Exhibit
99.1  RISK FACTORS  Except as otherwise required by
the context, references to we, us, or our refer to the combined business
of FairPoint Communications, Inc. and all of its subsidiaries. Except as
otherwise required by the context, all references to the Company refer to
FairPoint Communications, Inc. excluding its subsidiaries.  Capitalized terms have the meanings ascribed
to them in the Quarterly Report. Any
of the following risks could materially adversely affect our business,
consolidated financial condition, results of operations or liquidity or the
market price of our common stock.  The
risks described below are not the only risks facing us. Additional risks and
uncertainties not currently known to us or that we currently deem to be immaterial
may also materially and adversely affect our business operations.  Risks Relating to
Our Common Stock and Substantial Indebtedness  Our
stockholders may not receive the level of dividends provided for in the
dividend policy our board of directors has adopted or any dividends at all.  Our
board of directors has adopted a dividend policy which reflects an intention to
distribute a substantial portion of the cash generated by our business in
excess of operating needs, interest and principal payments on our indebtedness,
dividends on our future senior classes of capital stock, if any, capital
expenditures, taxes and future reserves, if any, as regular quarterly dividends
to our stockholders. Our board of directors may, in its discretion, amend or
repeal this dividend policy. Our dividend policy is based upon our directors
current assessment of our business and the environment in which we operate, and
that assessment could change based on regulatory, competitive or technological
developments (which could, for example, increase our need for capital
expenditures) or new growth opportunities. In addition, future dividends with
respect to shares of our common stock, if any, will depend on, among other
things, our cash flows, cash requirements, financial condition, contractual
restrictions, provisions of applicable law and other factors that our board of
directors may deem relevant. Our board of directors may decrease the level of
dividends provided for in the dividend policy or entirely discontinue the payment
of dividends. Our credit facility contains significant restrictions on our
ability to make dividend payments, and the terms of our future indebtedness are
expected to contain similar restrictions.  There can be no assurance that we will
generate sufficient cash from continuing operations in the future, or have
sufficient surplus or net profits, as the case may be, under Delaware law, to
pay dividends on our common stock in accordance with the dividend policy.  In addition,it is unclear what
restrictions, if any, on our operations, capital structure and/or our ability
to pay dividends at the current level and/or what expenditure requirements, if
any, may be imposed as part of the regulatory approvals related to the Merger
that may affect our ability to pay dividends at the current level or at all. The
reduction or elimination of dividends may negatively affect the market price of
our common stock.  To
operate and expand our business, service our indebtedness and complete future
acquisitions, we will require a significant amount of cash. Our ability to
generate cash will depend on many factors beyond our control. We may not
generate sufficient funds from operations to pay dividends with respect to
shares of our common stock, to repay or refinance our indebtedness at maturity
or otherwise, or to consummate future acquisitions.  A
significant amount of our cash flow from operations will be dedicated to
capital expenditures and debt service. In addition, we currently expect to
distribute a significant portion of our cash flow to our stockholders in the
form of quarterly dividends. As a result, there can be no assurance that the
cash that we retain will be sufficient to finance growth opportunities,
including acquisitions, or unanticipated capital expenditures or to fund our
operations.  Our
ability to make payments on our indebtedness will depend on our ability to
generate cash flow from operations in the future. This ability, to a certain
extent, will be subject to general economic, financial, competitive, legislative,
regulatory and other factors that will be beyond our control. There can be no
assurance that our business will generate sufficient cash flow from operations
or that future borrowings will be available to us in an amount sufficient to
enable us to service our indebtedness, to make payments of principal at
maturity or to fund our other liquidity needs.   1


We
may also be forced to raise additional capital or sell assets and, if we are
forced to pursue any of these options under distressed conditions, our business
and the value of our common stock could be adversely affected. In addition,
these alternatives may not be available to us when needed or on satisfactory
terms due to prevailing market conditions, a decline in our business,
legislative and regulatory factors or restrictions contained in the agreements
governing our indebtedness.  If
we have insufficient cash flow to cover the expected dividend payments under
our dividend policy due to costs associated with the Merger or other factors,
or are restricted from paying dividends under the agreements governing our
indebtedness, we will be required to reduce or eliminate dividends.  We expect to
continue to incur significant monthly expenditures related to the Merger
through the closing of the Merger which will reduce our cash available to pay
dividends.  If we do not have sufficient
cash to fund dividend payments, we intend to fund a portion of our dividends
with borrowings under our credit facility or from other sources.Subject to restrictions in our credit facility, we may
incur more indebtedness to pay dividends, but there can be no assurance that
additional financing, if permitted under the terms of our credit facility, will
be available to us on terms acceptable to us or at all.  If we were
to use borrowings to fund dividends, we would have less cash available for
future dividends and other purposes, which could negatively impact our
business, financial condition and results of operations.If we have insufficient cash flow
to cover expected dividend payments and borrowings under our credit facility
and/or other additional financing are not available to us, we may need to
decrease the level of dividends payable or discontinue entirely the payment of
dividends.  Our credit facility
contains a restriction on our ability to pay dividends to the extent of our Available
Cash, which is calculated based on our Adjusted Consolidated EBITDA,
each as defined in our credit facility. 
