C-TEC Corporation from May 1995 to December 1996; and Network Engineering Director of ACC Long Distance Corp., from February 1994 to April 1995.
Rita M. Brown		54
Senior Vice President and General Manager of CTSI, LLC (“CTSI”), since October 2004; Vice President of Strategic Initiatives of CTE from January 2004 to September 2004; Vice President of Operations of Commonwealth Telephone Company from 2002 to December 2003; Vice President of Corporate Engineering of CTE from 2001 to 2002; Vice President and General Manager of epix^® Internet Services from 2000 to 2001; Vice President and General Manager of Residential Markets of CTSI during 2000; Vice President and General Manager of Commonwealth Communications from 1998 to 2000; and various positions with CTE from 1973 to 1998.
Scott Burnside		62
Senior Vice President of Regulatory and Government Relations of CTE since May 2003; Senior Vice President of Regulatory and Government Affairs of RCN Corporation from June 1997 to May 2003; Vice President of Regulatory Affairs of C-TEC Corporation from 1985 to June 1997; and various positions with Commonwealth Telephone Company from January 1978 to 1985.
Thomas M. Davis		50
Vice President of Information Technology of CTE since February 2001; Senior Vice President of Software Engineering and Vice President of Solutions Delivery of Intertech Management Group, Inc., from February 1999 to February 2001; President of Dapro, Inc., from April 1992 to February 1999; Applications Development Manager at Alltel Information Services, Inc., from September 1988 to April 1992; and various positions with Nabisco Brands, Inc., C-TEC Corporation and Pennsylvania Gas and Water Company from 1982 to 1988.
J. Christine Feeley		45
Vice President of Marketing of CTE since March 2005; Director of Marketing of Valor Communications Group, Inc., from April 2001 to January 2004; Vice President of Rapp Collins Worldwide from May 2000 to February 2001; National Consultant from December 1992 to May 2000; and Promotions Manager of Berry Brown Advertising, Inc., from January 1991 to December 1992.


Name		Age
DG Gulati		57
Senior Vice President and General Manager of Commonwealth Telephone Company and epix^® Internet Services since June 2006; Senior Vice President of Operations Strategy and Development of CTE from April 2005 to June 2006; Senior Vice President of Corporate Development of CTE from 2002 to April 2005; Senior Vice President of Operations and Engineering of RCN Corporation from 2000 to 2002; Senior Vice President of Network Engineering of RCN Corporation from 1997 to 2000; Vice President of Business Operations of C-TEC Corporation from 1995 to 1997; Director of Telecommunications of Cablevision Industries from 1994 to 1995; Assistant Vice President of Network Services of Warwick Valley Telephone Company from 1993 to 1994; and various positions with Frontier Corporation from 1982 to 1993.
Todd T. Hanson		45
Senior Vice President of Network Services and Technology of CTE since September 2004; Senior Vice President of Engineering and Operations of CTE from January 2004 to September 2004; Vice President of Engineering of CTE from April 2003 to January 2004; President of Qwest Communications International Inc., Local Broadband—Eastern Region from 1999 to 2002; Vice President of Network Engineering and Field Operations of Electric Lightwave, LLC (wholly-owned subsidiary of Citizens Communications), from 1995 to 1999; Vice President of Network Planning, Engineering and Project Management of MFS Telecom, Inc., from 1993 to 1995; and various management positions with AT&T Canada, Inc. (formerly Unitel Communications Inc.), and Sprint Corporation from 1986 to 1993.
Steven J. Letts		49
Vice President and General Manager of Commonwealth Communications since December 2002; Vice President of Sales—Advanced Building Networks of WorldCom, Inc. (“WorldCom”) from 2001 to 2002; Vice President of Shared Tenant Sales of WorldCom from 2000 to 2001; Vice President and General Manager of Integrated Communications Services (“ICS”) Division of WorldCom from 1997 to 2000; Vice President of Service and Support—ICS Division of Metropolitan Fiber Systems, Inc. (“MFS”), from 1996 to 1997; Director of Operations—Central Region of MFS from 1995 to 1996; General Manager—Texas Region of Realcom Inc., from 1993 to 1995; various positions with Intecom, Inc., from 1985 to 1993; and United States Marine Corps Officer from 1980 to 1985.
Christopher M. McCorkendale		40
Vice President of Operations Strategy and Development of CTE since June 2006; Vice President of Operations Planning from March 2006 to June 2006; military leave of absence to serve on active duty as a Major in the United States Army from September 2004 to February 2006, in support of the Global War on Terrorism; Vice President, Southern Region of CTE from January 2004 to August 2004; Director of Operations of Commonwealth Communications from January 2003 to December 2003; Vice President of Sales and Marketing of Commonwealth Telephone Company from August 2002 to December 2003; Vice President and General Manager of Expansion Markets of CTSI, LLC (“CTSI”), from December 2001 to July 2002; Vice President and General Manager of the Capital, Central and Northeastern Pennsylvania and New York Operating Territories of CTSI from February 2000 to December 2001; Director of Network Services of CTSI from March 1999 to February 2000; and Officer in the United States Army from 1989 to 1998.
Raymond B. Ostroski		52
Senior Vice President, General Counsel and Corporate Secretary of CTE since February 2003; Vice President, General Counsel and Corporate Secretary of CTE from December 2002 to February 2003; Senior Corporate Counsel and Assistant Corporate Secretary of CTE from January 2002 to November 2002; Legal Consultant with RBO Consulting from January 1998 to December 2001; Executive Vice President, General Counsel and Corporate Secretary of RCN Corporation from October 1997 to December 1997; Executive Vice President, General Counsel and Corporate Secretary of C-TEC Corporation from February 1991 to September 1997; Corporate Counsel and Assistant Corporate Secretary of C-TEC Corporation from August 1988 to February 1991; Associate Counsel of C-TEC Corporation from August 1985 to August 1988; and Attorney at the law firm of Hoegen & Marsh, PC from August 1983 to August 1985.


