**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM10-K**

**(Mark one)**

**x****                             ****ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934**

**For the fiscal year ended December 31,****2006**

**OR**

**o****                                ****TRANSITION REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**Commission FileNo. 333-131152**

**HAWAIIAN TELCOM COMMUNICATIONS, INC.**

(Exact name of registrant as specified in ourcharter)

| **Delaware**                     |   | **16-1710376**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

 
| **1177 Bishop Street**                                                 |
|------------------------------------------------------------------------|
| **Honolulu,  Hawaii 96813**                                            |
| (Address of  principal executive offices) (Zip Code)                   |
|                                                                   |   |
| **808-546-4511**                                                       |   |
| (Registrant’s  telephone number, including area code)             |   |
| **Securities  registered pursuant to Section 12 (b) of the Act: None** |   |
| **Securities  registered pursuant to Section 12 (g) of the Act: None** |   |

 

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

Indicate by check mark if the registrant is not required tofile reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.   Yes o  No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the SecuritiesExchange Act of 1934 during thepreceding 12 months (or for such shorterperiod that the registrant wasrequired to file such reports), and(2) has been subject to such filingrequirements for the past 90 days.   Yes x  No  o

Indicateby check mark if disclosure of delinquent filers pursuantto Item 405 of Regulation S-K is not containedherein, and will not be contained, tothe best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part IIIof this Form 10-K or any amendment tothis Form 10-K.  x

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer. See definition of “AcceleratedFiler” and “Large Accelerated Filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  o    AcceleratedFiler  o    Non-AcceleratedFiler  x

Indicateby check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No  x

The registrantis a wholly-owned subsidiary of Hawaiian Telcom Holdco, Inc. As of March 31, 2007, there were no shares of voting or non-voting common equity held by non-affiliates of theregistrant. As of March 31, 2007, 1,000 shares of the registrant’s commonstock, $0.10 par value, were outstanding.

 

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**HAWAIIAN TELCOM COMMUNICATIONS, INC.**

**TABLE OF CONTENTS**
|   |   | ** **                                                                 |                                   | **Page** |
|--------|--------|----------------------------------------------------------------------------|----------------------------------------|----------|
|        |   | **PART I**                                                                 |                                   |     |
|        |   |                                                                       |                                   |     |
| Item 1 | .      | Business                                                                   |                                   | 1        |
|   |   |                                                                       |                                   |     |
|   | A.     |                                                                       | History                                |     | 1 |
|   | B.     |                                                                       | Industry Overview                      |     | 1 |
|   | C.     |                                                                       | Markets and Customers                  |     | 2 |
|   | D.     |                                                                       | Our Products and Services              |     | 4 |
|   | E.     |                                                                       | Sales and Marketing                    |     | 7 |
|   | F.     |                                                                       | Network  Architecture and Technology   |     | 8 |
|   | G.     |                                                                       | Back-Office and Information Technology |     | 10 |
|   | H.     |                                                                       | Competition                            |     | 10 |
|   | I.     |                                                                       | Employees                              |     | 12 |
|   | J.     |                                                                       | Insurance                              |     | 12 |
|   | K.     |                                                                       | Regulation                             |     | 12 |
|   | L.     |                                                                       | Business Transactions                  |     | 17 |
| Item 1 | A.     | Risk Factors                                                               |                                   | 23       |
| Item 1 | B.     | Unresolved Staff  Comments                                                 |                                   | 34       |
| Item 2 | .      | Properties                                                                 |                                   | 34       |
| Item 3 | .      | Legal Proceedings                                                          |                                   | 34       |
| Item 4 | .      | Submission  of Matters to a Vote of Security Holders                       |                                   | 34       |
|   |   |                                                                       |                                   |     |
|   |   | **PART II**                                                                |                                   |     |
|   |   |                                                                       |                                   |     |
| Item 5 | .      | Market for  Registrant’s Common Equity, Related Stockholder Matters   |                                   |     |
|   |   | and Issuer  Purchases of Equity Securities                                 |                                   | 35       |
| Item 6 | .      | Selected Financial  Data                                                   |                                   | 36       |
| Item 7 | .      | Management’s  Discussion and Analysis of Financial Condition and      |                                   |     |
|   |   | Results of  Operations                                                     |                                   | 37       |
| Item 7 | A.     | Quantitative  and Qualitative Disclosures About Market Risk                |                                   | 54       |
| Item 8 | .      | Financial  Statements and Supplementary Data                               |                                   | 55       |
| Item 9 | .      | Changes in and  Disagreements With Accountants on Accounting and           |                                   |     |
|   |   | Financial Disclosure                                                       |                                   | 95       |
| Item 9 | A.     | Controls and  Procedures                                                   |                                   | 95       |
| Item 9 | B.     | Other Information                                                          |                                   | 95       |
|   |   |                                                                       |                                   |     |
|   |   | **PART  III**                                                              |                                   |     |
|   |   | ** **                                                                 |                                   |     |
| Item 1 | 0.     | Directors,  Executive Officers and Corporate Governance                    |                                   | 91       |
| Item 1 | 1.     | Executive  Compensation                                                    |                                   | 97       |
| Item 1 | 2.     | Security  Ownership of Certain Beneficial Owners and Management and        |                                   |     |
|   |   | Related  Stockholder Matters                                               |                                   | 109      |
| Item 1 | 3.     | Certain  Relationships and Related Transactions, and Director Independence |                                   | 111      |
| Item 1 | 4.     | Principal  Accountant Fees and Services                                    |                                   | 113      |
|   |   |                                                                       |                                   |     |
|   |   | **PART IV**                                                                |                                   |     |
|   |   | ** **                                                                 |                                   |     |
| Item 1 | 5.     | Exhibits,  Financial Statement Schedules                                   |                                   | 113      |

 

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**PART I**

**Item 1. Business**

Hawaiian Telcom Communications, Inc. (the “Company”) is a full-service telecommunications provider in Hawaii, operating two business segments:

*Telecommunications Services*.  We offer a wide spectrumof telecommunications services, includinglocal exchange, long distance, networkaccess, wireless and Internet services.  Our services are offered on all of Hawaii’s major islands. As of December 31, 2006, our telecommunicationoperations served: 602,862 localaccess lines, of which 61% servedresidential customers and 38% servedbusiness customers, with the remaining1% serving other customers; 277,317 longdistance lines, of which 70% served residential customers and 30% servedbusiness customers; and 90,320 retail high-speed internet (“HSI”) lines, which served74,636 retail residential lines and 15,684 retail business lines.

*Directories publishing*.  The publishing businessincludes the sale of advertising in printed and electronic directories in Hawaii. We publish seven core yellow page directories annually and (in 2006) one mobile/companion directory annually on the islands of Oahu, Maui, Hawaii and Kauai andhad total circulation approximately 1.7 million copies for the year endedDecember 31, 2006. We also distributedapproximately 1.3 million white pagedirectories in 2006.

**A.  History**

Originallyincorporated in 1883 as Mutual TelephoneCompany, we have a strongheritage of over 120 years as Hawaii’s incumbent local exchange carrier (“ILEC”). From 1967 toMay 1, 2005, we operated as a division of Verizon Communications Inc. (“Verizon”) or itspredecessors. On May 2, 2005, pursuantto a merger (the “2005 Acquisition”) of Verizon HoldCo LLC with and into theCompany, we became a stand-aloneprovider of telecommunications services, operating as Hawaiian Telcom, Inc. (fka Verizon HawaiiInc.) and Hawaiian Telcom ServicesCompany, Inc., both wholly-owned subsidiaries of the Company. The Company inturn is a wholly-owned subsidiary of Hawaiian Telcom Holdco, Inc. Hawaiian Telcom,Inc. operates our regulatedlocal exchange carrier business and Hawaiian Telcom Services Company, Inc. operates all of our other businesses,including our long distance, Internet,wireless and directories businesses. The Company also has one indirect subsidiary, Hawaiian Telcom Insurance Company, Incorporated (fka GTE Hawaiian Tel InsuranceCompany Incorporated) that is acaptive insurance subsidiary wholly-owned by Hawaiian Telcom, Inc. Until December 31, 2003, it provided auto liability, general liability and worker’s compensation insurance to Verizon Hawaii Inc. on a direct basis. The captive subsidiary continues to settle claims related to incidentswhich occurred prior to January 1, 2004. We insure current incidents with external carriers.

****

**B.  IndustryOverview**

Thetelecommunications industry is comprised of companies involved in the transmission of voice, data andvideo communications over various media and through various

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technologies. There are two predominant types of local telephone service providers, or carriers, in the telecommunications industry: ILECs and CLECs. AnILEC refers to the regional Bell operating companies (“RBOCs”), which were the local telephone companies created from the break up of AT&T in 1984, as well as small and midsize independent telephone companies, such as HawaiianTelcom, Inc., Cincinnati Bell Inc., and Embarq Corporation (formerly a wholly-ownedsubsidiary of Sprint Nextel Corporation),which sell local telephone service. These ILECs were the traditional monopoly providers of local telephone service prior to thepassage of the Telecommunications Act of 1996. A CLEC is a competitor to localtelephone companies that has beengranted permission by a state regulatory commissionto offer local telephone service in an area already served by anILEC.

Inrecent years, the U.S. telecommunications industry has undergone significant structural changes. Many of the largest serviceproviders have achieved growth through acquisitions and mergers, while an increasing number of competitiveproviders have restructured or entered bankruptcy to obtain protection from their creditors. Since 2001, capital in the form of public financing has been generallydifficult to obtain for new entrants and competitive providers. Capital constraints have caused a number of competitiveproviders to change their businessplans, resulting in consolidation. Despite these changes, the demand for all types of telecommunications services, particularly data services, has not diminished, and companies increasingly bundle services and provide integrated offeringsfor end-user customers.

Demandfor telecommunications services in Hawaii has not diminished in recent years,and Hawaii’s telecommunications industry remains active. Hawaii’s geographicposition gives the state a comparative advantage relative to otherpotential information economies. Withits location between the mainland United States and Asia, Hawaii has beenand will likely continue to be a surfacinglocation for cables running between the two continents. Hawaii is also connected to the mainland United States and Asia via several satellite networks.

**C.  Markets and Customers**

***Telecommunications Services***

Wehave been a telecommunications provider in Hawaii for more than 120 years. Our market consists of 86 centraloffices serving an area ofapproximately 6,263 square miles on the islands of Oahu, Maui, Hawaii, Kauai, Molokai and Lanai. We are the incumbentprovider of local exchange services within this area and own the state’s most extensive local telecommunications network, with 602,862 local access lines served as of December31, 2006, of which 61% servedresidential customers, 38% business customersand the remaining 1% served othercustomers. Local customers include (1)interexchange carriers that pay for access to long distance calling customers located within our local service areas and (2) CLECs that payfor wholesale access to our network in orderto provide competitive local serviceon either a resale or UNE (unbundled network element) basis as prescribed under the Communications Act of 1934, as amended,which we refer to throughout thisannual report as the Communications Act.

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Ourmarket is characterized by high population density, with 71%of the state’s population concentrated on Oahu. Thisconcentration of customers andcommerce provides opportunities to leverage our network infrastructure todeliver products and services on an efficient and cost-effective basis, and to market and sellour services more effectively. The state of Hawaii has a diverse population with 41.5% of the state’s population of Asian descent. In 2006, the median household income was $54,145 which was higher than the national average of $48,713.

Ourbusiness marketplace is dominated by several key industries.State and federal government account for 27% of gross state product. With the U.S. Pacific Command, one of the largest of the U.S. unifiedservice commands, based in Hawaii and 39,000military personnel stationed inHawaii, the federal government is one of our largest customers. The hospitality industry andfinancial institutions also accountfor a significant portion of our business. The operations of these leading sectors are communications intensive, andwe believe that they are dependent on our modern, reliable services. Hawaii’ssmall business market (in aggregate) is also a key driver of Hawaii’seconomy — approximately 96% of the companiesin Hawaii employ fewer than 50 employees, representing approximately 32,000business customers. We believethat these business customersrepresent an underserved segment that we are targeting aggressively withnew product and service offerings.

We believe that the Hawaii marketplace has a distinct culture, which wehave considered when repositioning ourbusiness as a local company. Marketing strategies that may besuccessful on the mainland United States may not besuccessful in Hawaii, sinceHawaii residents and businesses have telecommunications needs that are different from those on the mainland.

Wireless communications will be an integral part of our telecommunicationsstrategy. We believe that the wirelessmarket presents us with substantial opportunities. The wireless market in Hawaii is projected to grow from the current 810,000 wireless subscribers to 1,100,000by the end of 2011. Our goal is to penetrate this market and gain marketshare by leveraging the  *Hawaiian Tel*TM brand established by our predecessors and our existing customer base. Keys to this growth strategy will be effective use of our multiple distribution channels, innovative bundling of services and development oflandline/wireless integrated services.

***Directories Publishing***

Wehave been publishing print directories in Hawaii for nearly50 years. Our directories are prepared to reach both the large markets of Oahu and the island of Hawaiiand smaller second tier markets for the smaller communities and islands.Our directories business has historically generated consistent revenues and does not depend to anysignificant extent on the sale of advertising to a particularindustry or to a particular advertiser.In 2006, we had relationships with over 21,000 advertisers. Neither any single directories heading nor the top 10 customers accounted for a material portion of our directories business revenues. The diversity of our directories business customer base reduces exposure to adverse economic conditions that may affect particular geographic regions orparticular industries and providesadditional stability in operatingresults.

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Renewing customers comprise the core advertiser base for our directories business and a large number of these customers have advertised in our directories for many years. In 2006, a substantial majority of our local advertisers renewed their advertising with us.

**D.  Our Productsand Services**

***Telecommunications Services***

Our strategy for the telecommunications businessis to increase customer loyalty and reducechurn by increasing the penetration of bundled service offerings that enhance the value of basic network service with value-added services,long distance, Internet and wireless.

*Local Exchange Services*

Our local exchange carrier business generatesrevenue from local network services, network access services and certainother services, each of which is described below.

*Local Network Service*

Ourtraditional local network service enables customers to originate and receive telephone callswithin a defined “exchange” area. We providebasic local services on a retail basis to residential and business customers, generally for a fixed monthly recurring charge. Basic local service also includes non-recurring chargesto customers for the installationof new products and services. Basiclocal exchange services are enhanced with a variety of value-added services such as call waiting, caller ID, voice messaging, three-way calling, call forwarding and speed dialing. Value-addedservices may be purchased individually or as part of a package offering for a monthly recurring charge. We also offer other local exchange services such as local private line and wire maintenance. The rates that can be charged to customers for basic local andcertain other services are determined by the Public Utilities Commission of the State of Hawaii (“HPUC”). We chargebusiness customers higher rates torecover a portion of the costs ofproviding local service to residential customers, as is customary in the industry. See “—Regulation” for further discussion of regulatory matters including our localnetwork service rate proceedings.

*Network Access Services*

Our network access services are offered inconnection with the origination andtermination of long distance, or toll, calls that typically involve more thanone company in the provision of end-to-end long distance service.Since toll calls are generally billedto the customer originating the call, a mechanism is required to compensate each company providing services relating to the call. This mechanism is the access charge, which we bill to each interexchange carrier for the use of our facilities to access our customers.In addition, we bill a component ofaccess charges directly to our customers. Our network access services generate

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intrastate access revenue when an intrastate long distance call that involves us and an interexchange carrier is originated and terminated within Hawaii. This access charge is regulated by theHPUC. Similarly, our network access services generate interstate access revenue when an interstate longdistance call is originatedfrom a Hawaii local calling area served by us and is terminated in a local calling area in another state, and vice versa. Interstate access charges are regulated by theFederal Communications Commission (“FCC”). We also offer special accessvoice and data services, which are akey area of growth driven by demandfor increasing bandwidth from business customers. Special access services include switched and non-switched (or dedicated) services such as point-to-point single channel circuits, DS1s, DS3s and OC services, as well as IP-based private networks.

*Long Distance Services*

We provide long distance services totransmit international calls, interLATA(Local Access Transport Area) domestic callsand regional toll calls madeto points outside a customers’ localcalling area, but within our local service area (intraLATA toll). InHawaii, each of the islands is a local calling area, and calls between the islands are intraLATA toll calls. Other long distance services include 800-number services and wide area telecommunicationservices, or WATS, private line services, and operator services associated withlong distance calls. As of December31, 2006, we served 277,317 long distance lines, of which 70% served residential customers and 30% served business customers.

*Internet Services*

We provide high-speed Internet (“HSI”) and dial-up Internet access to ourresidential and business customers.Our data network enables us to provideextensive high-speed network access. We have HSI available in 77 of our 86 central offices. As of December 31, 2006, we served 74,636 retail residential HSIlines and 15,684 retail business HSI lines.We also provided dial-up Internet access to approximately 4,000 subscribers as of the same date.

*Wireless Services*

Upon consummation of the 2005 Acquisition, we began offering a  *Hawaiian Telcom*® brandedwireless service. In January 2005, we entered into a services agreement with a subsidiary of Sprint Corporation that allows us to resell Sprint wireless services, includingaccess to Sprint’s nationwide personalcommunication service, or PCS, wireless network, under the  *HawaiianTelcom*® brandname to residential and businesscustomers in Hawaii under a mobilevirtual network operator, or MVNO, services agreement. Under the services agreement, we retaincontrol of all sales and marketingof our wireless services. Our services agreement with Sprint has an initial term of five years (with an automatic renewalfor successive two-year terms until either party provides notice of non-renewal). We have also entered into agreementswith Mobile Technology Services (a subsidiary of InPhonic, Inc.), a leading mobile virtual network enabler, to provide back-office support for the wireless operations. By partnering with Sprint and Mobile Technology Services, we believe we can maximize speed-to-market with afull product offering while minimizing upfront capital requirements in a heavily penetrated market.We believe that our eight existingretail stores, our distribution partners, our residential and business customer service call centers and our business-to-business sales forces serve as important distribution channels for acquiringnew wireless customers.

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*Other Services*

We seek to capitalize on our local presence andnetwork infrastructure by offering other services to customers and interexchangecarriers. Sales and maintenance ofcustomer premises equipment to the business markets are an importantsource of local exchange revenues.Customer premises equipment services are also an area of potential growth as attractive contracts withmajor equipment providers allow us to offer complete voice and data network and management solutions. For thewholesale or carrier market, we offer services including operator services, billing and collection services and space and power rents for collocation services. We also offer publicpay telephone services at approximately5,300 locations throughout the state.

During 2006, we announcedour effort to develop a network capable of providing integrated digitaltelevision, high-speed broadband and voice services in order to provideadditional bundled service offerings to new and existing customers. Inconjunction therewith, we filed an application for a video franchise for theisland of Oahu with the Cable Television Division of the State of HawaiiDepartment of Commerce and Consumer Affairs. We have developed plans andstarted to build out our network to offer such services. We are working withour vendors to develop the requisite hardware and software platform and arenegotiating for programming content. Our ability to provide an attractive andprofitable video offering will depend significantly on the results of theseregulatory and infrastructure development efforts.

***Directories Publishing***

We are the incumbent print directory publisher in Hawaii.  The sale of directory advertising to local businesses, generally small- and medium-sizedenterprises, generated a substantial majority of our directories revenues for the year ended December 31, 2006, with the balance generated by sales to nationaladvertisers. Since May 2005, we havebeen outsourcing the printing, distribution and advertising sales operations to L.M.Berry and Company (“L.M. Berry”), a subsidiary of BellSouth Corporation. Upon consummation of the 2005 Acquisition, we launched an onlinedirectories business to complement the existingprint directories business.

*Yellow page directories*.  In 2006, we distributedapproximately 1.7 million yellow page directories.Approximately 21,000 local and nationalbusinesses advertised in our yellow page directoriesin 2006, a substantial majority of which had advertised in our yellow page directories business during theprior year. We offer businesses abasic listing at no charge in the relevantedition of our yellow page directories. We also offer arange of paid advertising options inour yellow page directories and on-lineInternet services.

*White page directories*.  In 2006, we distributedapproximately 1.3 million white page directories.We provide white page listings to every residence and business in Hawaii that sets forth the name,address and telephone number of the residence or business in question, unless thecustomer has requested to be a non-published or non-listed customer.

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*Internet yellow pages*.  We believe that the Internet sector is a growing advertising offering inour directories, and we sell advertising listings in anInternet database that allows users tosearch for businesses in Hawaii and nationally.

**E.   Sales and Marketing**

Our sales and marketing strategy is aimed at repositioning our businessas a local Hawaii company, as well as developing and delivering products designed to meet our market’sspecific needs. We are transformingour customers’ past experience of purchasing telecommunication services from a nationally-based company with generically designed product offerings to a locally-based business with tailored product offerings for the Hawaii market. Key components of our sales and marketing strategy include:

·                  developing anddelivering products, services andbundles customized to meet the needs of the local Hawaii market;

·                  leveraging the  *Hawaiian Tel*TM brand established by our predecessors across all our product offerings;

·                  partnering with leaders in the Hawaii business community;

·                  raising visibility in the community through key sponsorships and executive positioning; and

·                  creating a customer driven organization, locallyoperated and managed, that providesreliable and high quality service in addition to excellent customerservice.

Weare implementing this strategy by:

·                  developing integrated sales and marketing plans that focuson meeting the needs of the local market;

·                  focusing local advertising and marketingexpenditures to create demand, promote ourproducts and services, and establish competitive positioning;

·                  re-designing sales coverage models to focus on previouslyunderserved customers and to increase segmentation and target marketing to small- and medium-business customers;

·                  improving the customer service experience;and

·                  increasing the capacity of all sales and marketing channels by centralizing sales support functions, enhancing performanceof retail stores, and tracking and managing profitability for eachsales channel.

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Ourlong distance services sales efforts are primarily directed toward increasing the number of subscribers we serve, selling bundled services and generating incrementalrevenues through product andfeature up-sale opportunities. We sell our long distance communications services throughlocal advertising, the use of bundled telecommunications packages, and up-selling by our customer contact personnel.

Wemarket our Internet services as a stand-alone product, as well as part of a package of bundled telecommunications services to our residential and business customers. We believe our ability to bundle Internet services with other telecommunications services has contributed to the growth of the revenue generated by ourInternet services business.

We believe there aresubstantial opportunities for us to differentiate and grow our wirelessbusiness, and at the same time positively impact landline churn, by developingand launching wireless/wireline converged services. Our family ofconverged Call ChoiceSM services give our wireless customers moreconvenience and control over their calling experience. Unique Call Choicefeatures such as “Visual Voicemail”, “Smart Routing” and “Follow-me Home”differentiate our wireless offerings while reinforcing the importance and valueof our landline services. Over time, this convergence strategy will yieldreduced wireless and wireline churn and spur top line revenue growth throughincremental ARPU, or average revenue per user, per customer.

The marketing of directory advertisements is primarily a direct sales business that requires both maintaining existing customers and developing new customers. Since May 2005, we have been outsourcing the advertising sales operations of our directoriesbusiness to L.M. Berry. In 2005, our directories business retained a substantial majority of its local advertisers from the previousyear. The high renewal rate reflectsthe importance of our directories to our local customers, for whom yellow page directory advertising is, in manycases, the primary form ofadvertising. Larger national companiesalso use advertising in our directories as an integral part oftheir national advertising strategy.

**F.  Network Architecture and Technology**

As of December 31, 2006, we owned a total of116 local base and remote switches and a total of seven tandem switches serving602,862 total lines in the islands of Hawaii, Kauai, Lanai, Maui, Molokai and Oahu. All of our access lines are served by digital switches provided predominantly by Lucent and Nortel. Since 2002, we have updated our infrastructure to meet the technological needs of our customers. Our switches on every island are linked through a combination of extensive aerial, underground,and undersea cable, allowing us toprovide our services to customers in a very challenging geographical territory.