Pursuant to an amendment to our credit facility, Adjusted Consolidated
EBITDA is calculated by adding back certain non-cash expenses and
one-time charges recorded as operating expenses relating to the
transactions contemplated by the Merger Agreement.  See Item 2. Unregistered Sales of Equity
Securities and Use of ProceedsRestrictions on Payment of Dividends for more
information on the calculation of Adjusted Consolidated EBITDA and Available
Cash.  The add-back of one-time pre-closing
expenses related to the Merger is subject to an aggregate cap which we expect
to reach by the end of December 2007.As a result, after we reach such cap, we
expect that the amount of Available
Cash we generate prior to the
closing of the Merger will decrease, which may adversely affect our ability to
continue paying dividends at the current level or at all.  Our substantial indebtedness could restrict our
ability to pay dividends on our common stock and have an adverse impact on our
financing options and liquidity position.  We
have a significant amount of indebtedness. This substantial indebtedness could
have important adverse consequences to the holders of our common stock,
including:  limiting our ability to pay dividends
on our common stock or make payments in connection with our other obligations,
including under our credit facility;  limiting our ability in the future to
obtain additional financing for working capital, capital expenditures or
acquisitions;  causing us to be unable to refinance our
indebtedness on terms acceptable to us or at all;  limiting our flexibility in planning
for, or reacting to, changes in our business and the communications industry
generally;  requiring a significant portion of our
cash flow from operations to be dedicated to the payment of interest, and to a
lesser extent, principal on our indebtedness, thereby reducing funds available
for future operations, dividends on our common stock, capital expenditures or
acquisitions;   2


making us more vulnerable to economic
and industry downturns and conditions, including increases in interest rates;
and  placing us at a competitive
disadvantage compared to those of our competitors that have less indebtedness.  Subject
to the covenants in the agreements governing our indebtedness, we may incur
additional indebtedness. Any additional indebtedness that we may incur would
exacerbate the risks described above.  In
anticipation of the Merger, we will spend a significant amount of money on
assets and services that are not useful in our existing business.  Assuming that the Merger closes in January 2008, we
expect to spend approximately $95 million to $110 million prior to closing on
infrastructure and network systems integration and planning in connection with
the Merger.  Verizon has agreed to
reimburse us for up to $40 million of these pre-closing transition costs
(subject to the specific terms contained in the Merger Agreement).  A significant portion of the amount we expect
to spend on pre-closing transition costs will be spent on assets and services
which will not be useful in our existing business.   In addition, the amounts actually spent on
such transition costs may exceed budgeted amounts.  The
Company is a holding company and relies on dividends, interest and other
payments, advances and transfers of funds from its operating subsidiaries and
investments to meet its debt service and other obligations.  The
Company is a holding company and conducts all of its operations through its
operating subsidiaries. The Company currently has no significant assets other
than equity interests in its subsidiaries. As a result, the Company relies on
dividends and other payments or distributions from its operating subsidiaries
to pay dividends with respect to its common stock and to meet its debt service
obligations generally. The ability of the Companys subsidiaries to pay
dividends or make other payments or distributions to the Company will depend on
their respective operating results and may be restricted by, among other
things:  the laws of their jurisdiction of
organization;  the rules and regulations of state
regulatory authorities;  agreements of those subsidiaries;  the terms of agreements governing
indebtedness of those subsidiaries; and  regulatory orders.  The
Companys subsidiaries have no obligation, contingent or otherwise, to make
funds available to the Company, whether in the form of loans, dividends or
other distributions.  Our
credit facility contains covenants that limit our business flexibility by
imposing operating and financial restrictions on our operations and the payment
of dividends.  Covenants
in our credit facility impose significant operating and financial restrictions
on us. These restrictions prohibit or limit, among other things:  the incurrence of additional
indebtedness and the issuance by our subsidiaries of preferred stock;  the payment of dividends on, and