Name		Age
Darryl Varnado		54
Vice President of Human Resources of CTE since January 2006; Leadership Consultant of Lee Hecht Harrison, Inc., in 2005; Vice President and Managing Director of Human Resources of The Nature Conservancy from 2001 to 2005; Director of Global Human Resources Strategy and Design of US Airways, Inc., from 1998 to 2001; Operations Manager of Compensation and Benefits of The Coca-Cola Company from 1995 to 1998; Manager of U.S. Compensation and Employee Rewards of The Coca-Cola Company from 1994 to 1995; and Director of Compensation and Employee Rewards of Tennessee Valley Authority from 1993 to 1994.
David G. Weselcouch		51
Senior Vice President of Investor Relations and Corporate Communications of CTE since June 2000; Vice President of Investor Relations and Corporate Communications of CTE from March 1999 to June 2000; Vice President of Investor Relations of CTE from 1998 to 1999; Director—Investor Relations of GTE Corporation from 1993 to 1998; and Manager—Capital Markets Development and Administration of GTE Corporation from 1989 to 1993.


PART I
Item 1.		Business	2
Item 1A.		Risk Factors	8
Item 1B.		Unresolved Staff Comments	14
Item 2.		Properties	14
Item 3.		Legal Proceedings	14
Item 4.		Submission of Matters to a Vote of Security Holders	14
		Executive Officers of the Registrant	15

PART II
Item 5.		Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	18
Item 5.(c)		Purchases of Equity Securities by the Issuer and Affiliated Purchasers	19
Item 6.		Selected Financial Data	19
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 7A.		Quantitative and Qualitative Disclosures about Market Risk	19
Item 8.		Financial Statements and Supplementary Data	19
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	20
Item 9A.		Controls and Procedures	20
Item 9B.		Other Information	20

PART III
Item 10.		Directors, Executive Officers and Corporate Governance	20
Item 11.		Executive Compensation	20
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	21
Item 13.		Certain Relationships and Related Transactions, and Director Independence	21
Item 14.		Principal Accountant Fees and Services	21