Ourtelecommunication infrastructure includes more than 13,100 sheath miles of fiber optic cable and copper wire distribution lines. Submarine anddeep-sea fiber optic cables connectthe islands of Kauai,Oahu, Maui and Hawaii, while digitalmicrowave provides other inter-island connections. The islands also are connected with Trans-Pacific fiber optic cables, not owned by us. Substantially all major switches have current generic software upgrades installed, allowing for a rangeof enhanced customer features.

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We have integrated numerous network elements to offer avariety of services and applicationsthat meet the increasinglysophisticated needs of customers. These network elements include aSignaling System 7, or SS7 network,consisting of a pair of signaling transferring points, or STPs,allowing the islands to interconnect with the global public networkthrough third-party STP gateways on the U.S. mainland. These network elements also connect to newly installed service control points for the provision of advanced network services, such as local number portability, caller name and number delivery (CNAM) and advanced intelligent network (AIN) services. Other sophisticated network elements integrated in our systeminclude voice messaging platforms, digital switching, and, in some communities, integrated service digitalnetwork access. As the telecommunications industry experiences significant changes in technology, customer demand, and competition, we intend to introduce additional enhancements.

Newnetwork elements similarly have beenintegrated to provide advanced data servicesand to improve the quality of existinghigh speed data services. Multiple Protocol Layer Switches (MPLS) have beendeployed to aggregate HSI services and to expand our capabilities to offer additional highspeed data services such as virtualprivate networks and gigabit Ethernet services.

Our broadband infrastructure consists of 21 Lucent Frame Relay switches and 13 ATM switches. Wehave HSI available in 77 of our 86central offices. There are also 376 Synchronous Optical Network (“ SONET”) ringsin service.

Certain network operations are provided by our Network Operations Center, or NOC,and our Network Services ComputerCenter, or NSCC, located in Honolulu. We also have customer reporting center facilities that coordinate the dispatch for installations and repairs and86 central offices that permit us to provide efficient attention toour customers needs. All of thesefacilities offer extended business hours to efficiently handle customer inquiries and orders for service. In addition, the Honolulu operation center is responsible for service delivery, installation and maintenance and repair for all of our customers, as well as outside plant construction activity for our network. The operation center isalso responsible for the distribution functions related to the inventory of supplies andequipment necessary for telephoneoperations. This function includes thesupply and maintenance of the fleetof cars and trucks that supportthese outside plant activities not only for us but for external third parties in the telecommunications industry.

Centraloffice equipment consists of digital electronic switching equipment,circuit, carrier and transmission equipment. Operating equipment consistsof motor vehicles and other equipment. We own or lease most of our administrative and maintenance facilities, customer service centers, central offices and remote switching platforms and transport and distribution network facilities. Our local telephone assets are located primarily inHawaii.

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**G.****            Back-Office and Information Technology**

Sincethe 2005 Acquisition, we have been making a substantial investment in a new back-officeand IT infrastructure. Our new IT infrastructure integrates certain coreoperations support systems purchasedfrom Verizon as part of the 2005Acquisition with customized off-the-shelf commercial systems. It alsointegrates our basictelecommunications systems, our network monitoring and maintenance systems, billing systems, customerrelationship management systems,corporate finance systems, human resource and payroll systems and backup data centers.

We believe that our new back-office and IT infrastructure, when completed, will allow usto improve and expand our customer services and streamline our operations. Enhanced data management and billing capabilities will allowus to broaden our bundled product offering and replace the multiple existing customer service systems with one central system that will improve efficiency and response time. In addition, our new back-office and IT infrastructure will provideus with a more comprehensive customer information tracking system, which webelieve will enhance our marketintelligence. We believe that the enhanced functionality of our new ITinfrastructure will allow us to sell more products and bundles, operate more efficiently and reduce our costs. See “—Business Transactions.”

**H.  Competition**

***Telecommunications Services***

*Local Exchange Service*

ILECs are subject to several types of competition, including, (i)facilities-based competition from providers with their own local service network; (ii) resale competition from providers who purchaselocal service from the ILEC at wholesale rates and resell these services to their customers; (iii) competition from providers who lease UNEsfrom us; (iv) cable companiesoffering local service through Voiceover Internet Protocol (“VoIP”) over their cable platform, and (v) new entrants and providers with technologyalternatives to local service networks like wireless providers.  Technological developments in wirelesstelephone features, personal communicationsservices, digital microwave and other wireless technologies are expected to promote the development of alternatives to traditionalwireline services. We believe thatcompetition is likely to come from resaleinterconnection or UNEinterconnection. We also anticipate increasedcompetition from certain service providers in Hawaii, primarily Oceanic TimeWarner Cable, and two local CLECs.

*Long Distance Services*

The long distance telecommunications market isintensely competitive and has been for several years. Competition in the long distance business is based primarily on price, although service bundling, branding, customer service,billing services and quality also playa role in customers’ choices. In the long distance market, we compete against the three largest interstate long distance carriers in Hawaii, AT&T, Verizon and Sprint, as well as all of the wireless providers that offer bundledlong distance with their rate plans. In addition, we believe that VoIP will also offer an alternative to long distance services.

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*Internet Services*

We expect that the Internet accessservices business will continue to behighly competitive due to the absenceof significant barriers to entry. Wecurrently compete with Oceanic Time Warner Cable, Pacific LightNet, Clearwire and traditional carriers providing dedicated Internet access services to business customers.

*Wireless Services*

While the market for wireless telephone services in Hawaii continues to grow, it ishighly competitive. The Hawaii wireless market is currently serviced by several wireless service providers,including Verizon Wireless, AT&TMobility LLC, Sprint Nextel, Inc., Sprint PCS and T-Mobile USA, Inc. Federal local number portability requirements also increase competition by allowing customers to keep their telephone number when they switch carriers. We expectto compete in the wireless market by leveraging our existing customer base and including wireless services in new bundled product offerings. We also believethat our eight existing retail stores serve as an important distributionchannel for garnering new wireless customers. We intend to developthe capability to deliver our wirelesscustomers one telecom bill covering both wireline and wireless services. We believe that our customerswill prefer receiving one bill for all of their telecommunications services and that we will benefit from that preference.

***Directories Publishing***

The directory advertising industry is competitive but provides a unique advertising value proposition compared with other forms of advertising. Unlike most U.S. mainland markets, Hawaii does not havethe full breadth of advertising services available to businesses. Billboards are not allowed in Hawaii, and there are restrictions on most other outdooradvertising. We compete with several different forms of advertising, includingnewspapers, radio, television, the Internet, direct mail and other yellow page directory publishers. It should also be noted that the effectiveness of television and radio advertising has limitations unique to Hawaii’sgeography. On Oahu, the directory publisherswith which we compete are principally The Paradise Pages, whichhas been in the market for seven years, and Ad Ventures, which has beenin the Oahu market for three years. OnMaui, we compete against The ParadisePages and Ad Ventures, both of which have been in the market for three and four years, respectively. On the Island of Hawaii, we also compete with The Paradise Pages, which began publishing there in 2004, and Ad Ventures, which began publishing there in 2001.

TheInternet is emerging as a new medium for advertisers. Although advertising on theInternet still represents only a small part of the total advertisingmarket, as the Internet grows it will become increasingly important as anadvertising medium. At this time ourcompetitors do not offer a completeInternet yellow page search product. We have created a localized Internet sitefor our directories business.

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**I.  Employees**

As of March 15, 2007, we employed1,704 full-time employees in Hawaii. Ofthe total employees, 61.5% were represented by the International Brotherhood of Electrical Workers, Local 1357, or IBEW. As part of the 2005 Acquisition, we assumedall of the obligations of the collective bargaining agreement that governs the terms and conditions ofemployment for all IBEW-represented employees working for us. On March26, 2007, we announced a tentative agreement with IBEW Local 1537 to extend thecurrent collective bargaining agreement to August 31, 2008.  The currentagreement had been scheduled to expire on September 1, 2007.  The tentativeagreement is subject to ratification by union members and approval by our Boardof Directors. We believe that management currently has a constructiverelationship with the represented andnon-represented employee group.

**J.  Insurance**

Wehave insurance to cover risks incurred in the ordinarycourse of business, including general liability, property coverage,director and officers and employmentpractices liability, auto, crime, fiduciary, worker’s compensation, andbusiness interruption insurance in amounts typical of similar operators in our industry and with reputable insurance providers. Central office equipment, buildings, furniture and fixtures and certain operating and other equipment are insured under a blanket property insurance program. This program provides substantial coverage against “all risks” of loss including fire, windstorm, flood, earthquake and other perilsnot specifically excluded by the terms of the policies. As is typical in thetelecommunications industry, we are self-insured for damageor loss to certain of our transmissionfacilities, including our buried, undersea,and above-ground transmission lines. We believe that ourinsurance coverage is adequate, however if we become subject to substantialuninsured liabilities due to damage or loss to such facilities, our financialresults may be adversely affected.

**K.  Regulation**

***Federal and State Regulation ofTelecommunications Services***

Our telephone operations generally are subjectto the jurisdiction of the FCC with respect to interstate services andthe HPUC with regard to intrastate services.

***Competition***

We face increasingcompetition in all areas of our business. Regulatory changes brought on by the 1996amendments to the Communications Act, regulatory and judicial actions, and the developmentof new technologies, products and services have created opportunities foralternative telecommunication service providers, many of which are subject to fewerregulatory constraints compared to ourILEC. We are unable to predictdefinitively the impact that the ongoing changes in the telecommunicationsindustry will ultimately have on ourbusiness, results of operations or financial condition. The financial impact will depend on several factors, including the timing, extent and success ofcompetition in our markets, the

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timing and outcome of various regulatory proceedings andany appeals, and the timing, extent and success of our pursuitof new opportunities resulting from the amendments to the Communications Act and technological advances, and any changesin the State or Federal laws or regulations governing communications.

SandwichIsles Communications, a rural localexchange carrier, or RLEC, also has obtained eligible telecommunicationscarrier, or ETC, status and is estimatedto have received over $14,000per-line, per year in federal high-cost loop support for the year 2006.Sandwich Isles is permitted to receivethis funding to certain remote areasof Hawaii administered by the State Department of Hawaiian Home Lands based on its representationsthat it is serving previously unserved territories as of 1997. In contrastto Sandwich Isles, we do notreceive federal high-cost support for serving the remote areas administered by theDepartment of Hawaiian Home Lands,making it difficult for us to compete effectively in those remote areas of the state. Nextel Partners also has been granted ETC status by the HPUC, and draws federal support forsome of its licensed servicearea.

***State Regulation of Retail Rates***

Although the FCC generally does not regulate our retail rates, theHPUC continues to impose relatively extensive rate regulation on us. However, the HPUC has reduced its rate regulation of some of our services,using a three-tiered approach.Services may be classified as fully competitive, partially competitive,or non-competitive. Certain services, such as intrastate (inter-island) toll areclassified as fully competitiveservices. They are exempt from rate-of-return regulation, are not subject to a price ceiling, must be offered on prices,terms, and conditions reflected in a tariff on file at the HPUC (effective on filing), and may notbe priced below the total servicelong-run incremental cost. Otherservices, such as central exchange (Centrex) features, are classified as partially competitive services, and they maybe flexibly priced and maybe subject to regulation (other than rate-of- return regulation) such as pricefloors and price ceilings, as authorizedby the HPUC. Most services, includingresidential and business local exchange services, integrated service digital network,or ISDN, services, and directory assistance,are considered non- competitive servicesand are not subject to any pricing flexibility when offered on a stand-alone basis. The HPUC, however, has recently allowed us to bundle these services with some fully orpartially competitive services or other services that are notwithin the HPUC’s jurisdiction, enabling us to charge a discounted rate for the bundle. The competitive classification of certain services and the ability to bundle the services have helped us to respond to competition, but we cannot quantify the effect.

The levels of rates charged to end-users for the provision ofbasic local service are generally subject torate-of-return regulation administered by theHPUC. Local rates historically havebeen set at a level that willallow the recovery of embedded costs for local service. Recognized costs include an allowance for a rate-of-returnon investment in plantused and useful to provide localservice. Competitive forces andconditions in the HPUC order approving the 2005 Acquisition may cause us tobe unable to raise our local rates in the future. Rate cases brought to the HPUCoccur infrequently, typically spacedby several years, are initiated by the carrier and require the carrier to submit substantial evidence and meet a high

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burdenof proof for rate increases. Moreover, the HPUC order approving the 2005Acquisition forbids us from initiating a ratecase with a test year earlier than2009, unless the HPUC finds a compelling financial need to justify an earlier filing. In addition, the order restricts in some ways ourability to pay dividends and requires that we obtain HPUCapproval prior to disposition of our directories business. If we seek a rate case with a test year earlier than 2009, we would be subject to certain additional conditions including theobligation of Hawaiian Telcom Holdco,Inc. to make an additional capital investment in us.

***State and Federal Regulation of Long Distance Services***

We are subject to certain conditions imposed by theHPUC and, to alesser degree, by the FCCon the manner in which we conduct our long distance operations. For example, we are prohibited from jointownership of local and long-distancetelephone transmission or switching facilities. We are also required to file tariffs and submit cost studies when bundling local service with intrastate, interstate, or international long distance services. The HPUC must insure that these bundled offerings do not result in (a) ourlong distance business being cross-subsidized by the regulated portion of our local exchange business or (b) discrimination by our ILEC against other long distance providers.

***Federal Requirements to Unbundle NetworkElements***

As an ILEC, we aresubject to a number of access and interconnection requirements under federallaw.  Generally, an ILEC must negotiate in good faith withany other carrier requesting interconnection and access to unbundlednetwork elements (UNEs), and offer our competitors access to certain UNEs, such as local loops andinter-office transport, at regulated rates.  Under the FCC’s rules, we nolonger will be required to provide access to either loop or transport UNEs oncecertain competitive thresholds are met in our market.  The FCC no longer requires us to provide ourcompetitors access to switching as a UNE, nor to provide competitors access tothe combination of UNEs known as the UNE Platform (or UNE-P).  The FCC also limited our obligation to unbundle fiber facilities to multiple dwellingunits, such as apartment buildings,and to homes and offices deployed in “fiber-to-the-curb” and “fiber-to-the-premises”arrangements.   The FCC currently is examining its pricing standardfor UNEs, and may modify other aspects of its UNE rules as marketconditions change.

***Interstate and Intrastate Access Charges***

The rates that we can charge for interstate access are regulatedby the FCC. For example, the FCC has instituteda cap on the per-minute rate we can charge for our switched access services. Monthly subscriber line charges, or SLCs, also are capped. The FCC has adopted rules for special access services that provide for pricing flexibility and ultimately the removal ofservices from price regulation when prescribed competitivethresholds are met.

Ourintrastate access rates are set forth in aninterim tariff approved by the HPUC in 1995 and are based on our embedded costs. Although it has been the HPUC’s intention to initiate a proceedingto adopt permanent access rates based on a forward-lookingcost methodology, the HPUC has not yet initiated a proceeding to do so.

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***Federal Framework for Intercarrier Compensation***

On April 27, 2001, the FCC released an order addressing intercarrier compensation for dial-up connections for Internet-bound traffic. The FCCfound that Internet-bound traffic is interstate and subject to the FCC’s jurisdiction. Moreover, the FCC again found that Internet-bound traffic is not subject to reciprocal compensation under Section251(b)(5) of the Communications Act. Instead,the FCC established federal rate caps per minute for this traffic that decline from $0.0015 to $0.0007 over a three-year period. The FCC order also set capson the total minutes of thistraffic that may be subject to any compensation, barred carriers from obtaining compensation on Internet-bound traffic inmarkets where they previously had not received it and requiredthat ILECs must offer to both bill and pay reciprocal compensation for local traffic at the same rate as they are requiredto pay on Internet-bound traffic. On May 3, 2002, the U.S.Court of Appeals for the D.C.Circuit rejected part of the FCC’s rationale for its April 27, 2001 order, butdeclined to vacate the order. OnOctober 18, 2004, the FCC denied a petition to discontinue the $0.0007 rate cap onthis traffic, but removed the new marketsbar and the cap on the total minutes of Internet-bound traffic that are subject to compensation.

Moregenerally, the FCC has an ongoing rulemaking that could fundamentallyrestructure the regulatory regime for intercarrier compensation, including, but not limited to, access charges, compensation for Internet traffic, and reciprocal compensation for local voice traffic.

The FCC alsois considering whether, and under what circumstances, services that employInternet protocol are “telecommunicationsservices” and potentially subject tonormal inter-carrier compensation rules, such as access charges, under current law.  The FCC has concludedin response to one such petition that one provider’s peer-to-peer Internet protocol service that does not use thepublic switched network is aninterstate information service and is not subject to access charges. In responseto another petition, the FCC concluded that a service that utilizesInternet protocol for only one intermediate part of a call’s transmission, but doesnot change the end-to-end service to the consumer, is a telecommunications service subject to access charges.  In stillanother decision, the FCC foundthat the nomadic, interconnected VoIP serviceoffered by Vonage Holdings Corp., and similar VoIP services, were not subject to licensing by state public utilities commissions. In a further decision, the FCC stated that providers ofinterconnected VoIP service to “nomadic” customers and providers ofinterconnected VoIP services to customers in fixed locations may be treateddifferently for federal regulatory purposes (in that case, the universalservice contribution obligation).  The FCC also requires certain types ofVoIP providers to comply with wiretap laws previously thought to apply only totelecommunications carriers.  However, the FCC has not yetdefinitively ruled on whether and under what circumstances interconnectedVoIP service providers will beclassified as “telecommunications carriers” subject to other federal (and possibly state) regulations.

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***Federal Regulatory Classification ofBroadband Services***

We provide Internet access services as an Internet service provider, or ISP. In September 2005, the FCC ruled that ILECslike ours may offer dedicated broadband Internet access service as an information service and not ona non-common carrier basis. As a result, we are no longer requiredto offer the underlying broadband transmissioncapacity on a tariffed, common carrier basis to competing ISPs, following a 12-month transition for existing wholesale customers. Thisdecision gives us greater flexibility in how we offer and price such transmission capacity. It also puts us on more even footing with our cable competitors in the broadbandmarket since the FCC had previouslyheld that high-speed Internet access service delivered using cable television facilities constitutes an information service not subject to commoncarrier regulations, which determination was upheld by the United StatesSupreme Court.

***Other Federal and State Regulatory Proceedings***

In addition to theforegoing matters, a number of other FCC, stateand judicial proceedings are currentlypending or may be initiated in the future which could materially affect our business.

Currently pending before the HPUC is a proceeding, filed onOctober 6, 2006, concerning our servicequality and performance levels and standards in relation to our wholesale andretail customers.  The HPUC, aspart of its approval of the 2005 Acquisitionpursuant to which Hawaiian Telcom acquired Verizon’s Hawaii assets, had calledfor such service quality review to take place beginning six months afterthe systems cutover from Verizon, which occurred April 1, 2006. The Consumer Advocate of the State of Hawaii, the Department of Defense, Time Warner Telecom ofHawaii LLP and Pacific LightNet, Inc. are parties to the proceeding.  In general, the HPUC is examining the effectthat the 2005 Acquisition had on our wholesale and retail customers, includingwhether any audit or other remedy should be required to mitigate any negativeeffects.  The HPUC also is addressingwhether any of the current service quality standards with which we are requiredto comply should be modified or eliminated and whether any new standards shouldbe enacted, including whether a procedure should be established to impose finesfor any failure to meet the service standards. We have submitted our Statement of Position and are currently respondingto interrogatories submitted by the other parties.  We cannotpredict the outcome of this or other proceedings before the FCC, the HPUC or the courts.

***Environmental, Health and Safety Regulations***

We are subject to various environmental, health and safety laws and regulations which governour operations and may adversely affect our costs. Some of our properties use, or mayhave used in the past, on-site facilities or underground storage tanks for the storage of hazardousmaterials that could create the potential for the release of hazardous substances or contamination of the environment. Wecannot predict with any certaintyour future capital expenditure requirementsfor environmental regulatorycompliance, although we have notcurrently identified any of ourfacilities as requiring major expenditures for environmental remediation or to achieve compliance with environmentalregulations.

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**L.  BusinessTransactions**

***Transition******to Becoming aStand-alone Provider***

Our transition to becoming a stand-alone provider of telecommunications services beganon May 2, 2005 and ended April 1, 2006(“Transition Period”). The followingtable summarizes certain important information about our cost structure before, during and after theTransition Period.
| Before Transition Period                                                                                                                                                                                      | ** ** | **During Transition Period**                                                                                                                                                                                                                                                                                                         | ** ** | **After Transition Period**                                                                                                                                                             |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·  Historical cost structure, including,

   -Local directly incurred costs; and

   -Allocated Verizon costs for services provided from  the mainland United States. |       | ·  Interim cost structure for the transition period, including,

   -Local directly-incurred costs;

   -Costs of building  stand-alone business; -Costs under Transition  Services Agreement and Verizon  Master Services Agreement; and

   -Cost for outsourced functions. |       | ·  Stand-alone cost structure, including,

   -Local directly incurred costs plus insourced functions; and

   -Costs for outsourced functions. |

 

Verizon and its affiliateshistorically provided our predecessor with services that are critical to the operation of our business. During the Transition Period that ended April 1, 2006, Verizon provided uswith on-going services pursuant to the terms of a Transition ServicesAgreement with Verizon Information TechnologiesInc. (later assigned to VerizonInformation Technologies LLC (“VIT”)),and a Master Services Agreement with Verizon Select Services, Inc. (“VSSI”).

Underthe Transition Services Agreement, Verizon and its affiliates provided us during theTransition Period with certain servicesrequired for us to run as a stand-alone telecommunicationsprovider, including, among otherthings:

·                  access to certain existing IT systems andapplications;

·                  maintenance and support of certain IT applications and systems;

·                  support for our residential and business customers;

·                  accounting, payroll, accounts payable and transaction tax preparation services;

·                  customer billing operation services;

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·                  network surveillance, maintenance and technical support of switches, relays, HSI and other Internet operations;

·                  call center support, systems and related services;

·                  infrastructure maintenance work for inside and outside plant engineering; and

·                  Internet operations and related support.

Pursuantto the Master Services Agreement, VSSIor its affiliates provided us duringthe Transition Period with certain telecommunications services on a wholesale basis for resale to our customers. These services enabled us to offer services to our customersbeyond the geographic scope of our network,and included:

·                  domestic and international long distance;

·                  private line, frame relay and other data networkservices spanning beyond Hawaii;

·                  calling card and voice conferencing services; and

·                  toll free services.

Uponthe expiration of the TransitionPeriod on April 1, 2006, we completed ourtransition from Verizon, which involved (a) terminating the services from Verizon under the TransitionServices Agreement and Master Services Agreement and transitioning those services to us, and (b) migrating thedata used in Verizon’s Hawaii Business from Verizon’s systems to our systems. As a result, the services previouslyprovided to us by Verizon and its affiliates are now being provided by our internal operations or third-party service providers.

Pursuantto a Master Services Agreement enteredinto with BearingPoint, Inc. (“BearingPoint”)in 2004, BearingPoint began building a back-office and IT infrastructureto allow us to migrate off software systems that we used prior to the 2005Acquisition and during the Transition Period, thereby enabling us to operateas a stand-alone provider of telecommunication services. These “build services” generally consisted of integration and installation of software, databases, hardware, operating systems, and internal network systems; providing the services ofthe primary and back-up data centers; providing certain training; and business process definition. The new back-office and IT infrastructurewas integrated with certain core operations support systems purchased from Verizon as part of the 2005 Acquisition, and provides network operations support functions andoperates our billing systems, customerrelationship management systems,corporate finance systems, human resource and payroll systems. Under the Master Services Agreement, BearingPointalso provided certain infrastructuremanagement services (includingmanagement of databases, storage, application and utility serversand managed network services) andapplication development andmaintenance services (includingapplication planning, design, testing,implementation, and maintenance and support). BearingPoint had committed to complete the “build services” by the endof the Transition Period expiring April 1, 2006.