purchases or redemptions of, capital stock;  a number of other restricted
payments, including investments;  the creation of liens;   3


the ability of each of our
subsidiaries to guarantee indebtedness;  specified sales of assets;  the creation of encumbrances or
restrictions on the ability of our subsidiaries to distribute and advance funds
or transfer assets to us or any other subsidiary;  specified transactions with
affiliates;  sale and leaseback transactions;  our ability to enter lines of
business outside the communications business; and  certain consolidations and mergers
and sales and/or transfers of assets by or involving us.  Our
credit facility also contains covenants which require us to maintain specified
financial ratios and satisfy financial condition tests, including, without
limitation, a maximum total leverage ratio and a minimum interest coverage
ratio.  Our ability to
comply with these covenants, ratios or tests contained in our credit facility
may be affected by events beyond our control, including prevailing economic,
financial and industry conditions. A breach of any of these covenants, ratios
or tests could result in a default under the agreements governing our
indebtedness. Events of default under our credit facility would prohibit us from
making dividend payments on our common stock. In addition, upon the occurrence
of an event of default under our credit facility, the lenders could elect to
declare all amounts outstanding under our credit facility, together with
accrued interest, to be immediately due and payable. If we were to be unable to
repay those amounts, the lenders could proceed against the security granted to
them to secure that indebtedness. If the lenders accelerate the payment of the
indebtedness under our credit facility, our assets may not be sufficient to
repay in full the indebtedness under our credit facility and our other
indebtedness, if any.  As
a result of general economic conditions, conditions in the lending markets, the
results of our business or for any other reason, we may elect or be required to
amend or refinance our credit facility, at or prior to maturity, or enter into
additional agreements for indebtedness. Any such amendment, refinancing or
additional agreement may contain covenants which could limit in a significant
manner our operations and our ability to pay dividends on our common stock.  We
anticipate that we may be in breach of certain financial covenants contained in
our credit facility (measured as of March 31, 2008) if we continue to make
expected pre-closing Merger related expenditures in 2008 and the Merger has not
been consummated. If such a breach occurs, it could result in the lenders under
our credit facility accelerating the indebtedness under our credit facility. If
the indebtedness under our credit facility were to be accelerated, we would not
have the ability to repay such indebtedness.  Limitations
on usage of net operating loss carryforwards, and other factors requiring us to
pay cash taxes in future periods, may affect our ability to pay dividends to our
stockholders.  Our
initial public offering in February 2005 resulted in an ownership change
within the meaning of the U.S. federal income tax laws addressing net operating
loss carryforwards, alternative minimum tax credits and other similar tax
attributes. As a result of this ownership change, there are specific
limitations on our ability to use our net operating loss carryforwards and
other tax attributes from periods prior to the initial public offering.
Although it is not expected that these limitations will materially affect our
U.S. federal and state income tax liability in the near-term, it is possible in
the future that these limitations could limit our ability to utilize the
carryforwards and, therefore, result in an increase in our U.S. federal and
state income tax payments. In addition, in the future we will be required to
pay cash income taxes because all of our net operating loss carryforwards have
been used or have expired. Limitations on our usage of net operating loss
carryforwards, and other factors requiring us to pay cash taxes in the future,
would reduce the funds available for the payment of dividends and might require
us to reduce or eliminate the dividends on our common stock.  The
price of our common stock may fluctuate substantially, which could negatively
affect holders of our common stock.   4


The
market price of our common stock may fluctuate widely as a result of various
factors, such as period-to-period fluctuations in our operating results, the volume
of sales of our common stock, developments in the communications industry, the
failure of securities analysts to cover the common stock or changes in
financial estimates by analysts, competitive factors, regulatory developments,
economic and other external factors, general market conditions and market
conditions affecting the stock of communications companies in particular.