PART IV
Item 15.		Exhibits, Financial Statement Schedules	21
Item 15.(a)	1.	Financial Statements	21
	2.	Financial Statement Schedules	22
	3.	Exhibits	22

SIGNATURES			26


	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
2006
Common Stock closing price:
High	$	34.75	$	34.24	$	41.55	$	42.20
Low		31.35		32.07		32.42		41.20

	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
2005
Common Stock closing price:
High	$	50.61	$	52.98	$	43.54	$	37.78
Low		46.50		40.19		37.22		33.48


Signature	Title	Date
PRINCIPAL EXECUTIVE AND ACCOUNTING OFFICERS:

/s/ MICHAEL J. MAHONEY Michael J. Mahoney	President and Chief Executive Officer, principal executive officer	March 1, 2007

/s/ DONALD P. CAWLEY Donald P. Cawley	Executive Vice President and Chief Accounting Officer, principal financial officer, principal accounting officer	March 1, 2007
DIRECTORS:

/s/ WALTER SCOTT, JR. Walter Scott, Jr.		March 1, 2007

/s/ MICHAEL J. MAHONEY Michael J. Mahoney		March 1, 2007

/s/ JOHN R. BIRK John R. Birk		March 1, 2007

/s/ JAMES Q. CROWE James Q. Crowe		March 1, 2007

/s/ RICHARD R. JAROS Richard R. Jaros		March 1, 2007

/s/ DAVID C. MITCHELL David C. Mitchell		March 1, 2007

/s/ EUGENE ROTH Eugene Roth		March 1, 2007

/s/ JOHN J. WHYTE John J. Whyte		March 1, 2007


	For the Years Ended December 31,
	2006			2005			2004
Sales:
CT	$	228,903		$	228,464		$	227,666
CTSI		82,881			86,495			83,568
Other		18,831			18,897			24,577

Total	$	330,615		$	333,856		$	335,811


	For the Years Ended December 31,
	2006			2005			2004
Operating income (loss):
CT	$	122,068		$	111,872		$	100,400

CTSI—edge-out		9,246			12,909			9,554
CTSI—restructuring reversals*		—			31			799

Total CTSI		9,246			12,940			10,353

Other		(17,817	)		(12,731	)		(4,306	)

Total	$	113,497		$	112,081		$	106,447


	As of December 31,
	2006	2005	2004
Access lines:
CT access lines	309,279	323,555	333,022
CTSI access lines	142,613	137,696	138,820

Total	451,892	461,251	471,842


	December 31,
	2006		2005
Cash and temporary cash investments	$	126,932	$	104,968
Working capital		85,352		55,466
Long-term debt (including current maturities, notes payable and capital lease obligations)		335,000		335,360


	December 31, 2006				December 31, 2005
	Balance		Available		Balance		Available
Revolving line of credit—CoBank	$	35,000	$	100,000	$	35,000	$	50,000
Convertible notes		300,000		—		300,000		—

Total	$	335,000	$	100,000	$	335,000	$	50,000


Net cash provided by (used in)	2006			2005			2004
Operating activities	$	108,190		$	128,505		$	142,504
Investing activities		(14,270	)		(40,567	)		(39,864	)
Financing activities		(71,956	)		(295,230	)		(126,415	)


	Payments Due by Period
Contractual obligations	Total		Less than 1 year		1-3 years		4-5 years		More than 5 years		Footnote reference(1)
Debt maturing within one year	$	35,000	$	35,000	$	—	$	—	$	—	9
Long-term debt		300,000		—		—		—		300,000	9
Interest on debt obligations(3)		162,258		10,645		29,250		19,500		102,863	9
Pension and other postretirement benefits		1,955		327		710		336		582	11
Operating leases		17,015		2,214		5,306		3,111		6,384	13
Purchase obligations(2)		81,591		14,096		20,974		14,371		32,150	13

Total contractual obligations	$	597,819	$	62,282	$	56,240	$	37,318	$	441,979


As of December 31, 2006	Carrying Amount		Fair Value		Fair Value Assuming +100 Basis Point Shift		Fair Value Assuming -100 Basis Point Shift
Fixed rate long-term debt	$	300,000	$	319,500	$	314,667	$	324,450
Variable rate notes payable		35,000		35,000		34,863		35,138