On the April 1, 2006 cutover date, while themajor network operational systems were built and functioned without significantproblems, critical systems related to back-office functions, such as customercare, order management, billing, supply chain, and other systems interfacingwith our financial systems, lacked significant functionality. This led todeficiencies in billings and collections, revenue assurance, and order entry flow-through.Despite

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BearingPoint’s efforts to improve the functionality ofthe related systems, we continued to experience many of these same issues, requiringus to incur significant incremental expenses in 2006 to retain third-partyservice providers to provide call center and manual processing services inorder to operate our business. To help remediate deficiencies, we also engagedthe services of Accenture LLP (“Accenture”), which has expertise in telecommunicationsback-office software systems and processes. In addition to the third-party costs,we incurred additional internal labor costs in the form of overtime pay. As aresult, we engaged in discussions with BearingPoint seeking reimbursement ofthe aforementioned costs and compensation for damages arising from failures todeliver promised services in a timely manner.

Effectiveas of February 6, 2007, we reached a mutual agreement with BearingPoint thatwas memorialized in a Settlement Agreement and Transition Agreement.  Under the Settlement Agreement, BearingPoint paidto us on March 27, 2007 the aggregate amount of $52 million (the “SettlementPayment”) and agreed to discharge previously-submitted invoices in an aggregateamount of approximately $29.6 million and other amounts otherwise payable toBearingPoint. The total benefit to us under the settlement includes the cashSettlement Payment and a reduction in accounts payable ($38.6 million at December31, 2006) associated with reversing amounts accrued under the Master ServicesAgreement. For the year ended December 31, 2006, the Company recorded arecovery contractually due under the Master Services Agreement amounting to$24.1 million. The remaining settlement consideration will be recognized in thefirst quarter of 2007. The Transition Agreement provides for, among otherthings, the transition of certain of the remaining “build services” andapplication management and support services to a successor provider, andcontemplates a transition period ending May 2, 2007 during which BearingPoint willprovide transition services at no cost to us. If necessary, we have the optionto extend the period during which BearingPoint provides transition services tous for up to 60 additional days, during which time BearingPoint would becompensated at agreed-upon rates, subject to certain exceptions.

Contemporaneouslywith the Settlement Agreement and Transition Agreement, we entered into anApplication Services Agreement with Accenture, effective as of February 5,2007, pursuant to which Accenture agreed to perform certain of the applicationdevelopment and management services previously covered by the Bearing Point MasterServices Agreement.  Under theApplication Services Agreement, Accenture will complete the development of keycustomer service and business support systems in 2007 and early 2008 andprovide ongoing applications management for 17 months from the effective dateof the agreement.  The agreement startedwith a transition period, scheduled to end May 2, 2007, during which Accenturewill assume responsibility from BearingPoint in stages for the completion andongoing development of applications.Accenture also will be responsible for leading and executing a systems recoveryprogram designed to deliver increased functionality and allow contingency costreductions. See “—Agreements Relating to our Back-Office and Information Technology.”

Thelack of full system functionality following the Transition Period substantiallyimpacted both customer satisfaction (as evidenced by large increases in thecustomer call volumes at our work centers) and collection efforts in 2006.  However, our remediation and systems recoveryefforts begun in 2006 are beginning to show some improvements. Functionality isimproving for our critical systems related to back-office functions such ascustomer care, order management, and billing systems. As a result, whilesystems issues still exist, we are experiencing fewer collection treatmentdelays, physical bill delivery problems and order flow-through issues, and customercall volumes at our work centers have decreased. We continue to work to improveour system functionality.

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***Intellectual Property Agreements***

Althoughthe merger agreement for the 2005Acquisition contains several provisions relating to the disposition of intellectual property assets related to our business, such as an obligation of GTE to use commerciallyreasonable efforts from signing of the merger agreement through May 2, 2006 to obtain for us the right to use all third-party network element software that is installed on our network elements in Hawaii, the ownership, rights, and licenses of Hawaiian Telcom in intellectual property are generally established under an Intellectual Property Agreement and a Verizon Proprietary SoftwareLicense Agreement, which were entered intowith GTE on May 2, 2005.

Pursuantto the Intellectual Property Agreement,we acquired certain trademarks and trade names that relate to ourbusiness, although the majority of themarks and names that were used in the businessbefore the 2005 Acquisition were retained by Verizon and GTE, which required us to undertake a re-branding process. We alsoacquired (a) the copyrightsto 41 specified phone books and compilationcopyrights to all of thewhite page, yellow page and othertelephone print directory products published by Verizon’s Hawaii Business for use by its customers (subjectto a license back to GTE in suchcopyrights), (b) all customerproprietary network information (other than subscriber listinformation) that relates solely tocustomers of Verizon’s Hawaii Business, and (c) a jointownership interest (with GTE) in the other non-technical proprietary business information relating to Verizon’s Hawaii Business.  In addition, under the Intellectual PropertyAgreement we are licensing from GTEall other intellectual property usedin the business (other than trademarks, third-party intellectual property, andVerizon proprietary software).

Pursuant to theVerizon Proprietary Software LicenseAgreement with GTE, we havenonexclusive, perpetual, internal-useonly licenses to use certainVerizon proprietary software(including object and source code) that was used by Verizon in connection with Verizon’s Hawaii Business. The software licensed to us consists of numerous back-office systems that were used invarious operations of Verizon’s Hawaii Business. The software includes, among other things, the assignment, activation and inventory system (AAIS); an automated workforce administration system (AWAS); an FTTP and HSI loop qualification system (LQP); and data exchange utility and connectionengine systems (DEU/DEUCE).

Certain other Verizon software applications arelicensed under other agreements withGTE and Verizon Information Technologies, Inc. For example, Verizon’s AccessGuardian software is licensed to us for a term equal to the term of theTransition Services Agreement plus two years, pursuant to a Supplemental Software License Agreement, dated May 2,2005, between us and Verizon Information Technologies LLC, or VIT, an affiliate of Verizon.Further, Verizon’s AIN Service Logic programs are licensed to us perpetually pursuant to the Verizon Proprietary AIN Software License Agreement, entered into as of May 2, 2005.

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***Agreements Relating to our DirectoriesPublishing Business***

On February 4, 2005, we entered into a directory services agreement with L.M. Berry, a subsidiaryof BellSouth Corporation, pursuant to which it is responsible for sellingadvertising in our print directories as well as for the publishing, printing and distribution of our print directories.

Asset forth below, L.M. Berry’s responsibilities under the directory services agreement vary depending upon the particular directory being published.

·                  *2006 through 2010 print directories*. L.M. Berry is responsible for selling advertising for our print directories, and for publishing, printing and distributing our white page and yellow page directories.

·                  *Customer service.*L.M. Berry is providing customer service for the above directories and is responsible for billing and collections for certain advertisers.

·                  *Internet web site.*L.M. Berry is hosting an Internet yellow pages web site for us,and is responsible for selling advertising for such web site. L.M. Berry may sell advertising with other Internet yellow pages providers with whom L.M. Berry has arelationship.

Inconsideration for its services, we arepaying L.M. Berry a percentage of (a) revenue actuallycollected from the sale of advertising for print directories; and (b) L.M. Berry’s expenses in providing the Internet services; and (c) revenue actually collected from the sale of Internet advertising. L.M. Berry will also be entitled to certain incentive compensation in connectionwith the 2006-2010 print directoriesif the annual growth inthe gross revenue actually collected from the sale of advertising exceedscertain thresholds.

Our directory services agreement with L.M. Berry will remain in effectuntil the last print directory for the 2010 calendar year is distributed. Either partymay terminate the agreement ifthe other party materiallybreaches the agreement and fails to cure such breach within 30 days. Either party may also terminate just the Internet related services if the other party breaches the Internet related services and fails to cure such breach within 30 days. In addition, we haveseveral other termination rights, including the right to terminate if, at theend of the sales campaign for the last directory of the2007 calendar year, the average annual growth in gross advertising revenues sold (for both print directories and Internet advertising) is less than a specified target, and for convenienceupon payment of a termination fee.

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***Agreements Relating to our Back-Office and Information Technology***

We originallyengaged BearingPoint, pursuant to aMaster Services Agreement effective as of August 6, 2004, to build and operate an IT solution environment, including businessprocesses, software applications and systems (such as billing systems, corporate finance systems, human resource and payrollsystems and customer relationshipmanagement systems) and hardware,that we would use to operate our business.

Effectiveas of February 6, 2007, we entered into a Settlement Agreement withBearingPoint to resolve a dispute relating to reimbursement of costs totemporarily obtain additional resources to assist with processing transactionsand compensation for damages arising from failures to deliver promised servicesin a timely manner. As a result of payment of the Settlement Payment on March27, 2007, the Master Services Agreement was terminated.  In addition to a Settlement Payment to us inthe aggregate amount of $52 million and discharge of previously-submittedinvoices in an aggregate amount of approximately $29.6 million, the settlementprovides for mutual releases of BearingPoint and the Company from all liabilityin connection with acts or omissions prior to the date of the SettlementPayment, other than certain customary indemnity obligations for any third-partyclaims for intellectual property infringement.

Contemporaneouslywith the Settlement Agreement, we entered into a Transition Agreement withBearingPoint that provides for, among other things, the transfer of theservices called for by the Master Services Agreement to a successorprovider.  The Transition Agreement alsowill govern all future liability matters between the Company and BearingPoint (otherthan for those claims reserved in the Settlement Agreement).  The Transition Agreement includes atransition period ending May 2, 2007 during which BearingPoint is providingtransition services at no charge to us. If necessary, we have the option to extend the period during whichBearingPoint provides services under the Transition Agreement for up to 60additional days, during which time BearingPoint would be compensated atagreed-upon rates, subject to certain exceptions.

Inaddition, we entered into an Application Services Agreement with Accentureeffective as of February 5, 2007, pursuant to which Accenture will complete thedevelopment of key customer service and business support systems. The initialfocus of this agreement is on critical, high-volume systems functionality.  Under the Application Services Agreement, wehave agreed to pay up to ****$27.1 million for certain development service********s****in 2007 and early 2008 and ****$18.6************millionfor certain application management services over 17 months beginning on theeffective date of the agreement, for a total contract value of up to $45.7million.

***Agreement Relating to Procurement and Logistics***

OnDecember 10, 2004, we enteredinto a supply chain services agreement with Sprint North Supply Company, now known as EmbarqLogistics, a division of Embarq Corporation (Embarq), pursuant to which Embarq provides us with a variety of telecommunications products and handles the logistics with respect to such products, including procurement, shipping, warranty returns, and related services (e.g., testing). On May2, 2005, these services replaced the procurement and logistic services that hadbeen provided by Verizon.

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Wehave the ability to purchase a significantportion of our telecommunications equipment from Embarq under the agreement. The agreement is non-exclusiveand has no minimum purchase requirements. The agreement alsocontains benchmarking and most-favored-customerprovisions that enable us to receive pricing that is roughly equivalent to pricesgenerally available to similarly situated customers in the telecommunications industry. Theterm of the agreement is five years from December 10, 2004. Wemay terminate the agreement for convenience at any time upon 90 days notice to Embarq.

***Agreements Relating to our WirelessBusiness***

*Sprint Wireless Agreement*

Weentered into a Private LabelPCS Services Agreement with Sprint Spectrum, L.P., a subsidiary ofThe Sprint Corporation, effective as of January 11, 2005, by whichwe purchase wireless telephone and data services from Sprint and resell thoseservices to our own end users under the  *Hawaiian Telcom*® brand name.This agreement allows us tobuy airtime from Sprint at wholesale ratesthat decline with volume and requires us to meet certain minimum line and usage volumes. The agreement has a term of five years and is renewable for additional two-year terms afterthe initial period.

*Other Agreements*

Wehave contracts with other parties that provide the equipment and other services that are necessaryto our wireless business. Our mobile virtual network enabler, or MVNE, Agreement with Mobile Technology Services is the contract by which we obtainvarious back-office services, such as billing, customer activation and inventory management for ourwireless business. Pursuant to theMVNE Agreement, we pay a flat monthly fee, plus additional per-customer or per-transaction fees for many of theservices performed. The MVNE Agreement is a month-to-month agreement. Our Agreement to Provide Products andLogistical Services with BrightstarUS, Inc. (the “Brightstar Agreement”) allows us to buy handsets and related equipment at prices that are unique to each such piece of equipment. The Brightstar Agreement has a three year term.

**Item 1A. Risk Factors**

*You shouldcarefully consider the risks described below as well as the other information contained in this annual report.The risks described below are not the only risks facing us. Additionalrisks and uncertainties not currentlyknown to us or that we currently deem tobe immaterial may also materially and adversely affect our business operations. Any of the following risks couldmaterially adversely affect our business, financial condition or results of operations.*

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**Risks Relating to our Business**

Our business faces avariety of financial, operating and market risks, including the following:

***Ourlack of critical back-office systems and IT infrastructure has negativelyimpacted our ability to operate as a stand-alone provider of telecommunicationservices, which has had an adverse effect on our business and results ofoperations.***

Tofacilitate our transition to a stand-alone telecommunications providerfollowing the 2005 Acquisition, we engaged BearingPoint to build and operate aback-office and IT infrastructure, including critical business processes,software applications, (such as billing systems, corporate finance systems,human resources and payroll systems and customer relationship managementsystems) and hardware.  This back-officeand IT infrastructure was necessary to enable us to migrate off softwaresystems provided by Verizon and used to operate our business prior to the 2005Acquisition.

Pursuantto the terms of a Master Services Agreement, BearingPoint committed to completethe majority of the “build services” by February 1, 2006, which transitionperiod subsequently was extended to February 4, 2006.  In December 2005, to accommodate BearingPoint’sneed for additional time to build the back-office and IT infrastructure, weextended the Transition Services Agreement with Verizon for an additionaltwo-month period through March 31, 2006. On April 1, 2006, we ceased receivingservices from Verizon under the Transition Services Agreement and the VerizonMaster Services Agreement and stopped making payments to Verizon under thoseagreements.

Whilethe major network operational systems were built and functioned withoutsignificant problems at and after the April 1, 2006 cutover date, criticalsystems related to back-office functions such as customer care, ordermanagement, billing and financial reporting systems lacked, and continue tolack, significant functionality.  Inparticular, lack of systems functionality has led to customer care, ordermanagement, and billing systems issues, which substantially impacted bothcustomer satisfaction (as evidenced in part though a large increase in thecustomer call volume at our work centers) and collection efforts.

DespiteBearingPoint’s efforts to improve the functionality of the related systems, wecontinued to experience many of these same issues.  As a result, effective as of February 6, 2007,the parties entered into a Settlement Agreement that provided, among otherthings, for the termination of the Master Services Agreement upon payment to usof the settlement payment provided for therein (which amount was paid on March27, 2007), as well as a Transition Agreement that provided for, among other things,the transfer of the services previously provided under the Master ServicesAgreement to a successor provider. Contemporaneously, we entered into anApplication Services Agreement with Accenture, effective as of February 5, 2007,pursuant to which Accenture agreed to perform certain of the applicationdevelopment and management services previously covered by the Master ServicesAgreement.

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Italso has been necessary for us to incur significant incremental expenses toretain third-party service providers to provide call center services and othermanual processing services in order to operate our business.  In addition to the costs of third-partyservice providers, we also incurred additional internal labor costs, in theform of diversion from other efforts as well as overtime pay. We expect tocontinue to incur significant incremental costs in the future, although theamounts of such costs should decline over time if and as our systemsfunctionality improves.

Inaddition to the significant expenses we have incurred, because we do not havefully functional back-office and IT systems, we have been unable to fullyimplement our business strategy and effectively compete in the marketplace,which has had an adverse effect on our business and results of operations.  In addition, our senior management has beenrequired to spend substantial time on developing interim solutions to thesesystems and infrastructure problems and on transitioning from BearingPoint toAccenture.

Whilewe are continuing to work to achieve full functionality of our systems and wehave seen improvement, there is no certainty that these activities will besuccessful or when we will achieve full functionality.  Until we are able to achieve this level offunctionality, our lack of critical back-office and IT infrastructure willnegatively impact our ability to operate as a stand-alone provider oftelecommunication services, and will have an adverse effect on our business andoperations.

***We have had a material weakness in internal control over financialreporting and cannot assure you that additional material weaknesses will not beidentified in the future. Our failure to implement and maintain effectiveinternal control over financial reporting could result in materialmisstatements in our financial statements which could require us to restatefinancial statements and cause investors to lose confidence in our reportedfinancial information.***

Oursenior management has determined that on December 31, 2006 a material weaknessin the Company’s internal control over financial reporting existed as definedin the Public Company Accounting Oversight Board’s Auditing Standard No. 2that may have affected our financial statements through December 31, 2006.  The material weakness related to significantweaknesses in several information technology system and change managementcontrols, as well as operating processes and controls needed to fully record,process, summarize and report financial data after our March 31, 2006transition to a stand-alone provider of telecommunication services.

Wecannot provide assurance that additional significant deficiencies or materialweaknesses in our internal control over financial reporting will not beidentified in the future. Any failure to maintain or implement required new orimproved controls, or any difficulties we encounter in their implementation,could result in additional significant deficiencies or material weaknesses,cause us to fail to meet our periodic reporting obligations or result inmaterial misstatements in our financial statements. The existence of a materialweakness could result in errors in our financial statements that could giverise to a restatement of financial statements, cause us to fail to meet our reportingobligations, which may result in defaults under our senior credit facilities,and cause investors to lose confidence in our reported financial information.

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***Wehave limited experience operating as a stand-alone provider oftelecommunications services.***

We have limitedexperience operating as a stand-alone provider of telecommunications services.The increased costs and lack of flexibility associated with operating as astand-alone provider of telecommunication services could negatively impact ourfinancial results and ability to maintain compliance with the covenantrequirements of our debt agreements.

***We have made and expect to continue to make a significant amount ofcapital expenditures and to incur significant transition related expenses inconnection with our transition to a stand-alone provider of telecommunicationsservices.  We intend to fund a portion ofsuch capital expenditures and expenses with our revolving credit facility.***

Inconnection with our transition to a stand-alone telecommunications provider, wehave made and expect to continue to make a significant amount of capitalexpenditures and incur significant transition related expenses to, among otherthings, build new IT systems and to enhance the functionality of our existingsystems. We intend to fund a portion of these capital expenditures and expenseswith funds available to us under our revolving credit facility. As of December31, 2006, we had approximately $160.0 million drawn under our revolving creditfacility and approximately $39.8 million available for borrowing, subject tocovenant restrictions.  If the amount ofcapital expenditures and transition related expenses exceeds those that arecontemplated by our current business plan, our revolving credit facility may beinsufficient to fund such capital expenditures and expenses and to provide uswith the liquidity that we would otherwise require.  The availability of funds under our revolvingcredit facility will be conditioned upon, among other things, our continuedcompliance with the covenants in our credit agreement.  If we fail to meet those conditions and areunable to draw funds under our revolving credit facility, we will be unable toexecute on our business plan.

***Werely on several material agreements to operate our business. The loss of any ofthese agreements, or the failure of any third party to perform under any ofthese agreements, could have a material adverse effect on our business.***

Since May 2005,several critical services historically provided by Verizon and its affiliatesare currently being provided by third-party service providers. We have enteredinto agreements with BearingPoint, Accenture, L.M. Berry, and certain oftheir affiliates for the provision of, among other things, critical printing,billing, accounting, and IT services. In addition, we have an agreement withThe Sprint Corporation to provide Internet transit, long distance, and privateline services. We have also entered into a MVNO agreement with a subsidiary ofSprint that allows us to resell Sprint wireless services, including access toSprint’s nationwide personal communications service wireless network, under theHawaiian Telcom® brand name.

The expiration ortermination of any of our material agreements by third-party service providerscould have a material adverse effect on our business. Upon expiration ortermination of any of these agreements, we may not be able to replace theservices provided to us in a timely manner or on terms and conditions,including service levels and cost, favorable to us.

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The failure of any of ourthird-party service providers to satisfy its obligations under its agreementwith us could have a material adverse effect on our business.  We are relying on BearingPoint to providetransition services during the transition period provided under the TransitionAgreement and to transfer certain of the services previously provided under theMaster Services Agreement to Accenture. As a result of several problems in connection with material weaknessesin BearingPoint’s financial reporting leading to (i) a delay in the preparationof its financial statements and the timely filing of periodic reports with theSecurities and Exchange Commission (“SEC”), (ii) an SEC investigation regardingits internal control deficiencies, (iii) class action lawsuits for violationsof the antifraud provisions of the Securities Exchange Act, and (iv)shareholder derivative lawsuits against its directors for alleged violations oftheir fiduciary duties, BearingPoint’s financial condition may make it moredifficult for it to provide effectively the transition services. IfBearingPoint is unable to do so, our business operations may suffer.  We expect the magnitude of this risk todiminish as we complete the transfer of the services currently provided byBearingPoint to Accenture.

Additionally, if any ofour third-party service providers seeks U.S. bankruptcy law protection, ouragreements with such service provider, and such service provider’s ability toprovide the services under its agreements with us, could be adversely impacted.For example, in bankruptcy proceedings, the third-party service provider, or abankruptcy trustee acting on its behalf, could seek to reject our agreementswith it as “executory” contracts under U.S. bankruptcy law. If the bankruptcycourt were to hold that any such contracts are executory, the third-partyservice provider would be able to avoid its obligations under such contracts,and we would have a claim for damages against the bankruptcy estate, which mayor may not be paid in the bankruptcy proceeding.

***Ourbusiness is subject to extensive governmental regulation. Applicablelegislation and regulations and changes to them could adversely affect ourbusiness.***

We operate in a heavilyregulated industry, and most of our revenues come from the provision ofservices regulated by the Federal Communications Commission (“FCC”) and thePublic Utilities Commission of the State of Hawaii (“HPUC”). Laws andregulations applicable to us and our competitors may be, and have been,challenged in the courts, and could be changed by federal or state legislativeinitiative, judicial review or regulatory agencies at any time. We cannotpredict the impact of future developments or changes to the regulatoryenvironment or the impact such developments or changes would have on us.

There are a number of FCCpolicies under review that could have a significant impact on us. For example,FCC policies with regard to the provisioning of local exchange carrierinterconnection are in the process of being clarified or revised. Changes tointer-carrier compensation that could impact our access revenues are alsopossible. Changes in FCC policies may increase our obligations and/or reduceour revenue. Further, most FCC telecommunications decisions are subject tojudicial review. The uncertainty created by these pending FCC proceedings andrelated litigation make it difficult to predict the impact on us.

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In addition, stategovernment regulation also is a source of business uncertainty. In response tocompetitors’ requests, the HPUC may initiate a proceeding to re-evaluateperformance measures and to evaluate whether performance incentives applicableto our provision of services to competitors should be adopted. The HPUC alsohas deferred several matters from earlier telecommunications proceedings, whichcould be initiated in the future. These matters involve, among other things,rate rebalancing. We cannot predict whether state proceedings will be initiatedor the possible outcome of such proceedings at this time.

***Areduction by the HPUC or the FCC of the rates we charge our customers wouldreduce our revenues and could reduce our earnings.***

The rates we charge ourlocal telephone customers are based, in part, on a rate-of-return authorized bythe HPUC on capital invested in our network. These authorized rates, as well asallowable investment and expenses, are subject to review and change by the HPUCat any time. If the HPUC orders us to reduce our rates, our revenues would bereduced and our earnings also could be reduced absent corresponding reductionsin costs or growth in services.