Communications companies have in the past experienced extreme volatility in the
trading prices and volumes of their securities, which has often been unrelated
to operating performance. High levels of market volatility may have a
significant adverse effect on the market price of our common stock. In
addition, in the past, securities class action litigation has often been
instituted against companies following periods of volatility in their stock
prices. This type of litigation could result in substantial costs and divert
managements attention and resources.  Our
certificate of incorporation and by-laws and several other factors could limit
another partys ability to acquire us and deprive our investors of the
opportunity to obtain a takeover premium for their securities.  A
number of provisions in our certificate of incorporation and by-laws make it
difficult for another company to acquire us and for our stockholders to receive
any related takeover premium for their securities. For example, our certificate
of incorporation provides that certain provisions of the certificate of
incorporation can only be amended by a vote of two-thirds or more in voting
power of all the outstanding shares of capital stock, that stockholders
generally may not act by written consent, and only stockholders representing at
least 50% in voting power may request that the board of directors call a
special meeting. Our certificate of incorporation provides for a classified
board of directors and authorizes the issuance of preferred stock without
stockholder approval and upon such terms as the board of directors may
determine. The rights of the holders of shares of our common stock are subject
to, and may be adversely affected by, the rights of holders of any class or
series of preferred stock that may be issued in the future.  We
may, under certain circumstances, suspend the rights of stock ownership the
exercise of which would result in any inconsistency with, or violation of, any
applicable communications law.  Our
certificate of incorporation provides that so long as we hold any
authorization, license, permit, order, filing or consent from the Federal
Communications Commission or any state regulatory commission having
jurisdiction over us, we will have the right to request certain information
from our stockholders. If any stockholder from whom such information is
requested should fail to respond to such a request or we conclude that the
ownership of, or the existence or exercise of any rights of stock ownership
with respect to, shares of our capital stock by such stockholder, could result
in any inconsistency with, or violation of, any applicable communications law, we
may suspend those rights of stock ownership the existence or exercise of which
would result in any inconsistency with, or violation of, any applicable
communications law, and we may exercise any and all appropriate remedies, at
law or in equity, in any court of competent jurisdiction, against any
stockholder, with a view towards obtaining such information or preventing or
curing any situation which would cause an inconsistency with, or violation of,
any provision of any applicable communications law.  Risks Related
to Our Business  We
provide services to customers over access lines, and if we lose access lines, our
business, financial condition and results of operations may be adversely
affected.  We
generate revenue by delivering voice and data services over access lines. We
have experienced net voice access line losses in the past few years. We
experienced a 14.1% decline in number of access lines (adjusted for acquisition
and divestitures) for the period from January 1, 2002 through September 30, 2007
and a 4.8% decrease for the period from October 1, 2006 through September
30, 2007. These losses resulted mainly from competition and technology
substitution and, to a lesser degree, challenging economic conditions and the
introduction of DSL services, which prompts some customers to cancel second
line service. Our inability to retain access lines could adversely affect our
business, financial condition and results of operations.  The
Merger may present significant challenges to our management that could divert
managements attention from day-to-day operations and have a negative impact on
our business.   5


There is a
significant degree of difficulty and management distraction inherent in the
process of closing the Merger and preparing to integrate our business and the
Spinco business which could cause an interruption of, or loss of momentum in,
the activities of our existing business. 
Prior to the closing of the Merger, our management team may be required
to devote considerable amounts of time to this integration process, which will
decrease the time they will have to manage our business, service existing
customers, attract new customers and develop new products or strategies. One
potential consequence of such distractions could be the failure of management
to realize opportunities to respond to the increasing forms of competition that
our business is facing, which could increase the rate of access line loss that
our business has experienced in recent years. If our senior management is not
able to effectively manage the process leading up to the Merger, or if any
significant business activities are interrupted as a result of the integration
process, our business could suffer.  We
are subject to competition that may adversely impact our business, financial
condition and results of operations.  As an incumbent carrier, we historically have
experienced little competition in our rural telephone company markets.
Nevertheless, the market for communications services is highly competitive.
Regulation and technological innovation change quickly in the communications
industry, and changes in these factors historically have had, and may in the
future have, a significant impact on competitive dynamics. In most of our rural
markets, we face competition from wireless technology, which may increase as
wireless technology improves. We also face competition from wireline and cable
television operators. We may face additional competition from new market
entrants, such as providers of wireless broadband, VoIP, satellite
communications and electric utilities. The Internet services market is also
highly competitive, and we expect that competition will intensify.  Many of our competitors have brand
recognition, offer online content services and have financial, personnel,
marketing and other resources that are significantly greater than ours. In
addition, consolidation and strategic alliances within the communications
industry or the development of new technologies could affect our competitive
position. We cannot predict the number of competitors that will emerge,
especially as a result of existing or new federal and state regulatory or
legislative actions, but increased competition from existing and new entities
could have a material adverse effect on our business, financial conditions and
results of operations.  Competition
may lead to loss of revenues and profitability as a result of numerous factors,
including: loss
of customers (in general, when we lose a customer for local service we also
lose that customer for all related services); reduced
usage of our network by our existing customers who may use alternative
providers for long distance and data services; reductions
in the prices for our services which may be necessary to meet competition;
and/or increases
in marketing expenditures and discount and promotional campaigns. In
addition, our provision of long distance service is subject to a highly
competitive market served by large nation-wide carriers that enjoy brand name
recognition.  We
may not be able to successfully integrate new technologies, respond effectively
to customer requirements or provide new services.  The
communications industry is subject to rapid and significant changes in
technology, frequent new service introductions and evolving industry standards.