/s/ Michael J. Mahoney		/s/ Donald P. Cawley
Michael J. Mahoney President and Chief Executive Officer		Donald P. Cawley Executive Vice President and Chief Accounting Officer


	Common Par Value			Additional Paid-in Capital			Deferred Compensation			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Deficit)			Treasury Stock			Total Common Shareholders’ Equity
Balance, December 31, 2003	$	24,014		$	267,076		$	(6,451	)	$	(2,490	)	$	24,900		$	(44,320	)	$	262,729
Net income														62,031						62,031
Restricted stock		(115	)		7,298			(3,356	)											3,827
Stock option transactions		273			8,863															9,136
Executive stock purchase plan								(286	)											(286	)
Tax benefits related to stock activity					880															880
Stock repurchases																	(75,177	)		(75,177	)
Unrealized gain on derivative instruments, net of tax											1,660									1,660
401(k) match					227												846			1,073
Other					14												43			57

Balance, December 31, 2004		24,172			284,358			(10,093	)		(830	)		86,931			(118,608	)		265,930
Net income														70,108						70,108
Restricted stock		2			5,717			(982	)								1,241			5,978
Stock option transactions		52			1,614												22,012			23,678
Executive stock purchase plan								266												266
Tax benefits related to stock activity					3,410															3,410
Dividends					(176,538	)		(6,052	)					(130,712	)		78			(313,224	)
Minimum pension liability adjustment, net of tax											(2,288	)								(2,288	)
Unrealized gain on derivative instruments, net of tax											703									703
401(k) match					164												1,091			1,255
Other					(2	)											51			49

Balance, December 31, 2005		24,226			118,723			(16,861	)		(2,415	)		26,327			(94,135	)		55,865
Net income														84,140						84,140
Restricted stock					1,937									(165	)		4,293			6,065
Stock option transactions					(815	)											2,994			2,179
Executive stock purchase plan					325									(57	)					268
Tax benefits related to stock activity					20															20
Dividends					565									(43,097	)					(42,532	)
Stock repurchase program																	(31,456	)		(31,456	)
Unrealized gain on derivative instruments, net of tax											127									127
Stock option compensation cost					797															797
401(k) match					(41	)											1,386			1,345
Additional minimum pension liability adjustment, net of tax											2,288									2,288
Adjustment to initially apply SFAS 158, net of tax:
Defined benefit pension plan											(9,622	)								(9,622	)
Other postretirement plans											472									472
Transfer deferred compensation balance to additional paid-in capital					(16,861	)		16,861												—

Balance, December 31, 2006	$	24,226		$	104,650		$	—		$	(9,150	)	$	67,148		$	(116,918	)	$	69,956


	Shares Issued		Treasury Stock		Shares Outstanding
Balance, December 31, 2003	24,013,902		1,207,016		22,806,886
Stock option transactions	272,945		—		272,945
Restricted stock	(6,750	)	—		(6,750	)
Restricted stock conversion	(107,721	)	—		(107,721	)
Stock repurchase program	—		1,868,044		(1,868,044	)
401(k) match	—		(24,646	)	24,646
Other	—		(1,300	)	1,300

Balance, December 31, 2004	24,172,376		3,049,114		21,123,262
Stock option transactions	52,106		(598,468	)	650,574
Restricted stock	2,000		(35,888	)	37,888
401(k) match	—		(29,794	)	29,794
Other	—		(1,400	)	1,400

Balance, December 31, 2005	24,226,482		2,383,564		21,842,918
Stock option transactions	—		(81,264	)	81,264
Restricted stock	—		(113,169	)	113,169
Stock repurchase program	—		947,905		(947,905	)
401(k) match	—		(37,663	)	37,663