We cannot assure you thatour rates will remain at their current levels. In connection with the HPUCproceeding involving the 2005 Acquisition, we agreed with the Division ofConsumer Advocacy that we would not initiate a rate case with a test yearearlier than 2009, unless the HPUC found a compelling financial need to justifyan earlier filing. If we seek a rate case with a test year earlier than 2009,we would be subject to certain additional conditions including the obligationof Hawaiian Telcom Holdco, Inc. to make an additional capitalinvestment in the Company. In addition, the HPUC order received in connectionwith the 2005 Acquisition places conditions upon the imputation of revenuesrelated to any future sale or encumbrance of our directories business. Suchconditions may adversely affect our ability to obtain rate increases in thefuture. Our local exchange service competitors also may gain a competitiveadvantage based on rules which favor competitors. For example, competitors havethe ability to resell our services at rates set by the HPUC and are not subjectto the level of regulatory scrutiny generally faced by us. Additionally, as aresult of the state regulators permitting our competitors to intervene inrate-setting proceedings, there is a potential that such competitors couldobtain business sensitive information about us during such proceedings.

The FCC approves tariffsfor interstate access and subscriber line charges, both of which are componentsof our network access revenue. The FCC is currently considering proposals toreduce interstate access charges for carriers like us, and may require us torecover the foregone revenue from our end users. If the FCC lowers interstateaccess charges, we may be required to recover more revenue through subscriberline charges or forego this revenue altogether. This could reduce our revenueor impair our competitive position.

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***Thetelecommunications industry is increasingly competitive, and we may have difficultycompeting effectively.***

All sectors of thetelecommunications industry are competitive. Competition in the markets inwhich we operate could:

·                  reduce our customer base;

·                  require us to lower rates and other prices in order to compete; or

·                  require us to increase marketing expenditures and the use ofdiscounting and promotional campaigns.

Any of these factorscould adversely affect our business.

*WirelineServices*. As the ILEC, we face competition mainly fromresellers, local providers who lease UNEs from us, and, to a lesser degree,from facilities-based providers of local telephone services.

We have historicallyfaced access line losses as a result of competition and substitution oftraditional wireline services with wireless services. Access line losses havebeen faced by the industry as a whole, and we cannot assure you that accessline losses will not continue in the future. In particular, the increasingpenetration of HSI and the introduction of Voice over Internet Protocol, orVoIP, could lead to further primary and second access line losses.

Interconnection dutiesare governed, in part, by telecommunications rules and regulations related tothe UNEs that must be provided. These rules and regulations remain subject toongoing modifications. Our business is subject to extensive governmentalregulation. Applicable legislation and regulations and changes to them couldadversely affect our business. In addition, while cellular wireless serviceshave historically complemented traditional local exchange and long distanceservices, existing and emerging wireless and Internet protocol, or IP,technologies are increasingly competitive with local exchange and,particularly, long distance services in some or all of our service areas.

*Internet Services*. We expect that the Internet accessservices business will continue to be highly competitive due to the absence ofsignificant barriers to entry. We currently compete with a number ofestablished online services companies, inter-exchange carriers and cablecompanies. Competition is particularly intense for broadband services.

*WirelessServices*. We are a relatively new entrantin the wireless telecommunications services business. We provide this serviceby use of a MVNO model in which we resell another carrier’s facilities-basedwireless services under the HawaiianTelcom® brand name. The market in Hawaii for wirelesstelecommunications services is subject to intense competition. In addition, ourwireless business may be less profitable than the wireless businesses of othertelecommunications companies due to our use of a MVNO model.

In addition, thesignificant expenses we have incurred because we do not have fully functionalback-office and IT systems have prevented us from fully implementing ourbusiness strategy and effectively competing in the marketplace.  For example, we are still working on assuringour back-office can support all forms of service bundles.

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***Ifwe do not adapt to technological changes in the telecommunications industry, wecould lose customers or market share.***

The telecommunicationsindustry is subject to rapid and significant changes in technology, frequentnew service introductions and evolving industry standards. We cannot predictthe effect of these changes on our competitive position, profitability orindustry. Technological developments may reduce the competitiveness of ournetwork and require unbudgeted upgrades or the procurement of additionalproducts that could be expensive and time consuming to implement. In addition,new products and services arising out of technological developments may reducethe attractiveness of our services. If we fail to adapt successfully totechnological changes or fail to obtain access to important new technologies,we could lose customers and be limited in our ability to attract new customersand sell new services to our existing customers. An element of our businessstrategy is to deliver enhanced and ancillary services to customers. Thesuccessful delivery of new services is uncertain and dependent on many factors,and we may not generate anticipated revenues from such services.

***Thesuccessful operation and growth of our businesses are dependent on economicconditions in Hawaii.***

Substantially all of ourcustomers and operations are located in Hawaii. Because of our geographicalposition, the successful operation and growth of our businesses is dependent oneconomic conditions in Hawaii. The Hawaii economy, in turn, is dependent uponmany factors, including:

·                  the level of government and military spending;

·                  the development of the local financial services industry;

·                  the strength of the Hawaii tourism industry;

·                  the continued growth in services industries; and

·                  the absence of hurricanes or terrorism incidents.

The customer base fortelecommunications services in Hawaii is small and geographically concentrated.In 2006, the population of Hawaii was approximately 1.28 million, approximately71% of whom live in the island of Oahu. Any adverse development affecting Oahuor Hawaii generally could substantially impact our ability to do businessthere.

In addition, therelatively low unemployment rate in Hawaii could make it more difficult for usto retain and find qualified personnel needed to operate as a stand-aloneprovider of telecommunications services. Labor shortages or increased laborcosts could have a material adverse effect on our operations and we cannotassure you that we will be able to continue to hire and retain a sufficientlabor force of qualified persons.

***Our business could suffer if we are unsuccessful in negotiating a newcollective bargaining agreement. As of March 15, 2007, 61.5% of our workforcewas represented by IBEW Local 1357.On March 26, 2007, we announced atentative agreement with IBEW Local 1357 to extend the current collectivebargaining agreement, which had been set to expire on September 1, 2007, toAugust 31, 2008. The tentative agreement is subject to ratification byunion members and approval by the Company’s Board of Directors. Although webelieve that our relations with our employees are good, we cannot assure youthat we will be successful in negotiating a new collective bargaining agreement,that such negotiations will not result in significant increases in the cost oflabor or that a breakdown in such negotiations or relations will not result inthe disruption of our operations.***

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***Wedepend on key members of our executive management team.***

Our future success as astand-alone telecommunications provider will be highly dependent upon membersof our executive management team. Although certain of these members are subjectto employment agreements and participate in the various incentive plans, suchemployment agreements may be terminated and the loss of the services of anysuch individuals or other key personnel could have a material adverse effectupon our future success as a stand-alone telecommunications provider. We do notmaintain any “key person” insurance on any of our personnel.

***Weare controlled by Carlyle, whose interests may not be aligned with those of ournote holders.***

A holding companycontrolled by Carlyle and its affiliates currently owns substantially all ofour fully diluted equity and, therefore, Carlyle has the power to control ouraffairs and policies. It also controls the election of directors, theappointment of management, the entering into mergers, sales of substantiallyall of our assets and other extraordinary transactions. The directors soelected have authority, subject to the terms of our debt and applicable HPUCrequirements, to issue additional stock, implement stock repurchase programs,declare dividends and make other decisions.

The interests of Carlyleand its affiliates could conflict with the interests of the holders of our notes.For example, if we encounter financial difficulties or are unable to pay ourdebts as they mature, the interests of Carlyle, as equity holders, mightconflict with the interests of our note holders. Carlyle and its affiliatesalso may have an interest in pursuing acquisitions, divestitures, financings orother transactions that, in their judgment, could enhance their equityinvestments, even though such transactions might involve risks to holders ofnotes. Additionally, Carlyle and its affiliates are in the business of makinginvestments in companies, and may from time to time in the future acquireinterests in businesses that directly or indirectly compete with certainportions of our business or are suppliers or customers of ours.

***Oursubstantial indebtedness could adversely affect our financial condition.***

We now have and willcontinue to have a significant amount of indebtedness. As of December 31,2006, we had total outstanding indebtedness of $1,407.0 million and additional available borrowings of $39.8million under our revolving credit facility, subject to covenant restrictions.Our total outstanding indebtedness consisted of $500.0 million of outstandingnotes, $160.0 million of securedindebtedness under our revolving credit facility, and $747.0 million of secured indebtedness under our senior creditfacilities.

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This level ofindebtedness could:

·                  make it more difficult for us to satisfy our obligations with respectto our outstanding indebtedness;

·                  increase our vulnerability to general adverse economic and industryconditions;

·                  require us to dedicate a substantial portion of our cash flow fromoperations to payments on our indebtedness, thereby reducing the availabilityof our cash flow to fund working capital, capital expenditures, research anddevelopment efforts and other general corporate purposes;

·                  limit our flexibility in planning for, or reacting to, changes in ourbusiness and the industry in which we operate;

·                  place us at a competitive disadvantage compared to our competitors thathave less debt; and

·                  limit our ability to borrow additional funds.

In addition, theindentures governing our notes and the agreement governing our senior creditfacilities contain financial and other restrictive covenants that limit ourability to engage in activities that may be in our long-term best interests.Our failure to comply with those covenants could result in an event of defaultwhich, if not cured or waived, could result in the acceleration of all of ourdebts.

***Despitecurrent indebtedness levels, we and our subsidiaries may still be able to incursubstantially more debt. This could further exacerbate the risks associatedwith our substantial financial leverage.***

Although covenants underour senior credit facilities and the indentures governing our notes limit ourability and the ability of our restricted subsidiaries to incur additionalindebtedness, the terms of our senior credit facilities and the indenturespermit us and our guarantors to borrow significant additional indebtedness,including secured indebtedness, in the future if conditions are satisfied. Inaddition, as of December 31, 2006, our revolving credit facility permitsadditional revolving borrowing, subject to covenant compliance, of up to $39.8 million subject to covenantrestrictions. If new debt is added to our and our subsidiaries’ current debtlevels, the related risks that we and they now face could intensify.

***Toservice our indebtedness, we will require a significant amount of cash. Ourability to generate cash depends on many factors beyond our control.***

Our ability to make paymentson and to refinance our indebtedness and to fund planned capital expendituresand certain transition related expenses will depend on our ability to generatecash in the future. This, to a certain extent, is subject to general economic,financial, competitive, legislative, regulatory and other factors that arebeyond our control.

We cannot assure you thatour business will generate sufficient cash flow from operations, and inparticular, that our anticipated cost structure will be realized on schedule orthat future borrowings will be available to us under our senior creditfacilities in an amount sufficient to enable us to pay our indebtedness or tofund our other liquidity needs. We may need to refinance all or a portion ofour indebtedness on or before maturity. We cannot assure you that we will beable to refinance any of our indebtedness, including our senior creditfacilities and our notes, on commercially reasonable terms or at all.

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***Restrictivecovenants in the indentures governing our notes and in the agreement governingour senior credit facilities may restrict our ability to pursue our businessstrategies, and a breach of such covenants may result in the acceleration ofour long term debt maturities.***

The indentures governing ournotes and the agreement governing our senior credit facilities limit ourability, among other things, to:

·                  incur additional indebtedness;

·                  pay dividends or make distributions in respect of our capital stock orto make certain other restricted payments or investments;

·                  sell assets, including capital stock of restricted subsidiaries;

·                  agree to payment restrictions affecting our restricted subsidiaries;

·                  consolidate, merge, sell or otherwise dispose of all or substantiallyall of our assets;

·                  enter into transactions with our affiliates;

·                  incur liens; and

·                  designate any of our subsidiaries as unrestricted subsidiaries.

In addition, theagreement governing our senior credit facilities includes other and morerestrictive covenants and prohibit us from prepaying our other indebtedness,including the notes, while indebtedness under our senior credit facilities isoutstanding. The agreement governing our senior credit facilities also requiresus to maintain compliance with specified financial ratios. Our ability tocomply with these ratios may be affected by events beyond our control.

The restrictionscontained in the indentures governing the notes and the agreement governing oursenior credit facilities could limit our ability to plan for or react to marketconditions or meet capital needs or otherwise restrict our activities orbusiness plans.

A breach of any of theserestrictive covenants or our inability to comply with the required financialratios could result in a default under the agreement governing our seniorcredit facilities. If a default occurs, the lenders under our senior creditfacilities may elect to:

·                  declare all borrowings outstanding, together with accrued interest andother fees, to be immediately due and payable; or

·                  prevent us from making payments on the notes,

either of which would result in an event of defaultunder the notes. The lenders will also have the right in these circumstances toterminate any commitments they have to provide further borrowings. If we areunable to repay outstanding borrowings when due, the lenders under our seniorcredit facilities will also have the right to proceed against the collateral,including our available cash, granted to them to secure the indebtedness. Ifthe indebtedness under our senior credit facilities and the notes were to beaccelerated, we cannot assure you that our assets would be sufficient to repayin full that indebtedness and our other indebtedness.

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**Item 1B. Unresolved Staff Comments**

None.

**Item 2. Properties**

Weown our corporate headquarters, which is located in 1177 BishopStreet, Honolulu, Hawaii 96813 and consists of over 465,000 square feet of office space. We also have other properties consisting primarily of approximately 120 owned and approximately 60 leasedreal estate properties, including our administrative facilities andfacilities for call centers, switching equipment, fiber optic networks, microwave radio and cable and wire facilities, cable head-end equipment, coaxial distributionnetworks, routers and servers used inour wireline business. See Item 1, “Business—Network Architecture and Technology.” There are nomaterial real estate properties relating to our directories and wireless business. For purposes of Hawaii state law, we are classified as a public utilityand accordingly do not payany property taxes.

Substantiallyall of our assets (including those ofour subsidiaries) are pledged as collateral for our senior credit facilities.

**Item 3. LegalProceedings**

We are involved in various claims, legal actions and regulatory proceedings arising in the ordinary course of business. In the opinion of management, the ultimate disposition of thesematters will not have a materialadverse effect on our combined financial position, results of operations or cash flows.

**Item 4. Submissionof Matters to a Vote of Security Holders**

Notapplicable.

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## **PART II**

**Item 5. Market for Registrant’s Common Equity, RelatedStockholder Matters and IssuerPurchases of Equity Securities**

**MarketInformation**

There is no established public market for our common stock.

**Stockholders**

Allof our common stock is held by Hawaiian Telcom Holdco, Inc. Affiliates of Carlyle control a substantial majority of thecommon stock of Hawaiian Telcom Holdco, Inc.

**Dividends**

Wehave not declared or paid any dividends on our common stock. Our senior secured creditfacilities and the indenturesgoverning our senior notes and senior subordinated notes limit our ability to declare or paydividends. For more detailed informationon our senior secured credit facilities and the indentures governing our notes,see Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Liquidity and Capital Resources” and notes to our consolidatedfinancial statements.

**Sales ofUnregistered Equity Securities**

None.

**Purchases of Equity Securities by the Issuerand Affiliated Purchasers**

None.

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**Item6:  Selected Financial Data**

The comparability of our selected historical financialinformation has been affected by the May 2, 2005 merger of the Company withVerizon HoldCo LLC (the “Hawaii Business Acquisition”). The historicalfinancial information includes periods prior to and subsequent to ourconsummation of the Hawaii Business Acquisition.  The historical Predecessor financialinformation set forth below, reflect expenses related to services that wereprovided to our Predecessor by Verizon and its affiliates.  Accordingly, we believe that the Predecessorhistorical financial statements are not indicative of our future performanceand do not reflect what our cost structure would have been had we operated as astand-alone telecommunications provider during the periods presented.

The following data should be read in conjunction with “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andour audited financial statements and related notes thereto included elsewhere inthis annual report.

**Selected Financial Data (dollarsin thousands)**
| ** **                                                          | ** ** | **Predecessor**                            | ** ** | **Company**                | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------|------------|----------------------------|------------|
| ** **                                                          | ** ** | ** **                                 | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Period from** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | ** **                                 | ** ** | ** **                 | ** ** | ** ** | ** ** | **Period from** | ** ** | **May 21 to** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | **Year Ended December 31,** | ** ** | **January 1 to** | ** ** | **December** | ** ** | **Year Ended December 31,** | ** ** |
| ** **                                                          | ** ** | **2002**                                   | ** ** | **2003**                   | ** ** | **2004** | ** ** | **May 1, 2005** | ** ** | **31, 2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                          | ** ** | ** **                                 | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Statement of operations  data:                                      |       |                                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Revenues (1)                                                        |       | $                                          | 635,400    |                       | $          | 612,300 |   | $ | 595,600 |   | $ | 200,700 |   | $ | — |   | $ | 337,417 |   | $ | 570,168 |   |
| Depreciation and  amortization (2)                                  |       | 107,900                                    |       | 109,400                    |       | 114,800 |   | 39,600 |   | — |   | 107,753 |   | 172,732 |   |
| Operating income (loss)  (3)                                        |       | 113,300                                    |       | 59,200                     |       | 90,900 |   | 35,900 |   | (17,373 | ) | (93,272 | ) | (23,212 | ) |
| Interest expense                                                    |       | 37,400                                     |       | 33,700                     |       | 36,800 |   | 11,700 |   | — |   | 79,208 |   | 115,770 |   |
| Provision for income  tax                                           |       | 27,800                                     |       | 8,800                      |       | 20,500 |   | 8,700 |   | — |   | 4,100 |   | 6,082 |   |
| Cumulative effect of  change in accounting principle (4)            |       | —                                     |       | 47,200                     |       | — |   | — |   | — |   | — |   | — |   |
| Net income (loss)                                                   |       | 50,900                                     |       | 65,500                     |       | 36,900 |   | 16,100 |   | (17,373 | ) | (175,705 | ) | (144,637 | ) |
|                                                                |       |                                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Statement of cash flow  data — net cash provided by (used in): |       |                                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Operating activities                                                |       | $                                          | 161,600    |                       | $          | 125,300 |   | $ | 107,700 |   | $ | 36,200 |   | $ | — |   | $ | (5,381 | ) | $ | 38,299 |   |
| Investing activities  (5)                                           |       | (84,500                                    | )          | (144,100                   | )          | 3,300 |   | (11,700 | ) | — |   | (1,421,035 | ) | (104,368 | ) |
| Financing activities  (5)                                           |       | (77,100                                    | )          | 18,900                     |       | (110,200 | ) | (24,000 | ) | — |   | 1,436,737 |   | 60,500 |   |
|                                                                |       |                                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Balance Sheet data (as  of end of period):                          |       |                                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                          |       | $                                          | 300        |                       | $          | 400 |   | $ | 1,200 |   | $ | 1,700 |   | $ | — |   | $ | 10,321 |   | $ | 4,752 |   |
| Property, plant and  equipment, net                                 |       | 685,300                                    |       | 786,400                    |       | 734,000 |   | 717,800 |   | — |   | 817,333 |   | 818,172 |   |
| Total assets                                                        |       | 1,510,600                                  |       | 1,607,700                  |       | 1,489,000 |   | 1,459,800 |   | 6,734 |   | 1,756,554 |   | 1,712,164 |   |
| Long-term debt                                                      |       | 428,000                                    |       | 427,400                    |       | 301,700 |   | 151,300 |   | — |   | 1,343,500 |   | 1,380,500 |   |
| Stockholder’s equity (deficiency) and parent funding           |       | 380,700                                    |       | 419,200                    |       | 410,000 |   | 685,800 |   | (17,373 | ) | 246,197 |   | 102,039 |   |

 

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(1)   Theconsolidated financial information for the Company includes the consolidatedfinancial position, results of operations and cash flows of the Company frominception on May 21, 2004 and also includes the results of Verizon’s HawaiiBusiness from the May 2, 2005 acquisition date.

(2)   Depreciationand amortization for the Company reflects the depreciation of acquired propertyand equipment and amortization of acquired amortizable intangibles based on thefair value and useful lives as of the May 2, 2005 acquisition date.

(3)   Theoperating loss for the Company is, in part, due to the transition costs theCompany is incurring to become a stand-alone provider of telecommunicationsservices.

(4)   ThePredecessor changed its method of accounting for directory revenues andexpenses and asset retirement obligations effective January 1, 2003.

(5)   TheCompany’s investing and financing activities during the year ended December 31,2005 include the Hawaii Business Acquisition.

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

**Background**

The following discussion and analysis covers bothperiods prior to and subsequent to our consummation of the Hawaii BusinessAcquisition.

The statements in the discussion and analysisregarding industry outlook, our expectations regarding the future performanceof our business and the other non-historical statements in the discussion andanalysis are forward-looking statements. These forward-looking statements aresubject to numerous risks and uncertainties, including, but not limited to, therisks and uncertainties described in Item 1A, “Risk Factors.” Our actualresults may differ materially from those contained in any forward-lookingstatements. You should read the following discussion together with Item 1A, “RiskFactors,” Item 6, “Selected Historical Financial Information” and our auditedfinancial statements and related notes thereto included elsewhere in thisannual report.

We have operated as a stand-alone company since theHawaii Business Acquisition. We have provided a discussion and analysis of acomparison of the Company’s results for the year ended December 31, 2006 to thecombined results of the Company and our Predecessor for the year ended December31, 2005.  In addition, we have provideda discussion and analysis of a comparison of the combined results of theCompany and our Predecessor for the year ended December 31, 2005 compared tothe historical results of our Predecessor for the year ended December 31, 2004.We believe such financial information may be important to an understanding ofour future operations. The combined presentation is not in accordance withgenerally accepted accounting principles and the periods presented are notcomparable because of the change in the historical carrying value or basis ofassets and liabilities that resulted from the Hawaii Business Acquisition.Historical periods of our Predecessor do not reflect the impact the Hawaii BusinessAcquisition has had on us, most notably significantly increased leverage andliquidity requirements.  We havepresented the combined results of operations in order to provide a moremeaningful discussion of the periods presented.

**Segments and Sources of Revenue**

We operate in two reportable segments(Telecommunications and Publishing) based on how our Company’s chief operatingdecision maker makes decisions about allocating resources and assessingperformance.

***Telecommunications***

The telecommunications segment derives revenue fromthe following sources:

Local Telephone Services – We receive revenue fromproviding local exchange telephone services. These revenues include monthlycharges for basic service, local private line services and enhanced callingfeatures such as voice mail, caller ID and 3-way calling.

Network Access Services – We receive revenue fromcharges established to compensate us for origination, transport and terminationof calls for long distance and other interexchange carriers. These includesubscriber line charges imposed on end users, and switched and special accesscharges paid by carriers.

Long Distance Services – We receive revenue fromproviding toll, or long distance, services to our customers.

High Speed Internet and Other Internet – We receiverevenue from monthly recurring charges for High Speed Internet and dial-upInternet access services.

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Other Communication Services and Sales – Otherservices and sales include inside line care and sale and maintenance ofcustomer premise equipment, as well as revenue from our wireless services.  We are currently incurring development costsrelated to our plan to provide digital television services.

***Publishing***

We receive revenue from the sale of advertising inprinted and electronic directories in Hawaii.

**Our New Cost Structure and Transition**

The historical financial information of ourPredecessor includes expenses directly incurred in Hawaii, as well as allocatedexpenses related to services that were provided from the mainland United Statesby Verizon and its affiliates. Calculating such allocated expenses requiredmanagement of Verizon and GTE to make certain assumptions, and we were notinvolved in the identification or calculation of the allocated costs. Theallocated expenses reflected in the historical financial information of ourPredecessor may not be indicative of our expenses as a stand-alone provider oftelecommunications services.