We cannot predict the effect of these changes on our competitive position,
profitability or industry. Technological developments may reduce the
competitiveness of our networks and require unbudgeted upgrades or the
procurement of additional products that could be expensive and time consuming.
In addition, new products and services arising out of technological
developments may reduce the attractiveness of our services. If we fail to adapt
successfully to technological changes or obsolescence or fail to obtain access to
important new technologies, we could lose customers and be limited in our
ability to attract new customers and sell new services to our existing
customers. Our ability to respond to new technological developments may be
diminished or our response thereto delayed while our management devotes
significant effort and resources to closing the Merger and preparing to
integrate our business and the Spinco business.   6


Our
relationships with other communications companies are material to our
operations and their financial difficulties may adversely affect our business,
financial condition and results of operations.  We
originate and terminate calls for long distance carriers and other
interexchange carriers over our network. For that service, we receive payments
for access charges. These payments represent a significant portion of our
revenues. Should these carriers go bankrupt or experience substantial financial
difficulties, our inability to then collect access charges from them could have
a negative effect on our business, financial condition and results of
operations.  We
face risks associated with acquired businesses and potential acquisitions.  We
have grown rapidly by acquiring other businesses and expect that a portion of
our future growth will result from additional acquisitions, some of which may
be material. Growth through acquisitions, including the Merger, entails
numerous risks, including:  strain on our financial, management
and operational resources, including the distraction of our management team in
identifying potential acquisition targets, conducting due diligence and
negotiating acquisition agreements;  difficulties in integrating the
network, operations, personnel, products, technologies and financial, computer,
payroll and other systems of acquired businesses;  difficulties in enhancing our customer
support resources to adequately service our existing customers and the customers
of acquired businesses;  the potential loss of key employees
or customers of the acquired businesses;  unanticipated liabilities or
contingencies of acquired businesses;  unbudgeted costs which we may incur
in connection with pursuing potential acquisitions which are not consummated;  failure to achieve projected cost
savings or cash flow from acquired businesses;  fluctuations in our operating results
caused by incurring considerable expenses to acquire businesses before
receiving the anticipated revenues expected to result from the acquisitions;  difficulties in finding suitable
acquisition candidates;  difficulties in making acquisitions
on attractive terms due to a potential increase in competitors; and  difficulties in obtaining and
maintaining any required regulatory authorizations in connection with
acquisitions.  The size of the Spinco business in relation
to our existing business may exacerbate the above risks with respect to the
Merger.  In
the future, we may need additional capital to continue growing through
acquisitions. This additional capital may be raised in the form of additional
debt, which would increase our leverage and could have an adverse effect on our
ability to pay dividends. We may not be able to raise sufficient additional
capital on terms that we consider acceptable, or at all.  There
can be no assurance that we will be able to successfully complete the
integration of Spinco or other businesses that we have recently acquired or
successfully integrate any businesses that we might acquire in the future.   7


If we fail to do so, or if we do so but at greater
cost than anticipated, our business, financial condition and results of
operations may be adversely affected.  A
network disruption could cause delays or interruptions of service, which could
cause us to lose customers.  To
be successful, we will need to continue to provide our customers reliable
service over our expanded network. Some of the risks to our network and
infrastructure include:  physical damage to access lines;  wide spread power surges or outages;  software defects in critical systems;
and  disruptions beyond our control.  Disruptions
may cause interruptions in service or reduced capacity for customers, either of
which could cause us to lose customers and incur expenses.  Our billing systems may not function
properly. The
failure of any of our billing systems could result in our inability to
adequately bill and provide service to our customers. We recently completed the
conversion of all of our companies to a single integrated, outsourced billing
platform for our end-user customers.  The
failure of any of our billing systems could have a material adverse effect on
our business, financial condition and results of operations.  We
depend on third parties for our provision of long distance and bandwidth
services.  Our
provision of long distance and bandwidth services is dependent on underlying
agreements with other carriers that provide us with transport and termination
services. These agreements are based, in part, on our estimate of future supply
and demand and may contain minimum volume commitments. If we overestimate
demand, we may be forced to pay for services we do not need. If we underestimate