Balance, December 31, 2006	24,226,482		3,099,373		21,127,109


	For the Year Ended December 31, 2006
	CT		CTSI			Other			Consolidated
Sales	$	255,455	$	83,307		$	18,926		$	357,688
Elimination of intersegment sales		26,552		426			95			27,073
External sales		228,903		82,881			18,831			330,615
Costs and expenses, excluding depreciation and amortization and strategic alternatives		83,425		54,600			30,990			169,015
Strategic alternatives		—		—			4,729			4,729
Depreciation and amortization		23,410		19,035			929			43,374
Operating income (loss)		122,068		9,246			(17,817	)		113,497
Identifiable assets		358,392		134,259			80,945			573,596
Capital expenditures		30,689		14,618			1,848			47,155

	For the Year Ended December 31, 2005
	CT		CTSI			Other			Consolidated
Sales	$	251,066	$	86,954		$	18,948		$	356,968
Elimination of intersegment sales		22,602		459			51			23,112
External sales		228,464		86,495			18,897			333,856
Costs and expenses, excluding depreciation and amortization		79,153		54,315			30,446			163,914
Depreciation and amortization		37,439		19,271			1,182			57,892
Restructuring reversals		—		(31	)		—			(31	)
Operating income (loss)		111,872		12,940			(12,731	)		112,081
Identifiable assets		337,795		138,521			79,078			555,394
Capital expenditures		27,174		15,320			1,381			43,875


	For the Year Ended December 31, 2004
	CT		CTSI			Other			Consolidated
Sales	$	246,788	$	84,022		$	24,602		$	355,412
Elimination of intersegment sales		19,122		454			25			19,601
External sales		227,666		83,568			24,577			335,811
Costs and expenses, excluding depreciation and amortization		79,219		53,809			26,161			159,189
Depreciation and amortization		48,047		20,205			2,722			70,974
Restructuring reversals		—		(799	)		—			(799	)
Operating income (loss)		100,400		10,353			(4,306	)		106,447
Identifiable assets		372,393		137,567			273,471			783,431
Capital expenditures		26,960		14,858			1,701			43,519


	Estimated Useful Lives in Years	December 31,
	Estimated Useful Lives in Years	2006			2005
Land		$	1,738		$	1,738
Building and leasehold improvements	3-40		37,653			37,286
Central office equipment	5-18		424,887			405,506
Outside communications plant	20-40		400,823			388,571
Furniture, vehicles and other equipment	3-25		88,151			85,412

Total property, plant and equipment			953,252			918,513
Less accumulated depreciation			(580,655	)		(550,007	)

Property, plant and equipment, net		$	372,597		$	368,506


	Number of Shares		Weighted Average Exercise Price
Outstanding December 31, 2005	456,559		$	28.56
Granted	—			—
Exercised	(81,264	)		26.82
Canceled	(10,337	)		28.91

Outstanding December 31, 2006	364,958			28.94

Shares exercisable December 31, 2006	340,664		$	28.94


	Number of Shares		Weighted Average Grant Date Fair Value
Unvested stock options December 31, 2005	181,440		$	11.84
Granted	—			—
Vested	(146,809	)		11.74
Canceled	(10,337	)		12.24

Unvested stock options December 31, 2006	24,294		$	12.24


	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding at December 31, 2006	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Aggregate Intrinsic Value		Number Exercisable at December 31, 2006	Weighted Average Exercise Price		Aggregate Intrinsic Value
$8.27	939	0.1	$	8.27	$	32	939	$	8.27	$	32
$18.35—$28.91	237,220	4.0		25.68		3,837	212,926		25.32		3,523
$29.95—$40.47	126,799	3.4		35.17		848	126,799		35.17		848

Total/weighted average	364,958	3.8	$	28.94	$	4,717	340,664	$	28.94	$	4,403


	Number of Shares		Weighted Average Grant Date Fair Value
Unvested restricted stock December 31, 2005	465,346		$	43.19
Granted	62,790			32.46
Vested	(164,882	)		42.67
Canceled	(33,700	)		41.37
Dividend equivalent units	18,521			37.19

Unvested restricted stock December 31, 2006	348,075		$	41.35


Plan Category	Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights	Weighted Average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans
Equity compensation plans approved by security holders	809,828	$	39.03	1,979,860
Equity compensation plans not approved by security holders	—			—