For the transition period that ended March 31, 2006,services that had historically been provided by Verizon and its affiliates werebeing provided by:

·                  Verizon and itsaffiliates (pursuant to the Transition Services Agreement and Verizon MasterServices Agreement);

·                  our internalteam (for such functions as human resources, marketing and legal); and

·                  third-partyservice providers.

For the period from April 1, 2006 to December 31,2006, all services were provided by our personnel or third parties other thanVerizon.

**Results of Operations for the YearEnded December 31, 2006, the Combined Operations for the Year Ended December31, 2005 and Predecessor Year Ended December 31, 2004**

We reported a net loss of$144.6 million for the year ended December 31, 2006, $175.7 million for theyear ended December 31, 2005 and $17.4 million for the period from May 21, 2004to December 31, 2004. Our Predecessor reported net income of $16.1 million forthe period from January 1, 2005 to May 1, 2005 and $36.9 million for the yearended December 31, 2004.

***Items ImpactingComparability***

To facilitate comparison of the Company’s consolidatedoperating results to those of the Predecessor, we have summarized the impactthat the consummation of the Hawaii Business Acquisition had on operatingresults because of the application of the purchase method of accounting and thecustomer appreciation credit.

Predecessor publishing deferred revenue and relatedcosts as of the date of the Hawaii Business Acquisition were not carried overto our balance sheet due to the application of purchase accounting. Thisresulted in the revenues and expenses being less than what our Predecessorwould have generated. Similarly, deferred activation fee revenue and therelated costs were not recognized in the purchase of Verizon’s Hawaii Business.The application of purchase accounting also increased depreciation andamortization as compared to what our Predecessor would have incurred, primarilyrelated to increased intangible asset amortization.

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In conjunction with the Hawaii Business Acquisition,Verizon agreed to reimburse us $12.0 million to fund a customer appreciationcredit.  We recognized the reimbursementas a reduction of the purchase price of the Hawaii Business Acquisition.  The actual credits granted to customersamounted to approximately $11.3 million (this amount was recognized as areduction of revenue during the five month period from May to September2005).  Local telephone service customersas of the date of the Hawaii Business Acquisition received a one time creditduring the fifth month after the Hawaii Business Acquisition (as agreed to withthe Hawaii Public Utilities Commission or HPUC).  The remaining amount of $0.7 million wascontributed in the fourth quarter of 2005 to local charitable andnot-for-profit organizations to satisfy the terms of the acquisition.

The impact of purchase accounting and the HPUC crediton our statement of operations for 2006 and 2005 is as indicated in thefollowing table (dollars in thousands). Positive amounts represent items thathad the effect of increasing our reported income and negative amounts representitems that had the effect of decreasing our reported income.
| ** **                             | ** ** | **2006**     | ** ** | **2005**     | ** ** |
|----------------------------------------|------------|--------------|------------|--------------|------------|
| ** **                             | ** ** | ** **   | ** ** | ** **   | ** ** | **Operating** | ** ** | ** ** | ** ** | ** ** | ** ** | **Operating** | ** ** |
| ** **                             | ** ** | **Revenues** | ** ** | **Expenses** | ** ** | **Loss** | ** ** | **Revenues** | ** ** | **Expenses** | ** ** | **Loss** | ** ** |
| Publishing  deferred revenue and costs |       | $            | (900       | )            | $          | 200 |   | $ | (700 | ) | $ | (32,600 | ) | $ | 6,900 |   | $ | (25,700 | ) |
| Wireline  activation                   |       | (3,700       | )          | 3,700        |       | — |   | (4,200 | ) | 4,200 |   | — |   |
| HPUC credit                            |       | —       |       | —       |       | — |   | (11,300 | ) | (700 | ) | (12,000 | ) |
| Depreciation and  amortization         |       | —       |       | (45,100      | )          | (45,100 | ) | — |   | (28,700 | ) | (28,700 | ) |
|                                   |       | $            | (4,600     | )            | $          | (41,200 | ) | $ | (45,800 | ) | $ | (48,100 | ) | $ | (18,300 | ) | $ | (66,400 | ) |

 

***Operating Revenues***

The following table summarizes our volume informationas of December 31, 2006, 2005 and 2004.

**Volume Information**
| ** **             | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** | **2006 vs. 2005** | ** ** | **2005 vs. 2004** | ** ** |
|------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **             | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **Change**                  | ** ** | **Change**                  | ** ** |
| ** **             | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2004**              | ** ** | **Number**                  | ** ** | **Percentage**              | ** ** | **Number** | ** ** | **Percentage** | ** ** |
| Switched access  lines |       |                  |       |                  |       |                  |       |                        |       |                        |       |   |   |   |   |
| Residential            |       | 369,105               |       | 406,801               |       | 434,949               |       | (37,696                     | )          | -9.3                        | %          | (28,148 | ) | -6.5 | % |
| Business               |       | 228,052               |       | 233,058               |       | 247,838               |       | (5,006                      | )          | -2.1                        | %          | (14,780 | ) | -6.0 | % |
| Public                 |       | 5,705                 |       | 5,868                 |       | 6,265                 |       | (163                        | )          | -2.8                        | %          | (397 | ) | -6.3 | % |
| Total                  |       | 602,862               |       | 645,727               |       | 689,052               |       | (42,865                     | )          | -6.6                        | %          | (43,325 | ) | -6.3 | % |
|                   |       |                  |       |                  |       |                  |       |                        |       |                        |       |   |   |   |   |
| High Speed  Internet   |       |                  |       |                  |       |                  |       |                        |       |                        |       |   |   |   |   |
| lines - retail         |       |                  |       |                  |       |                  |       |                        |       |                        |       |   |   |   |   |
| Residential            |       | 74,636                |       | 69,831                |       | 67,421                |       | 4,805                       |       | 6.9                         | %          | 2,410 |   | 3.6 | % |
| Business               |       | 15,684                |       | 9,142                 |       | 6,664                 |       | 6,542                       |       | 71.6                        | %          | 2,478 |   | 37.2 | % |
| Total                  |       | 90,320                |       | 78,973                |       | 74,085                |       | 11,347                      |       | 14.4                        | %          | 4,888 |   | 6.6 | % |
|                   |       |                  |       |                  |       |                  |       |                        |       |                        |       |   |   |   |   |
| Long distance  lines   |       |                  |       |                  |       |                  |       |                        |       |                        |       |   |   |   |   |
| Residential            |       | 193,716               |       | 211,649               |       | 214,229               |       | (17,933                     | )          | -8.5                        | %          | (2,580 | ) | -1.2 | % |
| Business               |       | 83,601                |       | 75,551                |       | 74,192                |       | 8,050                       |       | 10.7                        | %          | 1,359 |   | 1.8 | % |
| Total                  |       | 277,317               |       | 287,200               |       | 288,421               |       | (9,883                      | )          | -3.4                        | %          | (1,221 | ) | -0.4 | % |

 

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**2006 compared to 2005**

**OperatingRevenues (dollars in thousands)**
|                                        | ** ** | ** **  | ** ** | **Combined**         | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------------------------|------------|-------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **                             | ** ** | ** **  | ** ** | **Company and** | ** ** | ** ** | ** ** | ** **     | ** ** |
| ** **                             | ** ** | **Company** | ** ** | **Predecessor**      | ** ** | **Change** | ** ** |
| ** **                             | ** ** | **2006**    | ** ** | **2005**             | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
|                                   |       |        |       |                 |       |       |       |           |       |
| Telecommunications:                    |       |        |       |                 |       |       |       |           |       |
| Local services                         |       | $           | 227,301    |                 | $          | 223,132    |       | $              | 4,169      |   | 1.9 | % |
| Network access services                |       | 149,630     |       | 151,491              |       | (1,861     | )          | -1.2           | %          |
| Long distance services                 |       | 39,724      |       | 40,211               |       | (487       | )          | -1.2           | %          |
| High Speed Internet and other Internet |       | 39,153      |       | 35,154               |       | 3,999      |       | 11.4           | %          |
| Other services and sales               |       | 47,327      |       | 55,023               |       | (7,696     | )          | -14.0          | %          |
| Total telecommunications               |       | 503,135     |       | 505,011              |       | (1,876     | )          | -0.4           | %          |
| Publishing                             |       | 67,033      |       | 33,106               |       | 33,927     |       | 102.5          | %          |
|                                   |       |        |       |                 |       |       |       |           |       |
| Total operating  revenues              |       | $           | 570,168    |                 | $          | 538,117    |       | $              | 32,051     |   | 6.0 | % |

 

For 2006, local services revenues increased $4.2million, or 1.9%, as compared to 2005. The increase was related to the customer appreciation credit whichreduced revenue in 2005 and changes in the level of estimated activation feerevenue which is being deferred.  In2006, the Company adjusted its estimate of activation fee revenue resulting inthe recognition of $4.2 million of additional revenue.  The increases in revenue were principallyoffset by declines related to losses in the volume of switched access lines.

The decline in switched access lines reflects twocategories of factors:

·                  General industrytrends — increased competition resulting in customers using wireless, VoIPtechnology and cable services instead of phone lines for voice and data.Residential “second lines” continue to be disconnected as customers switch fromdial-up Internet services to DSL and cable broadband service.  And finally, CLECs focused on businesscustomers continue to sell services to our embedded customer base.

·                  Specific impactof our systems implementation effort – our on-going effort to stabilize andmigrate our systems has limited our ability to launch new products, androbustly support customer service requirements for both residential andbusiness customers.  As our systemsimplementation progresses with Accenture the impact of this effort will have asignificantly diminished effect on switched access line loss.

In an effort to slow the rate of line loss, we haveinstituted a “save-the-line” campaign and will focus efforts on bundling ofservices.  These efforts will includelaunching and promoting new products, as well as enhanced customer servicecapability to improve customer retention.

For 2006, network access service revenues decreased by$1.9 million, or 1.2%, as compared to 2005. The revenue decrease was caused bylower end user subscriber line and switched access charges as we served fewerswitched access lines in 2006 than in 2005.

Long distance revenues decreased $0.5 million, or1.2%, for 2006, as compared to 2005. The revenue decline was related to thereduction in switched access lines (resulting in fewer customers utilizing tollservices) and competitive pressures similar to those faced with localservice.  We began promoting a flat-ratelong distance plan in late September 2005 and reduced the price of service inthe first quarter of 2006 to increase its appeal to customers.  The flat rate plan is intended to extend theservice life of existing customers who use significant amounts of long distancewhile attracting new long distance users 

40

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from other providers. Late in the third quarter of 2006, we began bundling local, longdistance and High Speed Internet services.

High Speed Internet and other Internet revenuesincreased $4.0 million, or 11.4%, for 2006, as compared to 2005. The revenueincrease was related to the increase in subscribers during these periods.

Other services and sales decreased $7.7 million, or14.0%, for 2006, as compared to 2005. These decreases were primarily related to a decline in sales andinstallation revenues of customer premise equipment.  In addition, most of the billing andcollection agreements and related revenue maintained by the Predecessor werenot retained by us.

Wireless services (included in the other services andsales revenue category) are still in the early stages. As of December 31, 2006and 2005, we had approximately 16,600 and 6,200, respectively, of externalwireless subscribers. Wireless revenue was approximately $7.0 million for 2006compared with $1.6 million for 2005.

Publishing revenue increased by $34.0 million, or102.5%, for 2006 compared to 2005.  Theincrease was caused primarily by the application of purchase accounting.  The effect of purchase accounting was toreduce revenue that would have otherwise been recognized in our operatingresults in 2005 subsequent to the Acquisition Date (see “Items ImpactingComparability”).

**2005 compared to 2004**

**OperatingRevenues (dollars in thousands)**
|                                        | ** ** | **Combined**         | ** ** | ** **      | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------------------------|------------|----------------------|------------|-----------------|------------|------------|------------|----------------|------------|
| ** **                             | ** ** | **Company and** | ** ** | ** **      | ** ** | ** ** | ** ** | ** **     | ** ** |
| ** **                             | ** ** | **Predecessor**      | ** ** | **Predecessor** | ** ** | **Change** | ** ** |
| ** **                             | ** ** | **2005**             | ** ** | **2004**        | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
|                                   |       |                 |       |            |       |       |       |           |       |
| Telecommunications:                    |       |                 |       |            |       |       |       |           |       |
| Local services                         |       | $                    | 223,132    |            | $          | 253,400    |       | $              | (30,268    | ) | -11.9 | % |
| Network access services                |       | 151,491              |       | 144,600         |       | 6,891      |       | 4.8            | %          |
| Long distance services                 |       | 40,211               |       | 42,000          |       | (1,789     | )          | -4.3           | %          |
| High Speed Internet and Other Internet |       | 35,154               |       | 24,100          |       | 11,054     |       | 45.9           | %          |
| Other services and sales               |       | 55,023               |       | 65,400          |       | (10,377    | )          | -15.9          | %          |
| Total telecommunications               |       | 505,011              |       | 529,500         |       | (24,489    | )          | -4.6           | %          |
| Publishing                             |       | 33,106               |       | 66,100          |       | (32,994    | )          | -49.9          | %          |
|                                   |       |                 |       |            |       |       |       |           |       |
| Total operating  revenues              |       | $                    | 538,117    |            | $          | 595,600    |       | $              | (57,483    | ) | -9.7 | % |

 

For 2005, combined local services revenues decreased $30.3million, or 11.9%, as compared to 2004. Excluding the effects of purchaseaccounting related to deferred activation fee revenue and the HPUC credit (see “ItemsImpacting Comparability”), local service revenue would have been $238.6 millionfor the year ended December 31, 2005, a decrease of $14.7 million, or 5.8%, ascompared to 2004, which was caused by a reduction in the number of switchedaccess lines.  The decline in businessswitched access lines can partially be attributed to the elimination of approximately11,000 lines resulting from the loss of UUNET as a customer during the firstquarter of 2005.

For 2005, network access service revenues increased by$6.9 million, or 4.8%, as compared to 2004. The revenue growth is due, in part,to the increased number of special access services.

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Long distance revenues decreased $1.8 million, or4.3%, for 2005, as compared to 2004. The revenue decline was related to thereduction in switched access lines (resulting in fewer customers utilizing tollservices) and competitive pressures similar to those faced with local service.

High Speed Internet and Other Internet revenuesincreased $11.1 million, or 45.9%, for 2005, as compared to 2004. The revenueincrease was related to the increase in demand during those periods.

Other services and sales decreased $10.4 million, or15.9%, for 2005, as compared to 2004. The revenue was most significantlyimpacted by the decline in sales and installation of customer premise equipmentin the second half of 2005 compared to the same period in 2004.

Publishing revenue declined by $33.0 million, or49.9%, for 2005 compared to 2004. The decrease was caused primarily by theapplication of purchase accounting.

***Operating Costs andExpenses***

**2006 compared to 2005**

We incurred significant expenses in our efforts tobecome a stand-alone provider of telecommunication services and certain othertransition costs. The major components of such expenses incurred are summarizedas follows (dollars in thousands):
| ** **                                                                                                                                                                                                                 | ** ** | **Year Ended**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                 | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                                                                                                 | ** ** | **2006**              | ** ** | **2005** | ** ** |
|                                                                                                                                                                                                                       |       |                  |       |   |   |
| Expense  component of BearingPoint contract to build information technology  infrastructure                                                                                                                                |       | $                     | 1,842      |   | $ | 20,808 |   |
| DSL aggregation  contract terminated September 2005 with transition to a more cost effective  service                                                                                                                      |       | —                |       | 6,000 |   |
| Directories’  data conversion cost                                                                                                                                                                                    |       | —                |       | 3,576 |   |
| Verizon  transition services, components estimated by management to reflect transition  services net of expense recovery of $6,350 from BearingPoint to defer costs  of transition services because of delay in completion |       | 23,048                |       | 55,492 |   |
| Verizon software  license fee amortization                                                                                                                                                                                 |       | —                |       | 3,310 |   |
| Financial  advisory services related to the Hawaii Business Acquisition                                                                                                                                                    |       | —                |       | 5,465 |   |
| Accenture  transition services                                                                                                                                                                                             |       | 8,480                 |       | — |   |
| Facilities  renovation costs                                                                                                                                                                                               |       | 2,238                 |       | — |   |
| Employee relocation  costs                                                                                                                                                                                                 |       | 836                   |       | 2,782 |   |
| Other                                                                                                                                                                                                                      |       | 9,704                 |       | 18,347 |   |
| Total transition  to stand-alone provider                                                                                                                                                                                  |       | 46,148                |       | 115,780 |   |
| Other transition                                                                                                                                                                                                           |       | 960                   |       | — |   |
|                                                                                                                                                                                                                       |       | $                     | 47,108     |   | $ | 115,780 |   |

 

We expect that these costs will continue to decline aswe complete our transition.

Our cost structure changed considerably during 2006when compared to 2005.  The mostsignificant area of change is related to the composition of third-party serviceproviders utilized in our operations such as Verizon, BearingPoint, Accentureand LM Berry.

Through March 31, 2006, Verizon provided services tous under the Transition Services Agreement. The cost of such services amounted to $29.5 million for 2006 with mostof these costs incurred in the first quarter. Costs incurred under the Transition Services Agreement amounted to $69.8million for 2005.

We previously had an agreement with BearingPoint tobuild and operate our information technology infrastructure.  The costs for operating our informationtechnology infrastructure, which are currently all 

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expensed, amounted to $20.2 million for 2006.  BearingPoint costs for operating ourinformation technology infrastructure were not significant for 2005.

In conjunction with the transition to us fromBearingPoint for the responsibility for the build and operate of ourinformation technology infrastructure, we began utilizing the service ofAccenture late in the third quarter of 2006. Fees to Accenture for the transition services amounted to $8.5 million.

Our agreement with LM Berry provides for them toreceive a percentage of revenue for their services for sales, publishing,printing and distribution of our directories beginning in 2006.  The fees for such services in 2006 amountedto $12.3 million.

Our operating expenses are significantly impacted bynot incurring expenses that were allocated by Verizon and its affiliates to ourPredecessor for services performed.  Suchexpenses amounted to $31.6 million for the period January 1, 2005 to May 1,2005.

The following table summarizes our costs and expensesfor 2006 compared to the combined costs and expenses for 2005 (dollars inthousands):
|                                               | ** ** | ** **  | ** ** | **Combined**         | ** ** | ** ** | ** ** | ** **     | ** ** |
|-----------------------------------------------|------------|-------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **                                    | ** ** | ** **  | ** ** | **Company and** | ** ** | ** ** | ** ** | ** **     | ** ** |
| ** **                                    | ** ** | **Company** | ** ** | **Predecessor**      | ** ** | **Change** | ** ** |
| ** **                                    | ** ** | **2006**    | ** ** | **2005**             | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
|                                          |       |        |       |                 |       |       |       |           |       |
| Costs of  services and sales                  |       | $           | 231,181    |                 | $          | 226,624    |       | $              | 4,557      |   | 2.0 | % |
| Selling, general  and administrative expenses |       | 189,467     |       | 221,512              |       | (32,045    | )          | -14.5          | %          |
| Depreciation and  amortization                |       | 172,732     |       | 147,353              |       | 25,379     |       | 17.2           | %          |
|                                          |       |        |       |                 |       |       |       |           |       |
| Total                                         |       | $           | 593,380    |                 | $          | 595,489    |       | $              | (2,109     | ) | -0.4 | % |

 

Costs of services and sales increased by $4.6 million,or 2.0%, for 2006, as compared to 2005. The increase in expense is related to changes in our cost structurediscussed previously and the purchase adjustment for deferred activation costs.

Selling, general and administrative expenses decreasedby $32.0 million, or 14.5%, for 2006 compared to the prior year.  The decline in selling, general andadministrative expenses is primarily related to changes in cost structurediscussed previously.

Depreciation and amortization increased by $25.4million, or 17.2%, for 2006 when compared to 2005.  The increase is the result of the impact ofpurchase accounting associated with the recognition of amortizable intangibleassets.

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**2005 compared to 2004**

The following table summarizes our combined costs andexpenses for the year ended December 31, 2005 compared to those of ourPredecessor for 2004 (dollars in thousands):
|                                               | ** ** | **Combined**         | ** ** | ** **      | ** ** | ** ** | ** ** | ** **     | ** ** |
|-----------------------------------------------|------------|----------------------|------------|-----------------|------------|------------|------------|----------------|------------|
| ** **                                    | ** ** | **Company and** | ** ** | ** **      | ** ** | ** ** | ** ** | ** **     | ** ** |
| ** **                                    | ** ** | **Predecessor**      | ** ** | **Predecessor** | ** ** | **Change** | ** ** |
| ** **                                    | ** ** | **2005**             | ** ** | **2004**        | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
|                                          |       |                 |       |            |       |       |       |           |       |
| Costs of  services and sales                  |       | $                    | 226,624    |            | $          | 204,300    |       | $              | 22,324     |   | 10.9 | % |
| Selling, general  and administrative expenses |       | 221,512              |       | 185,600         |       | 35,912     |       | 19.3           | %          |
| Depreciation and  amortization                |       | 147,353              |       | 114,800         |       | 32,553     |       | 28.4           | %          |
|                                          |       |                 |       |            |       |       |       |           |       |
| Total                                         |       | $                    | 595,489    |            | $          | 504,700    |       | $              | 90,789     |   | 18.0 | % |

 

Costs of services and sales increased by $22.3million, or 10.9%, for 2005, as compared to 2004. As a result of the HawaiiBusiness Acquisition and consistent with our plans, we are incurring increasedcosts related to the Transition Services Agreement with Verizon. In addition,our retirement expense is greater than those incurred by our Predecessorprimarily because our Predecessor’s plans were overfunded. The increase inexpense is offset, in part, by the purchase adjustment related to deferredactivation costs amounting to $4.2 million for 2005.

Selling, general and administrative expenses increasedby $35.9 million, or 19.3%, for 2005 compared to the prior year. The increaseis primarily attributable to costs related to our transition to a stand-alonetelecommunications provider.

Depreciation and amortization increased by $32.6million, or 28.4%, for 2005 when compared to 2004. This is primarily the resultof purchase accounting associated with intangible assets.

***Interest Expense***

Interest expense increased by $24.9 million for 2006compared to the combined interest expense for 2005 primarily because ofincreased levels of debt.  Combinedinterest expense increased by $54.1 million for the year ended December 31,2005 compared to that of our Predecessor for 2004. In connection with theHawaii Business Acquisition, we incurred substantial indebtedness. The interestexpense relating to this debt has and will continue to adversely affect ourearnings.

***Income Tax Expense***

A valuation allowance hasbeen provided at December 31, 2006 and 2005 for our deferred tax assets becauseof the uncertainty as to the realization of such assets. We will continue toassess the recoverability of deferred tax assets and the related valuationallowance. To the extent that we generate taxable income in future years and itis determined that such valuation allowance is no longer required, the taxbenefit of the remaining deferred tax assets will be recognized at such time.