demand, we may need to acquire additional capacity on a short-term basis at
unfavorable prices, assuming additional capacity is available. If additional
capacity is not available, we will not be able to meet this demand. In
addition, if we cannot meet any minimum volume commitments, we may be subject
to underutilization charges, termination charges, or rate increases which may
adversely affect our business, financial condition and results of operations.  We
may not be able to maintain the necessary rights-of-way for our networks.  We
are dependent on rights-of-way and other permits from railroads, utilities,
state highway authorities, local governments and transit authorities to install
and maintain conduit and related communications equipment for any expansion of
our networks. We may need to renew current rights-of-way for our networks and
there can be no assurance that we would be successful in renewing these
agreements on acceptable terms. Some of our agreements may be short-term,
revocable at will, or subject to termination upon customary default provisions,
and we may not have access to existing rights-of-way after they have expired or
terminated. If any of these agreements were terminated or could not be renewed,
we could be required to remove our then-existing facilities from under the
streets or abandon our networks. Similarly, we may not be able to obtain
right-of-way agreements on favorable terms, or at all, in new service areas,
and, if it is unable to do so, our ability to expand our networks could be
impaired.  Our
success depends on our ability to attract and retain qualified management and
other personnel.  Our
success depends upon the talents and efforts of our senior management team.
With the exception of Eugene B. Johnson, our Chairman and Chief Executive
Officer, none of these senior executives are employed by us pursuant to an
employment agreement. The loss of any member of our senior management team, due
to retirement or   8


otherwise, and the inability to attract and retain
highly qualified technical and management personnel in the future, could have a
material adverse effect on our business, financial condition and results of
operations.  Wemay face significant future liabilities or compliance
costs in connection with environmental and worker health and safety matters.  Our
operations and properties are subject to federal, state and local laws and
regulations relating to protection of the environment, natural resources, and
worker health and safety, including laws and regulations governing the
management, storage and disposal of hazardous substances, materials and wastes.
Under certain environmental laws, we could be held liable, jointly and
severally and without regard to fault, for the costs of investigating and
remediating any contamination at owned or operated properties; or for
contamination arising from the disposal by us or our predecessors of hazardous
wastes at formerly owned properties or at third-party waste disposal sites.
In addition, we could be held responsible for third-party property or
personal injury claims relating to any such contamination or relating to
violations of environmental laws. Changes in existing laws or regulations or
future acquisitions of businesses could require us to incur substantial costs
in the future relating to these matters.  We are exposed to risks relating to evaluations of
controls required by Section 404 of the Sarbanes-Oxley Act.  Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002 and related
regulations implemented by the SEC, the New York Stock Exchange and the Public
Company Accounting Oversight Board, are creating uncertainty for public companies,
increasing legal and financial compliance costs and making some activities more
time consuming.  We evaluate our internal
controls systems to allow management to report on, and our independent auditors
to attest to, our internal controls as required by Section 404 of the
Sarbanes-Oxley Act. Our evaluation of our internal controls may result in
our identifying material weaknesses in our internal controls.  If we fail to maintain effective controls and
procedures, we may be unable to provide financial information in a timely and
reliable manner.  Risks Relating
to Our Regulatory Environment  We
are subject to significant regulations that could change in a manner adverse to
us.  We
operate in a heavily regulated industry, and the majority of our revenues are
supported by regulations, including access revenue and Universal Service Fund
support for the provision of telephone services in rural areas. Laws and
regulations applicable to us and our competitors may be, and have been,
challenged in the courts, and could be changed by Congress or regulators. In
addition, any of the following have the potential to have a significant impact
on us:   Risk of loss or reduction of network access charge
revenues.  A significant
portion of our revenues come from network access charges, which are paid to us
by intrastate and interstate long distance carriers for originating and
terminating calls in the regions served. This also includes Universal Service
Fund payments for local switching support, long term support and interstate
common line support. In recent years, several of these long distance carriers
have declared bankruptcy. Future declarations of bankruptcy by a carrier,
although less likely due to recent industry consolidation, that utilizes our
access services could negatively impact our business, financial condition and
results of the operations. The amount of access charge revenues that we
currently receive is based on rates set by federal and state regulatory bodies.