Total/weighted average	809,828	$	39.03	1,979,860


	For the Years Ended December 31,
	2006			2005			2004
Net periodic benefit cost:
Service cost	$	4,006		$	3,746		$	3,303
Interest cost		5,967			5,742			5,452
Expected return on plan assets		(7,133	)		(7,285	)		(6,577	)
Amortization of prior service cost		580			530			525
Recognized net actuarial loss		659			386			226

Total net periodic benefit cost	$	4,079		$	3,119		$	2,929


	Target Allocations		Percentage of Plan Assets December 31,
Asset Category	2007		2006		2005
Equity securities	70	%	71	%	72	%
Fixed income securities	30	%	29	%	28	%


Year	Amount
2007	$	4,550
2008		4,731
2009		4,845
2010		4,914
2011		5,315
2012-2016		31,962


	December 31, 2006
Loss/(gain)	$	11,642
Prior service cost		3,814

Total	$	15,456


	Pre-FAS 158 Without AML Adjustment			AML Adjustment			Pre-FAS 158 With AML Adjustment			FAS 158 Adoption Adjustment			Post- FAS 158
Prepaid pension asset/(pension liability)	$	(11,133	)	$	7,354		$	(3,779	)	$	(15,456	)	$	(19,235	)
Intangible asset		3,679			(3,679	)		—			—			—
Deferred tax asset		1,387			(1,387	)		—			5,834			5,834
AOCI-defined benefit pension plan, net of tax		2,288			(2,288	)		—			9,622			9,622
AOCI-defined benefit pension plan, pre-tax		3,675			(3,675	)		—			15,456			15,456


	VRP									Postretirement
	For the Years Ended December 31,									For the Years Ended December 31,
	2006			2005			2004			2006			2005			2004
Interest cost	$	18		$	28		$	37		$	45		$	49		$	49
Recognized net actuarial gain		(29	)		(40	)		(50	)		(75	)		(85	)		(109	)

Total net periodic postretirement benefit cost	$	(11	)	$	(12	)	$	(13	)	$	(30	)	$	(36	)	$	(60	)


Year	VRP Amount		Postretirement Amount
2007	$	127	$	109
2008		71		101
2009		49		94
2010		39		86
2011		23		79
2012-2016		—		292


	Pre-FAS 158			FAS 158 Adoption Adjustment			Post-FAS 158
VRP and postretirement liabilities	$	(1,942	)	$	891		$	(1,051	)
Deferred tax liability		—			(336	)		(336	)
AOCI-postretirement benefits, net of tax		—			(555	)		(555	)
AOCI-postretirement benefits, pre-tax		—			(891	)		(891	)


Year	Aggregate Amounts
2007	$	2,154
2008		1,905
2009		1,715
2010		1,497
2011		1,494
After 2011		7,317


DESCRIPTION	BALANCE AT BEGINNING OF PERIOD		ADDITIONS				DEDUCTIONS/ REVERSALS		BALANCE AT END OF PERIOD
DESCRIPTION	BALANCE AT BEGINNING OF PERIOD		CHARGED TO COSTS AND EXPENSE		CHARGED TO OTHER ACCOUNTS		DEDUCTIONS/ REVERSALS		BALANCE AT END OF PERIOD
ALLOWANCE FOR DOUBTFUL ACCOUNTS—DEDUCTED FROM ACCOUNTS RECEIVABLE IN THE CONSOLIDATED BALANCE SHEETS
2006	$	1,362	$	889	$	599	$	1,303	$	1,547
2005		2,185		712		513		2,048		1,362
2004		2,329		736		578		1,458		2,185
ALLOWANCE FOR DEFERRED TAX ASSETS—DEDUCTED FROM DEFERRED TAX ASSETS IN THE CONSOLIDATED BALANCE SHEETS
2006	$	2,464	$	3,558	$	—	$	—	$	6,022
2005		1,728		736		—		—		2,464
2004		2,320		210		—		802		1,728