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**Resultsof Operations for Company for the Three Months Ended December 31, 2006 andDecember 31, 2005**

We believe it is useful to provide Company condensedfinancial information for the fourth quarter of 2006 in comparison to thefourth quarter of 2005. Such condensed financial information is as follows:
|                                                  | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|
| ** **                                       | ** ** | **December 31,**            | ** ** |
| ** **                                       | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|                                             |       |                             |       |   |   |
| Operating  revenues                              |       | $                                | 142,322    |   | $ | 135,638 |   |
|                                             |       |                             |       |   |   |
| Operating  expenses:                             |       |                             |       |   |   |
| Cost of services and sales                       |       | 50,909                           |       | 55,970 |   |
| Selling, general and administrative              |       | 51,414                           |       | 54,433 |   |
| Depreciation and amortization                    |       | 38,565                           |       | 41,111 |   |
|                                             |       |                             |       |   |   |
| Total operating expenses                         |       | 140,888                          |       | 151,514 |   |
|                                             |       |                             |       |   |   |
| Operating income  (loss)                         |       | 1,434                            |       | (15,876 | ) |
|                                             |       |                             |       |   |   |
| Other income  (expense):                         |       |                             |       |   |   |
| Interest expense                                 |       | (29,580                          | )          | (27,603 | ) |
| Other income and expense, net                    |       | 103                              |       | 708 |   |
|                                             |       |                             |       |   |   |
| Total other income (expense)                     |       | (29,477                          | )          | (26,895 | ) |
|                                             |       |                             |       |   |   |
| Income (loss)  before provision for income taxes |       | (28,043                          | )          | (42,771 | ) |
|                                             |       |                             |       |   |   |
| Provision for  income taxes                      |       | 1,839                            |       | 1,500 |   |
|                                             |       |                             |       |   |   |
| Net income (loss)                                |       | $                                | (29,882    | ) | $ | (44,271 | ) |

 

We reported a net loss of$29.9 million and $44.3 million for the three months ended December 31, 2006and for the three months ended December 31, 2005, respectively. Certainexpenses were reclassified between cost of services and sales, and selling,general and administrative expenses in the fourth quarter of 2006. Thecondensed fourth quarter information for 2006 presented above reflects onlythose reclassifications applicable to activity during this quarter.

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***Items ImpactingComparability***

To facilitate comparisonof the Company’s consolidated operating results between periods, we havesummarized the impact that the consummation of the Hawaii Business Acquisitionhad on operating results because of the application of the purchase method ofaccounting and the HPUC credit.  Theimpact of purchase accounting and the HPUC credit on our statement ofoperations for the three months ended December 31, 2006 and 2005 is asindicated in the following table (dollars in thousands).  Positive amounts represent items that had theeffect of increasing our reported income and negative amounts represent itemsthat had the effect of decreasing our reported income.
| ** **                             | ** ** | **Three Months Ended December 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| ** **                             | ** ** | ** **                                              | ** ** | ** ** | ** ** | **Operating** | ** ** | ** ** | ** ** | ** ** | ** ** | **Operating** | ** ** |
| ** **                             | ** ** | **Revenues**                                            | ** ** | **Expenses** | ** ** | **Loss** | ** ** | **Revenues** | ** ** | **Expenses** | ** ** | **Loss** | ** ** |
|                                   |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Publishing deferred revenue  and costs |       | $                                                       | —     |   | $ | — |   | $ | — |   | $ | (5,100 | ) | $ | 1,100 |   | $ | (4,000 | ) |
| Wireline activation                    |       | (800                                                    | )          | 800 |   | — |   | 200 |   | (200 | ) | — |   |
| HPUC credit                            |       | —                                                  |       | — |   | — |   | — |   | (700 | ) | (700 | ) |
| Depreciation and  amortization         |       | —                                                  |       | (11,200 | ) | (11,200 | ) | — |   | (10,900 | ) | (10,900 | ) |
|                                   |       | $                                                       | (800       | ) | $ | (10,400 | ) | $ | (11,200 | ) | $ | (4,900 | ) | $ | (10,700 | ) | $ | (15,600 | ) |

 

***Operating Revenues***

The following tables summarize our volume statisticsas of December 31, 2006 and September 30, 2006 and our revenue information forthe three months ended December 31, 2006 in comparison to the three monthsended December 31, 2005.

**VolumeInformation**

|                                     | ** ** | **December 31,** | ** ** | **September 30,** | ** ** | **Change** | ** ** |
|-------------------------------------|------------|-----------------------|------------|------------------------|------------|------------|------------|
| ** **                          | ** ** | **2006**              | ** ** | **2006**               | ** ** | **Number** | ** ** | **Percentage** | ** ** |
|                                |       |                  |       |                   |       |       |       |   |   |
| Switched access  lines              |       |                  |       |                   |       |       |       |   |   |
| Residential                         |       | 369,105               |       | 380,379                |       | (11,274    | )          | -3.0 | % |
| Business                            |       | 228,052               |       | 229,136                |       | (1,084     | )          | -0.5 | % |
| Public                              |       | 5,705                 |       | 5,768                  |       | (63        | )          | -1.1 | % |
| Total                               |       | 602,862               |       | 615,283                |       | (12,421    | )          | -2.0 | % |
|                                |       |                  |       |                   |       |       |       |   |   |
| High Speed  Internet lines - retail |       |                  |       |                   |       |       |       |   |   |
| Residential                         |       | 74,636                |       | 76,250                 |       | (1,614     | )          | -2.1 | % |
| Business                            |       | 15,684                |       | 16,064                 |       | (380       | )          | -2.4 | % |
| Total                               |       | 90,320                |       | 92,314                 |       | (1,994     | )          | -2.2 | % |
|                                |       |                  |       |                   |       |       |       |   |   |
| Long distance  lines                |       |                  |       |                   |       |       |       |   |   |
| Residential                         |       | 193,716               |       | 199,571                |       | (5,855     | )          | -2.9 | % |
| Business                            |       | 83,601                |       | 83,682                 |       | (81        | )          | -0.1 | % |
| Total                               |       | 277,317               |       | 283,253                |       | (5,936     | )          | -2.1 | % |

 

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**Operating Revenues (dollars inthousands)**
| ** **                              | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                              | ** ** | **December 31,**            | ** ** | **Change** | ** ** |
| ** **                              | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
|                                    |       |                             |       |       |       |       |       |   |   |
| Telecommunications:                     |       |                             |       |       |       |       |       |   |   |
| Local services                          |       | $                                | 55,180     |       | $          | 57,023     |       | $ | (1,843 | ) | -3.2 | % |
| Network access  services                |       | 36,692                           |       | 37,755     |       | (1,063     | )          | -2.8 | % |
| Long distance  services                 |       | 9,854                            |       | 9,637      |       | 217        |       | 2.3 | % |
| High Speed  Internet and Other Internet |       | 9,200                            |       | 9,249      |       | (49        | )          | -0.5 | % |
| Other services  and sales               |       | 13,717                           |       | 10,868     |       | 2,849      |       | 26.2 | % |
| Total  telecommunications               |       | 124,643                          |       | 124,532    |       | 111        |       | 0.1 | % |
| Publishing                              |       | 17,679                           |       | 11,106     |       | 6,573      |       | 59.2 | % |
|                                    |       |                             |       |       |       |       |       |   |   |
| Total operating  revenues               |       | $                                | 142,322    |       | $          | 135,638    |       | $ | 6,684 |   | 4.9 | % |

 

For the three monthsended December 31, 2006, local services revenues decreased $1.8 million, or3.2%, as compared to the three months ended December 31, 2005.  The decrease was caused by the decline inswitched access lines.

For the three months ended December 31, 2006, networkaccess service revenues decreased by $1.1 million, or 2.8%, as compared to thethree months ended December 31, 2005. The decrease was caused by lower end user subscriber line and switchedaccess charges as we served fewer switched access lines in 2006 than in 2005.

Long distance revenues were relatively comparable forthe three months ended December 31, 2006 and the same period in 2005.

High Speed Internet and other Internet revenuesdecreased $0.1 million, or 0.5%, for the three months ended December 31, 2006as compared to the three months ended December 31, 2005.  The demand for High Speed Internet serviceshas increased from 2005 to 2006. However, competitive rate pressures and the elimination of the billingfor (and related cost) of a government surcharge has caused revenue to be relativelyflat for the fourth quarter of 2006 compared to the same period in 2005.  Beginning in mid-September 2006, the Companybegan offering the first three months of High Speed Internet service at asignificantly discounted price in an effort to compete with rate plans offeredby other providers.  In addition, therewas a higher level of High Speed Internet disconnects during the fourth quarterof 2006 because of delays in processing orders.

Other services and sales increased $2.8 million, or26.2%, for the three months ended December 31, 2006 as compared to the sameperiod in 2005.  The increase was relatedprimarily to several large installations of customer premise equipment whichoccurred in the fourth quarter of 2006.

Publishing revenues increased by $6.6 million, or59.2%, for the three months ended December 31, 2006 compared to the threemonths ended December 31, 2005. The increase was caused primarily by theapplication of purchase accounting in 2005.

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***Operating Costs andExpenses***

We incurred significantexpenses in our efforts to become a stand-alone provider of telecommunicationservices and certain other transition expenses. The major components of such expenses incurred are summarized as follows(dollars in thousands):
| ** **                                                                                                                                                                                                       | ** ** | **Three**             | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                       | ** ** | **Months Ended** | ** ** |
| ** **                                                                                                                                                                                                       | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                                                                                       | ** ** | **2006**              | ** ** | **2005** | ** ** |
|                                                                                                                                                                                                             |       |                  |       |   |   |
| Expense component of  BearingPoint contract to build information technology infrastructure                                                                                                                       |       | $                     | —     |   | $ | (1,015 | ) |
| Verizon transition  services, components estimated by management to reflect transition services  net of expense recovery from BearingPoint to defer costs of transition  services because of delay in completion |       | —                |       | 21,472 |   |
| Verizon software  license fee amortization                                                                                                                                                                       |       | —                |       | 1,295 |   |
| Accenture transition  services                                                                                                                                                                                   |       | 6,350                 |       | — |   |
| Facilities renovation  costs                                                                                                                                                                                     |       | 167                   |       | — |   |
| Employee relocation  costs                                                                                                                                                                                       |       | 47                    |       | 1,374 |   |
| Other                                                                                                                                                                                                            |       | 2,351                 |       | 4,279 |   |
| Total transition to  stand-alone provider                                                                                                                                                                        |       | 8,915                 |       | 27,405 |   |
| Other transition                                                                                                                                                                                                 |       | 960                   |       | — |   |
|                                                                                                                                                                                                             |       |                  |       |   |   |
|                                                                                                                                                                                                             |       | $                     | 9,875      |   | $ | 27,405 |   |

 

The following table summarizes our costs and expensesfor the three months ended December 31, 2006 compared to the three months endedDecember 31, 2005 (dollars in thousands):
|                                               | ** ** | **Three Months Ended  December 31,** | ** ** | **Change** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                    | ** ** | **2006**                                            | ** ** | **2005**   | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
|                                          |       |                                                |       |       |       |   |   |   |   |
| Costs of  services and sales                  |       | $                                                   | 50,909     |       | $          | 55,970 |   | $ | (5,061 | ) | -9.0 | % |
| Selling, general  and administrative expenses |       | 51,414                                              |       | 54,433     |       | (3,019 | ) | -5.5 | % |
| Depreciation and  amortization                |       | 38,565                                              |       | 41,111     |       | (2,546 | ) | -6.2 | % |
|                                          |       |                                                |       |       |       |   |   |   |   |
|                                          |       | $                                                   | 140,888    |       | $          | 151,514 |   | $ | (10,626 | ) | -7.0 | % |

 

Costs of services and sales decreased by $5.1 million,or 9.0%, for the three months ended December 31, 2006 as compared to the threemonths ended December 31, 2005.  Thedecrease in expense is related to changes in our cost structure similar to thosediscussed previously related to annual periods.

Selling, general and administrative expenses decreasedby $3.0 million, or 5.5%, for the three months ended December 31, 2006 comparedto the same period in the prior year. The decrease in expense is related to changes in our cost structuresimilar to those discussed previously related to annual periods.

Depreciation and amortization for the three monthsended December 31, 2006 decreased by $2.5 million, or 6.2%, as compared to thethree months ended December 31, 2005. The decrease was related to changes in depreciation estimates.

***Interest Expense***

Interest expense increased by $2.0 million for thethree months ended December 31, 2006 compared to the same period in 2005.  The increase was because of the increase ininterest rates on our floating rate debt as well as the overall level ofCompany debt.

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***Income Tax Expense***

A valuation allowance has been provided at December31, 2006 and 2005 for our deferred tax assets because of the uncertainty as tothe realization of such assets. We will continue to assess the recoverabilityof deferred tax assets and the related valuation allowance. To the extent thatwe generate taxable income in future years and it is determined that suchvaluation allowance is no longer required, the tax benefit of the remainingdeferred tax assets will be recognized at such time.

**Liquidity and Capital Resources**

Our short-term and long-term liquidity requirementsprimarily arise from: (i) interest and principal payments related to our seniorcredit facilities; (ii) capital expenditures; (iii) working capitalrequirements; and (iv) certain transition related expenditures.

We intend to fund our operations, interest expense,debt principal payments and working capital requirements from our cash fromoperations and our revolving credit facility, subject to covenant restrictions.

Our ability to service our indebtedness will depend onour ability to generate cash in the future. Given our high level of debt andrelated debt service requirements, we may not have significant cash availableto meet any large unanticipated liquidity requirements, other than fromavailable borrowings, if any, under our revolving credit facility. As a result,we may not retain a sufficient amount of cash to finance growth opportunities,including acquisitions, or unanticipated capital expenditures or to fund ouroperations. If we do not have sufficient cash for these purposes, our financialcondition and our business could suffer.

***Cash Flows for theYear Ended December 31, 2006***

Net cash provided by operations of $38.3 million for2006 was related primarily to our net loss of $144.6 million adjusted toexclude non-cash items of $182.9 million. The most significant non-cash itemduring the period was depreciation and amortization expense of $172.7 million.

Cash used in investing activities was $104.4 millionfor the year ended December 31, 2006. Our investing activities consisted ofproceeds on the sale of investments of $2.5 million and capital expenditures of$106.9 million.  Capital expendituresinclude $19.6 million related to our efforts to build our back-office and ITinfrastructure.

Cash provided by financing activities was $60.5million for 2006. This was related entirely to borrowing activity.

***Cash Flows for theYear Ended December 31, 2005***

Net cash used in operations of $5.4 million for 2005was related primarily to our net loss of $175.7 million adjusted to excludenon-cash items of $170.3 million. The most significant non-cash item during theperiod was depreciation and amortization expense of $107.8 million. The netloss and related cash used in operations was caused, in part, by oursignificant costs of transition to a stand-alone provider of telecommunicationservices and by interest charges.

Cash used in investing activities was $1,421.0 millionfor 2005. Our investing activities consisted primarily of the Hawaii BusinessAcquisition for $1,323.4 million (net of cash acquired) and capitalexpenditures of $112.7 million. Capital expenditures include $61.5 millionrelated to our efforts to build our back-office and IT infrastructure.

Cash provided by financing activities was $1,436.7million for 2005. This was related primarily to $1,030.5 million from theissuance of debt, net of debt issue costs, and $428.0 million of capitalcontributions. The capital was funded through investment funds sponsored byCarlyle and a group of private investors.

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***OutstandingDebt and Financing Arrangements***

As of December 31, 2006,we had outstanding $1,407.0 million in aggregate indebtedness, excluding unusedcommitments, with $39.8 million of additional borrowing capacity available,subject to covenant restrictions, under our revolving credit facility.  As a result of the Hawaii BusinessAcquisition, our liquidity requirements have been significantly increased,primarily due to increased debt service obligations.  In connection with the Hawaii BusinessAcquisition, we incurred $485.0 million of borrowings under our senior creditfacilities and $500.0 million of indebtedness with the issuance of notes and weassumed $300.0 million of Verizon Hawaii debt.

Our senior credit facilities consist of a revolvingcredit facility and term loan facilities. Our revolving credit facility isavailable for general corporate purposes and comprised of loans in a totalprincipal amount of up to $200.0 million, of which $160.0 million has beendrawn and $39.8 million was available as of December 31, 2006 (subject to thecovenants described below and a $0.2 million outstanding letter of credit). Theterm loan facilities are comprised of a Tranche A term loan facility in a totalprincipal amount of $300.0 million and a Tranche B term loan facility in atotal principal amount of $450.0 million, the proceeds of which were used tofund the Hawaii Business Acquisition. Our total outstanding balance on our senior credit facilities amountedto $907.0 million as of December 31, 2006. Our senior credit facilities bearinterest at a rate equal to the applicable margin plus, at our option, either:

·                  abase rate determined by reference to the higher of (1) JPMorgan Chase Bank’sprime rate and (2) the federal funds rate plus 1⁄2 of 1%; or

·                  a Eurocurrencyrate on deposits for one-, two-, three- or six-month periods (or nine- ortwelve-month periods if, at the time of the borrowing, all lenders agree tomake such a duration available).

The applicable margin on loans under our revolvingcredit facility and our Tranche A term loan facility are subject to changedepending on our leverage ratio.

In addition to paying interest on outstandingprincipal amounts under our senior credit facilities, we are required to pay acommitment fee to the lenders for the unused commitments under our revolvingcredit facility which is payable quarterly in arrears. The commitment fee issubject to change depending on our leverage ratio.

Our senior credit facilities contain negative andaffirmative covenants affecting us and our existing and future restrictedsubsidiaries, with certain exceptions set forth in our credit agreement. Oursenior credit facilities contain the following negative covenants andrestrictions, among others: restrictions on liens; sale-leaseback transactions;debt, dividends and other restricted payments; redemptions and stockrepurchases; consolidations and mergers; acquisitions; asset dispositions;investments; loans; advances; changes in line of business; changes in fiscalyear; agreements with subsidiaries; transactions with affiliates; amendments tocharter, by-laws and other material documents; hedging agreements; and certainprepayments of indebtedness. Our senior credit facilities also require us, andwill require our existing and future restricted subsidiaries, with certainexceptions set forth in our credit agreement, to meet certain financial covenantsand ratios, particularly a leverage ratio, a senior secured leverage ratio andan interest coverage ratio. We were in compliance with all covenants as ofDecember 31, 2006.

Our senior credit facilities contain the followingaffirmative covenants, among others: delivery of financial and otherinformation to the administrative agent; notice to the administrative agentupon the occurrence of certain events of default, material litigation and otherevents; conduct of business and existence; payment of obligations; maintenanceof properties; licenses and insurance; access to books and records by thelenders; compliance with laws; use of proceeds and letters of credit; furtherassurances; and maintenance of collateral.

Our senior floating rate notes in the aggregateprincipal amount of $150.0 million mature on May 1, 2013 and bear interest at arate reset and payable semi-annually at LIBOR, as defined, plus 5.50%. Oursenior 

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fixed rate notes in the aggregate principal amount of$200.0 million mature on May 1, 2013 and bear interest at a rate of 9.75% peryear. Our senior subordinated notes in the aggregate principal amount of $150.0million will mature on May 1, 2015 and bear interest at a rate of 12.50% peryear. Our senior notes are general unsecured obligations. A portion or all ofour senior notes may be redeemed at various dates beginning May 1, 2007 atcertain premiums based on specified terms. Our senior notes contain variouscovenants that restrict, among other things, incurrence of additionalindebtedness, payment of dividends, redemptions of stock, other distributionsto shareholders and sales of assets.

The following table sets forth our long-term debt andcontractual obligations for the next several years (dollars in thousands):
| ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2012 and** | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|-------------------|------------|------------|------------|
| ** **                     | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2011**   | ** ** | **Thereafter**    | ** ** | **Total**  | ** ** |
|                           |       |       |       |       |       |       |       |       |       |       |       |              |       |       |       |
| Debt(1):                       |       |       |       |       |       |       |       |       |       |       |       |              |       |       |       |
| Revolving credit  facility (2) |       | $          | —     |       | $          | —     |       | $          | —     |       | $          | —            |       | $          | —     |   | $ | 160,000 |   | $ | 160,000 |   |
| Term loan facility,  Tranche A |       | 22,500     |       | 45,000     |       | 45,000     |       | 75,000     |       | 90,000     |       | 22,500            |       | 300,000    |       |
| Term loan facility,  Tranche B |       | 4,000      |       | 4,000      |       | 4,000      |       | 4,000      |       | 4,000      |       | 427,000           |       | 447,000    |       |
| Senior notes                   |       | —     |       | —     |       | —     |       | —     |       | —     |       | 500,000           |       | 500,000    |       |
| Total debt                     |       | 26,500     |       | 49,000     |       | 49,000     |       | 79,000     |       | 94,000     |       | 1,109,500         |       | 1,407,000  |       |
| Operating leases               |       | 3,267      |       | 2,673      |       | 2,501      |       | 2,368      |       | 2,005      |       | 7,509             |       | 20,323     |       |
| Other supplier  contracts (3)  |       | 11,210     |       | 10,668     |       | 2,000      |       | 2,000      |       | 167        |       | —            |       | 26,045     |       |
|                           |       |       |       |       |       |       |       |       |       |       |       |              |       |       |       |
| Total                          |       | $          | 40,977     |       | $          | 62,341     |       | $          | 53,501     |       | $          | 83,368            |       | $          | 96,172     |   | $ | 1,117,009 |   | $ | 1,453,368 |   |

 

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| (1) |   | Interest commitments on debt amount to approximately  $105,000 to $123,000 for years 2007 to 2011, $141,000 cumulative for years  2012 and thereafter, and $719,000 in the aggregate.  The interest commitment was estimated based  on the fixed rate where applicable or, for floating rate debt, it was based  on the rate in effect at December 31, 2006. |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Based on balance at December 31, 2006.                                                                                                                                                                                                                                                                                                                            |
| (3) |   | Represents payments due under long-term supplier  contracts.                                                                                                                                                                                                                                                                                                      |

 

Our ability to make payments on and to refinance ourindebtedness and to fund planned capital expenditures and certain transitionrelated expenses will depend on our ability to generate cash in the future.This ability, to a certain extent, is subject to general economic, competitive,regulatory and other factors that are beyond our control. Based on our currentlevel of operations and our anticipated cost structure, we believe that ourcash flow from operations, available cash and available borrowing capacityunder our senior credit facilities will be adequate to meet our liquidity needsfor the foreseeable future.

We cannot provide assurance that our business willgenerate sufficient cash flow from operations or that future borrowings will beavailable to us under our revolving credit facility to enable us to pay ourindebtedness or to fund our other liquidity needs. In addition, our coststructure may be higher than currently anticipated.  We may need to refinance all or a portion ofour indebtedness on or before maturity. We cannot provide assurance that we will be able to refinance any of ourindebtedness on commercially reasonable terms or at all.

**Critical Accounting Policies**

The process of preparing financial statements requiresthe use of estimates on the part of management. The estimates used bymanagement are based on our historical experience combined with management’sunderstanding of current facts and circumstances. Certain of our accountingpolicies are considered critical, as they are both important to the portrayalof our financial statements and require significant or complex judgment on thepart of management. The following is a summary of certain policies consideredcritical by management.

***Goodwill andIndefinite-Lived Intangible Assets***

Goodwill and intangible assets not subject toamortization are tested for impairment annually, or when events or changes incircumstances indicate that the asset might be impaired. For goodwill, atwo-step impairment test is performed. The first step compares the fair valueof a reporting unit with its carrying 

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amount, including goodwill. If the carrying value of areporting unit exceeds its fair value, the second step of the impairment testis performed to measure the amount of impairment loss. The second step comparesthe implied fair value of the reporting unit goodwill with the carrying amountof that goodwill. The implied fair value is determined by allocating the fairvalue of a reporting unit to all of the assets and liabilities of that unit asif the reporting unit had been acquired in a business combination. The excessof the fair value of a reporting unit over the amounts assigned to its assetsand liabilities is the implied fair value of goodwill. If the carrying amountof the reporting unit goodwill is in excess of the implied fair value of thatgoodwill, then an impairment loss is recognized equal to that excess. Forindefinite-lived intangible assets, the impairment test consists of acomparison of the fair value of the intangible asset with its carrying value.If the carrying value of an indefinite-lived intangible asset exceeds its fairvalue, an impairment loss is recognized in an amount equal to that excess.  Fair value is an estimate based on thepresent value of an expected range of future cash flows. The expected range offuture cash flows is based on internal forecasts developed utilizing management’sknowledge of the business and the anticipated effects of market forces. The useof different assumptions or estimates of future cash flows could producedifferent impairment amounts (or none at all) for goodwill and indefinite-livedintangible assets.