Further, from time to time federal and state regulatory bodies conduct rate
cases, earnings reviews, or adjustments to price cap formulas which may
result in rate changes. The Federal Communications Commission has reformed and
continues to reform the federal access charge system. States often mirror these
federal rules in establishing intrastate access charges. In 2000 and 2001, the
Federal Communications Commission reformed the system to reduce interstate
access charges for price cap and rate-of-return carriers and shift a portion of
cost recovery, which historically has been based on minutes-of-use, to
flat-rate, monthly per line charges on end-user customers rather than long
distance carriers. As a result, the aggregate amount of access charges paid by
long distance carriers to access providers, such as our local exchange
carriers, has decreased and may continue to decrease. Although these changes
were implemented on a revenue neutral basis (with commensurate increases in
other charges and Universal Service Fund support), there is no assurance that future
changes in access charge rates will be implemented on a revenue neutral basis.
Furthermore, to the extent the rural local exchange carriers operated by us
become subject to competition,   9


access charges could be paid to competing
communications providers rather than to us. Additionally, the access charges we
receive may be reduced as a result of competition from wireless, VoIP or other
new technology utilization. Finally, the Federal Communications Commission is
currently weighing several proposals to comprehensively reform the intercarrier
compensation regime in order to create a uniform system of intercarrier
payments. Any proposal of this nature eventually adopted by the Federal
Communications Commission will likely involve significant changes in the access
charge system and could potentially result in a significant decrease or
elimination of access charges altogether. Decreases or losses of access charges
may or may not result in offsetting increases in local, subscriber line or
Universal Service Fund revenues. Regulatory developments of this type could
adversely affect our business, financial condition and results of operations.   Risk of loss or reduction of Universal Service Fund
support.  We receive Universal
Service Fund revenues to support the high cost of operations in high costs
areas. Current Federal Communications Commission rules provide different
methodologies for the determination of federal universal service payments to
rural and non-rural telephone company areas. In general, the rules provide high
cost support to rural telephone company study areas where the companys actual
costs exceed a preset nationwide benchmark level. High cost support for
non-rural telephone company areas, on the other hand, is determined by a
nationwide proxy cost model. The Federal-State Joint Board on Universal
Service is considering proposals to update the proxy model upon which non-rural
high-cost funding is determined. These changes could have a negative impact on
the Universal Service Fund revenues.  The
high cost loop support we receive from the Universal Service Fund is based upon
our average cost per loop compared to the national average cost per loop
benchmark. This revenue stream will fluctuate based upon our rural company
average cost per loop compared to the national average cost per loop. For
example, if the national average cost per loop increases and our rural company
operating costs (and average cost per loop) remain constant or decrease, the
payments we receive from the Universal Service Fund would decline. Conversely,
if the national average cost per loop decreases and our operating costs (and
average cost per loop) remain constant or increase, the payments we receive
from the Universal Service Fund would increase. The national average cost per
loop in relation to our historic average cost per loop has increased and we
believe that the national average cost per loop will likely continue to
increase in relation to our average cost per loop. As a result, the payments we
receive from the rural Universal Service Fund have declined and the payments
that we will receive will likely continue to decline. This support has
fluctuated based upon the historical costs of our rural operating companies. In
addition to the Universal Service Fund high cost loop support, we also receive
other Universal Service Fund support payments for our rural company service
areas, which include local switching support, long term support, and interstate
common line support that used to be included in our interstate access charge
revenues (the Federal Communications Commission has recently merged long term
support into interstate common line support). If our rural local exchange
carriers were unable to receive support from the Universal Service Fund, or if
that support was reduced, many of our rural local exchange carriers would be
unable to operate as profitably as they have historically, in the absence of
implementation of increases in charges for other services. Moreover, if we raise
prices for services to offset loss of Universal Service Fund payments, the
increased pricing of our services may disadvantage us competitively in the
marketplace, resulting in additional potential revenue loss.  The
Telecommunications Act provides that eligible communications carriers,
including competitors to rural local exchange carriers, such as wireless
operators, may obtain the same per line support as the rural local exchange
carriers receive if a state commission determines that granting support to
competitors would be in the public interest. In fact, wireless communications
providers in certain of our markets have obtained matching support payments
from the Universal Service Fund, but this matching has not led to a loss of
revenues for our rural local exchange carriers under existing regulations. Any
shift in universal service regulation, however, could have an adverse effect on
our business, financial condition and results of operations.  During