***Impairment ofLong-Lived Assets Other than Goodwill and Indefinite-Lived Intangibles***

We assess the recoverability of long-lived assets,including property, plant and equipment and definite-lived intangible assets,whenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable. In such cases, if the sum of the expectedcash flows, undiscounted and without interest, resulting from use of the assetis less than the carrying amount, an impairment loss is recognized based on thedifference between the carrying amount and the fair value of the assets. Whendetermining future cash flow estimates, we consider historical operatingresults, as adjusted to reflect current and anticipated operating conditions.Estimating future cash flows requires significant judgment by us in such areasas future economic conditions, industry specific conditions and necessarycapital expenditures. The use of different assumptions or estimates for futurecash flows could produce different impairment amounts (or none at all) forlong-lived assets, including identifiable intangible assets subject toamortization.

***Revenue Recognition***

We recognize service revenues based upon usage of ourlocal exchange network and facilities and contract******fees. In general, fixed fees for localtelephone, Internet access and certain other services are billed one month in******advance andrecognized the following month when earned. Revenue from other products thatare not fixed fee or******thatexceed contracted amounts is recognized when such services are provided. Longdistance revenues are******generallybilled in arrears and revenue recognized as service is provided.

***Allowance forDoubtful Accounts***

Our allowance for doubtful accounts reflects reservesfor customer receivables to reduce receivables to amounts expected to becollected. In estimating uncollectible amounts, management considers factorssuch as current overall economic conditions, industry-specific economic conditions,historical customer performance and anticipated customer performance. While webelieve our process effectively addresses our exposure for doubtful accounts,changes in economic, industry or specific customer conditions may requireadjustment to the allowance for doubtful accounts recognized by us.

***Income Taxes***

Management calculates the income tax provision,current and deferred income taxes along with the valuation allowance based uponvarious complex estimates and interpretations of income tax laws andregulations. Deferred tax assets are reduced by a valuation allowance to theextent that it is more likely than not that they will not be realized. To theextent we begin to generate taxable income in future years 

52

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and it is determined the valuation allowance is nolonger required, the tax benefit for the remaining deferred tax assets will berecognized at such time.

***Employee-RelatedBenefits***

We incur certain employee-related costs associatedwith pensions and post-retirement health care benefits. In order to measure theexpense associated with these employee-related benefits, management must make avariety of estimates, including discount rates used to measure the presentvalue of certain liabilities, assumed rates of return on assets set aside tofund these expenses, compensation increases, employee turnover rates,anticipated mortality rates and anticipated healthcare costs. The estimatesused by management are based on our historical experience, as well as currentfacts and circumstances. We use third-party specialists to assist management inappropriately measuring the expenses associated with these employee-relatedbenefits. Different estimates could result in our recognizing different amountsof expense over different time periods.

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**Item 7A.  Quantitative and Qualitative Disclosuresabout Market Risk**

As of December 31, 2006, our floating rate obligationsconsisted of $160.0 million of debt outstanding under our revolving creditfacility, $300.0 million of debt outstanding under our Tranche A term loanfacility, $447.0 million of debt outstanding under our Tranche B term loanfacility and $150.0 million in aggregate principal amount of outstanding seniorfloating rate notes. Accordingly, our earnings and cash flow are affected bychanges in interest rates. Based on our borrowings at December 31, 2006 andassuming a 0.125 percentage point increase in the average interest rate underthese borrowings, we estimate that our annual interest expense would increaseby approximately $1.3 million.

We utilize a combination of fixed-rate andvariable-rate debt to finance our operations. The variable-rate debt exposes usto variability in interest payments due to changes in interest rates. Ourmanagement believes that it is prudent to mitigate our interest rate risk on aportion of our variable-rate borrowings.

To manage fluctuations in cash flows resulting fromadverse changes in interest rates on our term loan facilities and notes, inJune 2005, we entered into six interest rate swap agreements to hedge againstthe effects of increases in interest rates associated with floating rate debton our term loan facilities and notes. The interest rate swap agreements have acumulative notional amount that ranges from $451.4 million at June 30, 2005, toa high of $704.3 million at September 30, 2006, to a balance of $253.0 millionat maturity on December 31, 2010. The fixed rate is 3.98% for the period fromJune 30, 2005 to December 30, 2006 and 4.36% from December 31, 2006 to December31, 2010. The interest rate swaps effectively change the variable-rate cashflow exposure on our debt obligations to fixed cash flows. Under the terms ofthe interest rate swap agreements, we receive fluctuating interest ratepayments and make fixed rate payments, thereby creating the equivalent offixed-rate interest payments. We do not speculate using derivative financialinstruments and do not enter into derivative instruments for any purpose otherthan cash-flow-hedging purposes. The fair value of the swap amounted toapproximately $11.6 million as of December 31, 2006. Changes in the fair valueof these swaps are recognized in other comprehensive income to the extent ofthe swaps’ effectiveness.

By using derivative financial instruments to hedgeexposures to changes in interest rates, we expose ourself to market risk.Market risk may involve the adverse or beneficial effects on the value of afinancial instrument resulting from changes in interest rates. While we expectsuch changes in value may be significant, the market risk associated with interest-ratecontracts is managed by establishing and monitoring parameters that limit thetypes and degree of market risk that may be undertaken. Market risk may havesignificantly changed the value of our swap agreements subsequent to date ofthe most recent balance sheet presented. However, as our management does notcurrently intend to terminate our swap agreements prior to their maturities,such changes in value will only result in realization as an effective offset tothe variability in cash flows associated with our variable rate debt.

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**Item 8. Financial Statements andSupplementary Data**

**Index toFinancial Statements**
| **Hawaiian Telcom Communications, Inc. Consolidated Financial  Statements**                                                                                                                                                                                                                                 | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| Reports  of Independent Registered Public Accounting Firms                                                                                                                                                                                                                                                  |       | 57         |
| Consolidated Statements of Operations for the Years  Ended December 31, 2006 and 2005 and for the Period from May 21, 2004 (date  of inception) to December 31, 2004 with Predecessor Comparative Information  for the Period from January 1, 2005 to May 1, 2005 and for the Year Ended  December 31, 2004 |       | 58         |
| Consolidated Balance Sheets as of December 31, 2006  and 2005                                                                                                                                                                                                                                               |       | 59         |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2006 and 2005 and for the Period from May 21, 2004 (date  of inception) to December 31, 2004 with Predecessor Comparative Information  for the Period from January 1, 2005 to May 1, 2005 and for the Year Ended December  31, 2004 |       | 60         |
| Consolidated Statements of Changes in Stockholder’s  Equity (Deficiency) for the Years Ended December 31, 2006 and 2005 and for  the Period from May 21, 2004 (date of inception) to December 31, 2004                                                                                                 |       | 61         |
| Combined Statements of Changes in Parent Funding  (Predecessor) for the Period from January 1, 2005 to May 1, 2005 and the Year  Ended December 31, 2004                                                                                                                                                    |       | 62         |
| Notes to Consolidated Financial Statements                                                                                                                                                                                                                                                                  |       | 63         |

 

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**Report of Independent Registered Public AccountingFirm**

Stockholder and Board of Directors

Hawaiian TelcomCommunications, Inc.:

We have audited theaccompanying consolidated balance sheets of Hawaiian Telcom Communications,Inc. and subsidiaries (the “Company”) as of December 31, 2006 and 2005, and therelated consolidated statements of operations, changes in stockholder’s equity(deficiency), and cash flows for the years then ended and for the period fromMay 21, 2004 (date of inception) to December 31, 2004. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. The Company is not required to have, nor were weengaged to perform, an audit of its internal control over financial reporting.Our audits included consideration of internal control over financial reportingas a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.Accordingly, we express no such opinion. An audit also includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of Hawaiian Telcom Communications, Inc. and subsidiaries atDecember 31, 2006 and 2005, and the results of their operations and their cashflows for the years then ended and for the period from May 21, 2004 (date ofinception) to December 31, 2004, in conformity with accounting principlesgenerally accepted in the United States of America.

As discussed in Note 3 tothe consolidated financial statements, on January 1, 2006, the Company changedits method of accounting for share-based payment arrangements to conform toStatement of Financial Accounting Standards No. 123(R), *Share-BasedPayment*.
| /s/  DELOITTE& TOUCHE LLP |   |
|-------------------------------|--------|
|                          |
| Honolulu, Hawaii              |
| March 30, 2007                |

 

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**Report ofIndependent Registered Public Accounting Firm**

The Board of Directors and Management

Verizon CommunicationsInc.

We have audited thespecial-purpose combined statements of income (consolidated statements ofoperations in the accompanying financial statements), parent funding (combinedstatements of changes in parent funding – predecessor), and cash flows(consolidated statements of cash flows) of Verizon Communications Inc.’s (“Verizon”)Hawaii Business, a combination of Verizon Hawaii Inc. and carved-out componentsof Verizon Information Services, GTE.Net LLC, Bell Atlantic CommunicationsInc., and Verizon Select Services Inc., for the period from January 1, 2005 toMay 1, 2005 and the year ended December 31, 2004. These financial statementsare the responsibility of Verizon’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. We were not engaged to perform an audit of theinternal control over financial reporting of Verizon’s Hawaii Business. Ouraudits included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the internal control overfinancial reporting of Verizon’s Hawaii Business.  Accordingly, we express no such opinion. Anaudit also includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

As described in Notes 2and 3, the special-purpose combined financial statements were prepared topresent the statements of income, parent funding and cash flows of Verizon’sHawaii Business in contemplation of a potential sale. The combined financialstatements include allocations of certain indirectly attributable amounts onbases determined by management of Verizon.

In our opinion, thespecial-purpose combined financial statements referred to above present fairly,in all material respects, the combined results of operations, changes in parentfunding and cash flows of Verizon’s Hawaii Business for the period from January1, 2005 to May 1, 2005 and the year ended December 31, 2004, in conformity withU.S. generally accepted accounting principles.
| /s/  ERNST&YOUNGLLP |   |
|-------------------------|--------|
|                    |
| New York, New York      |
| July 26, 2005           |

 

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**Hawaiian Telcom Communications,Inc.**

**ConsolidatedStatements of Operations**

**(Dollars in thousands)**
|                                                                          | ** ** | **Company**           | ** ** | **Predecessor**         | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|
| ** **                                                               | ** ** | ** **            | ** ** | ** **              | ** ** | **Period from** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                               | ** ** | **Year Ended**   | ** ** | **May 21 to** | ** ** | **Period from** | ** ** | **Year Ended** | ** ** |
| ** **                                                               | ** ** | **December 31,** | ** ** | **December**            | ** ** | **January 1 to** | ** ** | **December 31,** | ** ** |
| ** **                                                               | ** ** | **2006**              | ** ** | **2005**                | ** ** | **31, 2004** | ** ** | **May 1, 2005** | ** ** | **2004** | ** ** |
|                                                                     |       |                  |       |                    |       |   |   |   |   |   |   |
| Operating revenues                                                       |       | $                     | 570,168    |                    | $          | 337,417 |   | $ | — |   | $ | 200,700 |   | $ | 595,600 |   |
|                                                                     |       |                  |       |                    |       |   |   |   |   |   |   |
| Operating expenses:                                                      |       |                  |       |                    |       |   |   |   |   |   |   |
| Cost of services  and sales (exclusive of depreciation and amortization) |       | 231,181               |       | 150,324                 |       | — |   | 76,300 |   | 204,300 |   |
| Selling, general  and administrative                                     |       | 189,467               |       | 172,612                 |       | 17,373 |   | 48,900 |   | 185,600 |   |
| Depreciation and  amortization                                           |       | 172,732               |       | 107,753                 |       | — |   | 39,600 |   | 114,800 |   |
|                                                                     |       |                  |       |                    |       |   |   |   |   |   |   |
| Total operating  expenses                                                |       | 593,380               |       | 430,689                 |       | 17,373 |   | 164,800 |   | 504,700 |   |
|                                                                     |       |                  |       |                    |       |   |   |   |   |   |   |
| Operating income (loss)                                                  |       | (23,212               | )          | (93,272                 | )          | (17,373 | ) | 35,900 |   | 90,900 |   |
|                                                                     |       |                  |       |                    |       |   |   |   |   |   |   |
| Other income (expense):                                                  |       |                  |       |                    |       |   |   |   |   |   |   |
| Interest expense                                                         |       | (115,770              | )          | (79,208                 | )          | — |   | (11,700 | ) | (36,800 | ) |
| Other income and  expense, net                                           |       | 427                   |       | 875                     |       | — |   | 600 |   | 3,300 |   |
|                                                                     |       |                  |       |                    |       |   |   |   |   |   |   |
| Total other  income (expense)                                            |       | (115,343              | )          | (78,333                 | )          | — |   | (11,100 | ) | (33,500 | ) |
|                                                                     |       |                  |       |                    |       |   |   |   |   |   |   |
| Income (loss) before  provision for income taxes                         |       | (138,555              | )          | (171,605                | )          | (17,373 | ) | 24,800 |   | 57,400 |   |
|                                                                     |       |                  |       |                    |       |   |   |   |   |   |   |
| Provision for income  taxes                                              |       | 6,082                 |       | 4,100                   |       | — |   | 8,700 |   | 20,500 |   |
|                                                                     |       |                  |       |                    |       |   |   |   |   |   |   |
| Net income (loss)                                                        |       | $                     | (144,637   | )                       | $          | (175,705 | ) | $ | (17,373 | ) | $ | 16,100 |   | $ | 36,900 |   |

 

See accompanyingnotes to consolidated financial statements.

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**HawaiianTelcom Communications, Inc.Consolidated Balance Sheets(Dollars in thousands, except share information)**

 

 
|                                                                                 | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                      | ** ** | **2006**              | ** ** | **2005** | ** ** |
|                                                                            |       |                  |       |   |   |
| **Assets**                                                                      |       |                  |       |   |   |
|                                                                            |       |                  |       |   |   |
| Current assets                                                                  |       |                  |       |   |   |
| Cash and cash  equivalents                                                      |       | $                     | 4,752      |   | $ | 10,321 |   |
| Receivables                                                                     |       | 100,370               |       | 78,940 |   |
| Material and  supplies                                                          |       | 9,915                 |       | 5,711 |   |
| Prepaid expenses                                                                |       | 4,894                 |       | 4,364 |   |
| Other current  assets                                                           |       | 7,690                 |       | 6,346 |   |
| Total current  assets                                                           |       | 127,621               |       | 105,682 |   |
| Property, plant and  equipment, net                                             |       | 818,172               |       | 817,333 |   |
| Deferred financing and  other assets                                            |       | 46,372                |       | 52,067 |   |
| Intangible assets, net                                                          |       | 583,220               |       | 647,199 |   |
| Goodwill                                                                        |       | 136,779               |       | 134,273 |   |
|                                                                            |       |                  |       |   |   |
| Total assets                                                                    |       | $                     | 1,712,164  |   | $ | 1,756,554 |   |
|                                                                            |       |                  |       |   |   |
| **Liabilities and Stockholder’s  Equity**                                  | ** ** | ** **            | ** ** | ** ** | ** ** |
|                                                                            |       |                  |       |   |   |
| Current liabilities                                                             |       |                  |       |   |   |
| Accounts payable                                                                |       | $                     | 91,690     |   | $ | 50,387 |   |
| Accrued expenses                                                                |       | 23,941                |       | 32,572 |   |
| Advance billings  and customer deposits                                         |       | 15,540                |       | 16,006 |   |
| Current  maturities of long-term debt                                           |       | 26,500                |       | 3,000 |   |
| Other current  liabilities                                                      |       | 3,764                 |       | 9,306 |   |
| Total current  liabilities                                                      |       | 161,435               |       | 111,271 |   |
| Long-term debt                                                                  |       | 1,380,500             |       | 1,343,500 |   |
| Deferred income taxes                                                           |       | 10,300                |       | 4,100 |   |
| Employee benefit  obligations                                                   |       | 50,874                |       | 44,141 |   |
| Other liabilities                                                               |       | 7,016                 |       | 7,345 |   |
| Total liabilities                                                               |       | 1,610,125             |       | 1,510,357 |   |
|                                                                            |       |                  |       |   |   |
| Commitments and  contingencies (Note 15)                                        |       |                  |       |   |   |
|                                                                            |       |                  |       |   |   |
| Stockholder’s equity                                                       |       |                  |       |   |   |
| Common stock,  par value of $0.01 per share, 1,000 shares authorized and issued |       | —                |       | — |   |
| Additional  paid-in capital                                                     |       | 428,118               |       | 428,000 |   |
| Accumulated  other comprehensive income                                         |       | 11,636                |       | 11,275 |   |
| Accumulated  deficit                                                            |       | (337,715              | )          | (193,078 | ) |
| Total stockholder’s  equity                                                |       | 102,039               |       | 246,197 |   |
|                                                                            |       |                  |       |   |   |
| Total liabilities and stockholder’s equity                                 |       | $                     | 1,712,164  |   | $ | 1,756,554 |   |

 

See accompanyingnotes to consolidated financial statements.

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**Hawaiian Telcom Communications,Inc.**

**ConsolidatedStatements of Cash Flows**

**(Dollars in thousands)**

 
| ** **                                                                                          | ** ** | **Company**           | ** ** | **Predecessor**         | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|
| ** **                                                                                          | ** ** | ** **            | ** ** | ** **              | ** ** | **Period from** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                          | ** ** | **Year Ended**   | ** ** | **May 21 to** | ** ** | **Period from** | ** ** | **Year Ended** | ** ** |
| ** **                                                                                          | ** ** | **December 31,** | ** ** | **December**            | ** ** | **January 1 to** | ** ** | **December 31,** | ** ** |
| ** **                                                                                          | ** ** | **2006**              | ** ** | **2005**                | ** ** | **31, 2004** | ** ** | **May 1, 2005** | ** ** | **2004** | ** ** |
|                                                                                                |       |                  |       |                    |       |   |   |   |   |   |   |
| Cash flows from  operating activities:                                                              |       |                  |       |                    |       |   |   |   |   |   |   |
| Net income (loss)                                                                                   |       | $                     | (144,637   | )                       | $          | (175,705 | ) | $ | (17,373 | ) | $ | 16,100 |   | $ | 36,900 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities |       |                  |       |                    |       |   |   |   |   |   |   |
| Depreciation and  amortization                                                                      |       | 172,732               |       | 107,753                 |       | — |   | 39,600 |   | 114,800 |   |
| Deferred income  taxes, net                                                                         |       | 6,200                 |       | 4,100                   |       | — |   | (11,700 | ) | 9,000 |   |
| Employee  retirement benefits                                                                       |       | 6,733                 |       | 10,072                  |       | — |   | (300 | ) | (3,500 | ) |
| Provision for uncollectibles                                                                        |       | 25,563                |       | 5,827                   |       | — |   | 1,000 |   | 3,300 |   |
| Changes in  operating assets and liabilities:                                                       |       |                  |       |                    |       |   |   |   |   |   |   |
| Receivables                                                                                         |       | (49,248               | )          | 17,470                  |       | — |   | 10,400 |   | 1,600 |   |
| Material and  supplies                                                                              |       | (4,204                | )          | 276                     |       | — |   | (3,300 | ) | 2,600 |   |
| Other current  assets                                                                               |       | (1,876                | )          | (8,854                  | )          | — |   | (400 | ) | 12,900 |   |
| Accounts payable  and accrued expenses                                                              |       | 29,435                |       | 43,103                  |       | 8,427 |   | (8,800 | ) | (53,500 | ) |
| Other current  liabilities                                                                          |       | (5,743                | )          | (13,132                 | )          | 8,946 |   | 1,400 |   | (3,000 | ) |
| Other, net                                                                                          |       | 3,344                 |       | 3,709                   |       | — |   | (7,800 | ) | (13,400 | ) |
| Net cash provided by  (used in) operating activities                                                |       | 38,299                |       | (5,381                  | )          | — |   | 36,200 |   | 107,700 |   |
|                                                                                                |       |                  |       |                    |       |   |   |   |   |   |   |
| Cash flows from  investing activities:                                                              |       |                  |       |                    |       |   |   |   |   |   |   |
| Capital expenditures                                                                                |       | (106,868              | )          | (112,680                | )          | — |   | (22,800 | ) | (63,700 | ) |
| Proceeds on sale of  investments                                                                    |       | 2,500                 |       | 15,000                  |       | — |   | — |   | 31,500 |   |
| Net change in note  receivable                                                                      |       | —                |       | —                  |       | — |   | 11,300 |   | 35,500 |   |
| Purchase of Verizon’s  Hawaii Business, net of cash acquired                                   |       | —                |       | (1,323,355              | )          | — |   | — |   | — |   |
| Other                                                                                               |       | —                |       | —                  |       | — |   | (200 | ) | — |   |
| Net cash provided by  (used in) investing activities                                                |       | (104,368              | )          | (1,421,035              | )          | — |   | (11,700 | ) | 3,300 |   |
|                                                                                                |       |                  |       |                    |       |   |   |   |   |   |   |
| Cash flows from  financing activities:                                                              |       |                  |       |                    |       |   |   |   |   |   |   |
| Issuance of common  stock                                                                           |       | —                |       | 428,000                 |       | — |   | — |   | — |   |
| Proceeds from issuance  of debt                                                                     |       | 443,000               |       | 1,068,300               |       | — |   | — |   | — |   |
| Repayment of debt                                                                                   |       | (382,500              | )          | (21,800                 | )          | — |   | (283,800 | ) | (63,800 | ) |
| Net change in parent  funding                                                                       |       | —                |       | —                  |       |   |   | 259,700 |   | (46,100 | ) |
| Payment of debt issue  costs                                                                        |       | —                |       | (37,763                 | )          | — |   | — |   | — |   |
| Other                                                                                               |       | —                |       | —                  |       | — |   | 100 |   | (300 | ) |
| Net cash provided by  (used in) financing activities                                                |       | 60,500                |       | 1,436,737               |       | — |   | (24,000 | ) | (110,200 | ) |
|                                                                                                |       |                  |       |                    |       |   |   |   |   |   |   |
| Net change in cash and  cash equivalents                                                            |       | (5,569                | )          | 10,321                  |       | — |   | 500 |   | 800 |   |
| Cash and cash  equivalents, beginning of period                                                     |       | 10,321                |       | —                  |       | — |   | 1,200 |   | 400 |   |
|                                                                                                |       |                  |       |                    |       |   |   |   |   |   |   |
| Cash and cash equivalents, end of period                                                            |       | $                     | 4,752      |                    | $          | 10,321 |   | $ | — |   | $ | 1,700 |   | $ | 1,200 |   |

 

See accompanyingnotes to consolidated financial statements.