the last four years, pursuant to recommendations made by the Multi Association
Group and the Rural Task Force, the Federal Communications Commission has made
certain modifications to the universal service support system for rural
carriers that changed the sources of support and the method for determining the
level of support. To date, these changes have been revenue neutral to our
operations. It is unclear whether the changes in methodology will continue to
accurately reflect the costs incurred by our rural local exchange carriers and
whether the revised methodology will provide for the same amount of Universal
Service Fund support that our rural local exchange carriers have received in
the past. In addition, several parties have raised objections to the size of
the Universal Service Fund and the types of services eligible for support. A
number of issues regarding the source and amount of contributions to,   10


and eligibility for payments from, the Universal
Service Fund are pending and will likely be addressed by the Federal
Communications Commission or Congress in the near future. For example, a number
of proposals to be examined by the Federal Communications Commission in its
current rulemaking with respect to the reform of the intercarrier compensation system
include reforms of the Universal Service Fund. The outcome of any regulatory
proceedings or legislative changes could affect the amount of Universal Service
Fund support that we receive, and could have an adverse effect on our business,
financial condition and results of operations.  On
February 28, 2005, the Federal Communications Commission issued a press
release announcing additional requirements for the designation of competitive
Eligible Telecommunications Carriers for receipt of high-cost support. In its
corresponding order, released on March 17, 2005, the Federal
Communications Commission adopted additional mandatory requirements for
Eligible Telecommunications Carriers designation in cases where it has
jurisdiction, and encourages states that have jurisdiction to designate
Eligible Telecommunications Carriers to adopt similar requirements. The Federal
Communications Commission is still considering revisions to the methodology by
which contributions to the Universal Service Fund are determined. These
revisions will be part of an overall rulemaking regarding Universal Service
Support which will be dealt with in future proceedings.   Risk of loss of statutory exemption from burdensome
interconnection rules imposed on incumbent local exchange carriers.  Our rural local exchange carriers are exempt
from the Telecommunications Acts more burdensome requirements governing the
rights of competitors to interconnect to incumbent local exchange carrier
networks and to utilize discrete network elements of the incumbents network at
favorable rates. If state regulators decide that it is in the publics interest
to impose these more burdensome interconnection requirements on us, we would be
required to provide unbundled network elements to competitors in our rural
telephone company areas. As a result, more competitors could enter our
traditional telephone markets than are currently expected and we could incur
additional administrative and regulatory expenses, and experience additional
revenue losses.   Risks posed by costs of regulatory compliance.  Regulations create significant compliance
costs for us, and are expected to continue to do so. Our subsidiaries that
provide intrastate services are generally subject to certification, tariff
filing and other ongoing regulatory requirements by state regulators. Our
interstate access services are currently provided in accordance with tariffs
filed with the Federal Communications Commission. Challenges in the future to our
tariffs by regulators or third parties or delays in obtaining certifications
and regulatory approvals could cause us to incur substantial legal and
administrative expenses, and, if successful, these challenges could adversely
affect the rates that we are able to charge our customers.  Our
business also may be impacted by legislation and regulation imposing new or
greater obligations related to assisting law enforcement, bolstering homeland
security, minimizing environmental impacts, or addressing other issues that
impact our business. For example, existing provisions of the Communications
Assistance for Law Enforcement Act and Federal Communications Commission
regulations implementing the Communications Assistance for Law Enforcement Act
require communications carriers to ensure that their equipment, facilities, and
services are able to facilitate authorized electronic surveillance. We cannot
predict whether and when the Federal Communications Commission might modify its
Communications Assistance for Law Enforcement Act rules or any other rules or
what compliance with new rules might cost. Similarly, we cannot predict whether
or when federal or state legislators or regulators might impose new security,
environmental or other obligations on our business.  Regulatory
changes in the communications industry could adversely affect our business by
facilitating greater competition, reducing potential revenues or raising our
costs.  The
Telecommunications Act provides for significant changes and increased
competition in the communications industry, including the local communications
and long distance industries. This statute and the Federal Communications
Commissions implementing regulations remain subject to judicial review and
additional rulemakings of the Federal Communications Commission, thus making it
difficult to predict what effect the legislation will have on us, including our
operations and our revenues and expenses, and our competitors. Several
regulatory and judicial proceedings have recently concluded, are underway or
may soon be commenced, that address issues affecting our operations and those
of our competitors. We cannot predict the outcome of these developments, nor
can there be any assurance that these changes will not have a material adverse
effect on us or our industry.   11