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**Hawaiian Telcom Communications,Inc.**

**ConsolidatedStatements of Changes in Stockholder’s Equity (Deficiency)**

**(Dollars in thousands)**

 
|                                                                      | ** ** | ** **            | ** ** | ** **       | ** ** | ** **        | ** ** | **Accumulated** | ** ** | ** **  | ** ** | **Total**              | ** ** |
|----------------------------------------------------------------------|------------|-----------------------|------------|------------------|------------|-------------------|------------|-----------------|------------|-------------|------------|------------------------|------------|
| ** **                                                           | ** ** | ** **            | ** ** | ** **       | ** ** | **Additional**    | ** ** | **Other**       | ** ** | ** **  | ** ** | **Stockholder’s** | ** ** |
| ** **                                                           | ** ** | **Common Stock** | ** ** | **Paid—In** | ** ** | **Comprehensive** | ** ** | **Accumulated** | ** ** | **Equity**  | ** ** |
| ** **                                                           | ** ** | **Shares**            | ** ** | **Amount**       | ** ** | **Capital**       | ** ** | **Income**      | ** ** | **Deficit** | ** ** | **(Deficiency)**       | ** ** |
|                                                                 |       |                  |       |             |       |              |       |            |       |        |       |                   |       |
| Balance, May 21, 2004  (date of inception)                           |       | —                |       | $           | —     |              | $     | —          |       | $      | —     |                   | $     | — |   | $  | — |   |
|                                                                 |       |                  |       |             |       |              |       |            |       |        |       |                   |       |
| Loss for the period  ended December 31, 2004                         |       | —                |       | —           |       | —            |       | —          |       | (17,373     | )          | (17,373                | )          |
|                                                                 |       |                  |       |             |       |              |       |            |       |        |       |                   |       |
| Balance, December 31,  2004                                          |       | —                |       | —           |       | —            |       | —          |       | (17,373     | )          | (17,373                | )          |
|                                                                 |       |                  |       |             |       |              |       |            |       |        |       |                   |       |
| Issuance of common  stock                                            |       | 1,000                 |       | —           |       | 428,000           |       | —          |       | —      |       | 428,000                |       |
|                                                                 |       |                  |       |             |       |              |       |            |       |        |       |                   |       |
| For the year ended ended  December 31, 2005:                         |       |                  |       |             |       |              |       |            |       |        |       |                   |       |
| Net loss                                                             |       | —                |       | —           |       | —            |       | —          |       | (175,705    | )          | (175,705               | )          |
| Other  comprehensive income - Gains on cash flow hedging derivatives |       | —                |       | —           |       | —            |       | 11,387          |       | —      |       | 11,387                 |       |
| Unrealized loss  on investments                                      |       | —                |       | —           |       | —            |       | (112            | )          | —      |       | (112                   | )          |
| Total other  comprehensive income                                    |       |                  |       |             |       |              |       |            |       |        |       | 11,275                 |       |
| Comprehensive  loss                                                  |       |                  |       |             |       |              |       |            |       |        |       | (164,430               | )          |
|                                                                 |       |                  |       |             |       |              |       |            |       |        |       |                   |       |
|                                                                 |       |                  |       |             |       |              |       |            |       |        |       |                   |       |
| Balance, December 31,  2005                                          |       | 1,000                 |       | —           |       | 428,000           |       | 11,275          |       | (193,078    | )          | 246,197                |       |
|                                                                 |       |                  |       |             |       |              |       |            |       |        |       |                   |       |
| Stock based  compensation                                            |       | —                |       | —           |       | 118               |       | —          |       | —      |       | 118                    |       |
|                                                                 |       |                  |       |             |       |              |       |            |       |        |       |                   |       |
| For the year ended ended  December 31, 2006:                         |       |                  |       |             |       |              |       |            |       |        |       |                   |       |
| Net loss                                                             |       | —                |       | —           |       | —            |       | —          |       | (144,637    | )          | (144,637               | )          |
| Other  comprehensive income - Gains on cash flow hedging derivatives |       | —                |       | —           |       | —            |       | 228             |       | —      |       | 228                    |       |
| Unrealized gain  on investments                                      |       | —                |       | —           |       | —            |       | 133             |       | —      |       | 133                    |       |
| Total other  comprehensive income                                    |       |                  |       |             |       |              |       |            |       |        |       | 361                    |       |
| Comprehensive  loss                                                  |       |                  |       |             |       |              |       |            |       |        |       | (144,276               | )          |
|                                                                 |       |                  |       |             |       |              |       |            |       |        |       |                   |       |
| Balance, December 31, 2006                                           |       | 1,000                 |       | $                | —     |              | $          | 428,118         |       | $           | 11,636     |                   | $          | (337,715 | ) | $ | 102,039 |   |

 

See accompanyingnotes to consolidated financial statements.

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**Hawaiian Telcom Communications,Inc.**

**Combined Statements of Changes inParent Funding - Predecessor**

**(Dollars in thousands)**

 
| Balance, January 1,  2004                                                      |   | $       | 419,200 |   |
|--------------------------------------------------------------------------------|--------|---------|---------|--------|
|                                                                           |   |    |    |
| Net income                                                                     |   | 36,900  |    |
|                                                                           |   |    |    |
| Net change due to  parent funding, allocations and intercompany reimbursements |   | (46,100 | )       |
|                                                                           |   |    |    |
| Balance, December 31,  2004                                                    |   | 410,000 |    |
|                                                                           |   |    |    |
| Net income                                                                     |   | 16,100  |    |
|                                                                           |   |    |    |
| Net change due to  parent funding, allocations and intercompany reimbursements |   | 259,700 |    |
|                                                                           |   |    |    |
| Balance, May 1, 2005                                                           |   | $       | 685,800 |   |

 

See accompanyingnotes to consolidated financial statements.

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**Hawaiian Telcom Communications,Inc.**

**Notes toConsolidated Financial Statements**

**(Dollarsin thousands)**

**1. Description of Business**

***BusinessDescription***

Hawaiian Telcom Communications, Inc. and subsidiaries(the “Company”) is the incumbent local exchange carrier for the State of Hawaiiand is estimated to be one of the ten largest incumbent local exchange carriersin the United States with an integrated telecommunications network servicingapproximately 603,000 switched access lines as of December 31, 2006. TheCompany also served approximately 277,000 long distance lines and had 90,000High Speed Internet connections as of December 31, 2006.

The Company provides a range of voice and datacommunication services to residential and commercial customers. Local telephoneservice is provided on each island in Hawaii and intraLATA (Local AccessTransport Area) toll service is provided among the islands. InterLATA tollservices between Hawaii and domestic points within the United States areprovided by long-distance carriers, which connect to the Company’s localfacilities for call origination and termination. Business and residentialcustomers also pay access charges to the Company to connect to the localnetwork to obtain long-distance service. In addition, the Company providespublishing services associated with printed and electronic telephonedirectories published in areas served by the Company; Internet access servicesfor customers located in Hawaii, including both High Speed Internet and remotedial-up for residential and business customers; long-distancetelecommunications services for interLATA and international toll trafficoriginating in Hawaii; and customer premise equipment sales and services. TheCompany offers *Hawaiian Telcom*® branded wireless services toresidential and commercial customers through a leased network.

The communication services the Company provides aresubject to regulation by the Public Utilities Commission of the State of Hawaii(“HPUC”) with respect to intrastate rates and services and other matters.Certain agreements with the HPUC limit the amount of dividends and otherdistributions the Company may pay as well as place restrictions on certaintransactions affecting the operations and capital structure of the Company.  The Federal Communication Commission (“FCC”)regulates rates that the Company charges long distance carriers and otherend-user subscribers for interstate access services and interstate traffic.

***Acquisition***

On May 21, 2004, the Company and Hawaiian TelcomHoldco, Inc. (“Holdco”), the parent of the Company, both new entities formed bythe private equity firm of The Carlyle Group (the “Sponsor”), entered into anAgreement of Merger, which was subsequently amended and restated on April 8,2005, with GTE and Verizon HoldCo LLC, both subsidiaries of VerizonCommunications Inc. (“Verizon”), to acquire Verizon’s Hawaii Business (the “Predecessor”).The merger was consummated on May 2, 2005 (the “Acquisition”).

***Organization***

With the Acquisition, the Company has two directsubsidiaries – Hawaiian Telcom, Inc. and Hawaiian Telcom Services Company, Inc.Hawaiian Telcom, Inc. operates the regulated local exchange carrier andHawaiian Telcom Services Company, Inc. operates all other businesses. HawaiianTelcom Insurance Company, Incorporated is a captive insurance subsidiary ofHawaiian Telcom, Inc. and, until December 31, 2003, provided auto liability,general liability and worker’s compensation insurance to its parent. Thecaptive subsidiary continues to settle claims related to incidents whichoccurred prior to January 1, 2004. The Company insures current incidents withexternal carriers.

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**2. Basis of Presentation**

The accompanying financial statements have beenprepared in accordance with accounting principles generally accepted in the UnitedStates of America.

***The Company***

The accompanying consolidated balance sheets as ofDecember 31, 2006 and 2005 and the related consolidated statements ofoperations, cash flows and changes in stockholder’s equity (deficiency) for theperiods ended December 31, 2006, 2005 and 2004 include the consolidatedfinancial position, results of operations and cash flows from inception of theCompany on May 21, 2004 and also include the results of Verizon’s HawaiiBusiness (defined below) from the May 2, 2005 acquisition date. The historicalfinancial statements of the Predecessor are included in the accompanyingconsolidated financial statements including the combined statements ofoperations, parent funding and cash flows for the period from January 1, 2005to May 1, 2005, and the year ended December 31, 2004. The Predecessor financialstatements have not been adjusted to give effect to the Acquisition.Accordingly, the accompanying consolidated financial statements of the Companyare not comparable to the Predecessor financial statements.

***The Predecessor***

The Predecessor financial statements include theactivities of Verizon conducted in Hawaii, with certain exceptions. Verizon’sHawaii Business was comprised of Verizon Hawaii Inc. (now Hawaiian Telcom,Inc.) and carved-out components of Verizon Information Services (“VIS”),GTE.NET LLC (dba Verizon Online) (“VOL”), Bell Atlantic Communications Inc.(dba Verizon Long Distance) (“VLD”) and Verizon Select Services, Inc. (“VSSI”)(collectively, the “Hawaii Business”). To prepare these statements, managementof Verizon specifically identified, assigned or apportioned revenues andexpenses of Verizon to the Hawaii Business. However, because of the HawaiiBusiness’s relationship with Verizon and its other affiliates, the revenues andexpenses are not necessarily indicative of what they would have been had theHawaii Business operated without the shared resources of Verizon and itsaffiliates. Accordingly, these Predecessor financial statements are notnecessarily indicative of future results of operations.

***The Subsidiary andParent Guarantors***

Hawaiian Telcom, Inc. and Hawaiian Telcom ServicesCompany, Inc. guarantee the senior notes and the notes payable to banks (seeNote 8). Financial statements of the subsidiary guarantors have not beenpresented as Hawaiian Telcom Communications, Inc. has no independent assets oroperations, the guarantees are full and unconditional and joint and several,and the assets of Hawaiian Telcom Insurance Company, Incorporated, which areexcluded from the guarantee, are not significant.

Holdco, the Company’s parent, also is a guarantor forthe notes payable to banks. Financial statements of Holdco have not beenpresented as it has no independent assets, liabilities or operations and theguarantees are full and unconditional and joint and several.

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**3. Summary of Significant AccountingPolicies**

***Use of Estimates***

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenue and expenses during the reporting periods. Actual results could differfrom those estimates.

***Principles ofConsolidation***

The consolidated financial statements of the Companyinclude the results of operations, financial position, and cash flows ofHawaiian Telcom Communications, Inc. and its wholly-owned subsidiaries. Allintercompany balances and transactions have been eliminated in consolidation.

***Revenue Recognition***

Revenue is recognized when evidence of an arrangementexists, the earnings process is complete and collectibility is reasonablyassured. The prices for most services are filed in tariffs with the regulatorybody that exercises jurisdiction over the services.

Basic local service, enhanced calling features such ascaller ID, special access circuits, long distance flat rate calling plans, mostdata services and wireless services are billed one month in advance. Revenuefor these services is recognized in the month services are rendered. Theportion of advance-billed services associated with services that will bedelivered in a subsequent period is deferred and recorded as a liability inadvance billings and customer deposits.

Amounts billed to customers for activating wirelineservice are deferred and recognized over the average customer relationship. Thecosts associated with activating such services are deferred and recognized asan operating expense over the same period. Costs in excess of revenues arerecognized as expense in the period in which activation occurs.

Revenues for providing usage based services, such asper-minute long distance service and access charges billed to long distancecompanies for originating and terminating long distance calls on the Company’snetwork, are billed in arrears. Revenues for these services are estimated basedon actual rated usage and, where necessary, historical usage patterns, and arerecognized in the month services are rendered.

Universal Service revenues are government-sponsoredsupport received in association with providing service in mostly rural,high-cost areas. These revenues are typically based on information provided bythe Company and are calculated by the government agency responsible foradministering the support program. These revenues are recognized in the periodthe service is provided.

Telephone equipment revenues generated from retailchannels are recorded at the point of sale. Telecommunication systems andstructured cabling project revenues are recognized on a percentage completionbasis except for short duration projects which are recognized upon completionof the project. Maintenance services are recorded when the service is provided.

The Company recognizes publishing revenue and relatedexpenses on a straight-line method over the twelve month period in which thecorresponding directory is distributed. The Company recognizes the revenue fromthe sale and maintenance of customer premises equipment in the period the saleor service is rendered.

***Cash and CashEquivalents***

For purposes of reporting cash flows, cash and cashequivalents include cash and money market accounts with maturities atacquisition of three months or less.

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***Receivables***

The Company makes estimates of the uncollectibility ofits accounts receivables by specifically analyzing accounts receivables andhistoric bad debts, customer concentrations, customer creditworthiness, currenteconomic trends and changes in its customer payment terms when evaluating theadequacy of the allowance for doubtful accounts.

***Material andSupplies***

Material and supplies which consists mainly of cable,supplies and replacement parts, are stated at the lower of cost, determinedprincipally by the average cost method, or net realizable value.

***Property andDepreciation***

Property, plant and equipment are carried at cost.Depreciation has been calculated using the composite remaining life methodologyand straight-line depreciation rates. The composite method depreciates theremaining net investment in telephone plant over remaining economic asset livesby asset category. This method requires periodic review and revision ofdepreciation rates. The average economic lives utilized for assets acquiredfrom Verizon are as follows: buildings – 34 years; cable and wire – 5 to 18years; switching and circuit equipment – 1 to 12 years; and other property – 1to 20 years. The average economic lives for all other assets (i.e., primarilynew additions) are as follows: building – 34 years; cable and wire – 11 to 37years; switching and circuit equipment – 6 to 14 years; and other property – 5to 17 years.

***Software***

The Company capitalizes the costs associated withexternally acquired software for internal use. Project costs associated withinternally developed software are segregated into three project stages:preliminary project stage, application development stage andpost-implementation stage. Costs associated with both the preliminary projectstage and post-implementation stage are expensed as incurred. Costs associatedwith the application development stage are capitalized. Software maintenanceand training costs are expensed as incurred. Capitalized software is generallyamortized on a straight-line method basis over its useful life, not to exceedfive years.

***Goodwill and OtherIntangible Assets***

Goodwill and indefinite-lived intangibles assets arenot amortized. Such assets are reviewed annually, or more frequently undervarious conditions, for impairment. Impairment occurs when the fair value ofthe asset is less than the carrying value. The Company performs its annualgoodwill impairment test during the fourth quarter, primarily using a discountedcash flow methodology. Intangible assets with definite lives, including thevalue assigned to the customer base at the date of acquisition, are beingamortized over the remaining estimated lives. For customer relationshipintangibles, amortization is calculated using a declining balance method inrelation to estimated retention lives of acquired customers.

***Impairment ofLong-Lived Assets***

The Company assesses the recoverability of long-livedassets, including property, plant and equipment and definite-lived intangibleassets, whenever events or changes in circumstances indicate that the carryingamount of an asset may not be recoverable. In such cases, if the sum of theexpected cash flows, undiscounted and without interest, resulting from use ofthe asset are less than the carrying amount, an impairment loss is recognizedbased on the difference between the carrying amount and the fair value of theassets. No impairment loss has been recognized to date.

***Debt Issuance***

Deferred financing costs are amortized over the termof the related debt issuance.

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***DerivativeFinancial Instruments***

The Company accounts for all derivative financialinstruments, such as interest rate swap agreements, by recognizing thederivative on the balance sheet at fair value, regardless of the purpose orintent of holding them.  In addition, forderivative instruments that qualify for hedge accounting, changes in the fairvalue will either be offset against the change in the fair value of the hedgedassets, liabilities, or firm commitment through earnings or recognized instockholder’s equity as a component of accumulated other comprehensive incomeuntil the hedged item is recognized in earnings, depending on whether thederivative is being used to hedge changes in fair value or cash flows. TheCompany measures hedge effectiveness by formally assessing, at least quarterly,the historical and probable future high correlation of changes in the fairvalue of expected future cash flows of the hedged item. The ineffective portionof a derivative’s change in fair value will be immediately recognized in otherincome or expense.

***Income Taxes***

Deferred tax assets and liabilities are determinedbased on the differences between the financial reporting and tax bases ofassets and liabilities at each balance sheet date using enacted tax ratesexpected to be in effect in the year the differences are expected to reverse.Deferred tax assets are reduced by a valuation allowance to the extent that itis unlikely they will be realized.

***Employee BenefitPlans***

Pension and postretirement health care and lifeinsurance benefits earned during the year as well as interest on projectedbenefit obligations are accrued currently. Prior service costs and creditsresulting from changes in plan benefits are amortized over the averageremaining service period of the employees expected to receive benefits.

***Maintenance andRepairs***

The cost of maintenance and repairs, including thecost of replacing minor items not constituting substantial betterments, ischarged to expense as these costs are incurred.

***Advertising***

Advertising costs are expensed as incurred.Advertising expense for the Company amounted to $8,223 and $14,311 for theyears ended December 31, 2006 and 2005, respectively, and $278 for the periodfrom May 21, 2004 to December 31, 2004. For the Predecessor, advertisingexpense amounted to $400 for the period from January 1, 2005 to May 1, 2005,and $1,900 for the year ended December 31, 2004. Limited advertising expensewas incurred by the Predecessor given the nationwide nature of the Verizonfranchise.

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***Stock BasedCompensation***

Effective January 1, 2006, the Company adopted thefair value recognition provisions of Statement of Financial AccountingStandards (“SFAS”) No. 123(R), “Share-Based Payment” using the prospectivemethod to all new awards granted, modified or settled after January 1,2006.  The following table illustratesthe effect of the net loss for the years ended December 31, 2006 and 2005 ifthe fair value method had been applied to all outstanding and unvested options(see Note 12):
|                                                                               | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                    | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| Net loss, as  reported                                                        |       | $                                          | (144,637   | ) | $ | (175,705 | ) |
| Add: Stock  option related employee compensation expense included in net loss |       | 118                                        |       | — |   |
| Deduct:  Stock-based compensation expense under the fair value based method   |       | (1,911                                     | )          | (2,834 | ) |
|                                                                          |       |                                       |       |   |   |
| Pro forma net  loss                                                           |       | $                                          | (146,430   | ) | $ | (178,539 | ) |

 

Theimpact of stock based compensation was not significant for the Predecessor.

***Earnings per Share***

Because the Company has one shareholder, Holdco, andhas no common stock trading in a public market, information on earnings (loss)per share is not meaningful and has not been presented.

***PredecessorFinancial Statements***

Historically, financial statements had not beenprepared for the Hawaii Business as it had no separate legal existence. Thecombined Predecessor financial statements include the accounts of VerizonHawaii Inc. and its subsidiary, as well as printed directory, digitalsubscriber line, Internet access, long distance and customer premise equipmentservices provided to customers in the State of Hawaii.  The preparation of financial informationrelated to the operations of VIS, VOL, VLD and VSSI in Hawaii was based on thefollowing:

VIS: Revenues were identified using applicable billingsystem data. Cost of services and sales were identified based upon acombination of direct cost for Hawaii sales and information from the job ordercosting system. Selling, general, and administrative expenses were allocatedbased upon the percentage of total VIS selling, general, and administrativeexpenses to total VIS revenues applied to the VIS revenue component of theHawaii Business.

VOL: Revenues were determined using applicable billingsystem data and average access lines in service. Cost of services and saleswere allocated based on the ratio of average Hawaii VOL access lines to totalVOL access lines applied to VOL operating expenses. Selling, general andadministrative expenses were allocated based on the ratio of Hawaii Businessrevenues related to the VOL component to total VOL revenues applied to totalVOL selling, general and administrative expenses.

VLD: Revenues were determined using applicable billingsystem data. Cost of sales and services and selling, general and administrativeexpenses were allocated based on the ratio of Hawaii Business revenue relatedto the VLD component to total VLD revenues applied to operating expenses fortotal VLD.

VSSI: Revenues were identified using applicablebilling system data.  Cost of sales andservices and selling, general and administrative expenses were allocated basedon the ratio of Hawaii Business revenue related to the VSSI component to totalVSSI revenues applied to operating expenses for total VSSI.

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Management of Verizon believes the allocations used todetermine selected amounts in the financial statements are appropriate methodsto reasonably reflect the related revenues and expenses of the Hawaii Business.

***Recently IssuedAccounting Pronouncements***

In February 2007, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities” which allows entities to choose to measure manyfinancial instruments and certain other assets and liabilities at fairvalue.  The Company is in the process ofevaluating the impact this standard will have on its financial statements.  This standard is effective for the Company’sfiscal year beginning January 1, 2008.

In September 2006, the FASB issued SFAS No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans, anamendment of FASB Statements No. 87, 88, 106, and 132(R).”  Under this new standard, companies mustrecognize a net liability or asset to report the funded status of their definedbenefit pension and other postretirement benefit plans on their balancesheets.  The change in the funded statusis to be recognized through comprehensive income the year in which the changeoccurs.  In addition, companies arerequired to obtain the measurement of defined benefit plan assets andobligations as of the date of its fiscal year-end statement of financialposition.  The Company is in the processof evaluating the impact this standard will have on its financial statements.  This standard is effective for the Company asof the end of its fiscal year ending December 31, 2007.

In September 2006, the FASB issued SFAS No. 157, “FairValue Measurements.”  SFAS No. 157provides a common definition for fair value under generally accepted accountingprinciples, establishes a framework for measuring fair value and expandsdisclosure requirements for fair value measurements.  The Company is in the process of evaluatingthe impact this standard will have on its financial statements.  This standard is effective for the Company’sfiscal year beginning January 1, 2008.

In June 2006, the FASB issued FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASBStatement No. 109.”  The Company is inthe process of assessing the impact this interpretation will have on itsfinancial statements.  ThisInterpretation provides a threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken.  It also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition.  ThisInterpretation became effective for the Company on January 1, 2007.

In March 2006, the FASB’s Emerging Issues Task Force(EITF) issued Issue 06-03, “How Sales Taxes Collected From Customers andRemitted to Governmental Authorities Should Be Presented in the IncomeStatement.”  The Company is in theprocess of assessing the impact this will have on its financialstatements.  Under the guidance, theentity can chose to adopt a policy of presenting sales taxes in the incomestatement on a gross or net basis.  Thepolicy should be disclosed if taxes are significant.  EITF 06-03 became effective for the Companyon January 1, 2007.

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**4. Receivables**

Receivables consist of the following:
|                                         | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2006**              | ** ** | **2005** | ** ** |
|                                    |       |                  |       |   |   |
| Customers and  other                    |       | $                     | 106,426    |   | $ | 87,098 |   |
| Receivable from  BearingPoint (Note 15) |       | 24,129                |       | — |   |
| Other  receivables from Verizon         |       | —                |       | 1,559 |   |
| Allowance for doubtful  accounts        |       | (30,185               | )          | (9,717 | ) |
|                                    |       |                  |       |   |   |
| Total                                   |       | $                     | 100,370    |   | $ | 78,940 |   |

 

The Company grants credit to customers in the normalcourse of business. At December 31, 2006, the Company did not have any customerbalances representing more than 10% of total receivables other than thereceivable due from BearingPoint.  AtDecember 31, 2005, the Company did not have any customer balances representingmore than 10% of total receivables. During the periods ended December 31, 2006,2005 and 2004, the Company and the Predecessor had no customers thatrepresented more than 10% of total revenues.

The following is a summary of activity for theallowance for doubtful accounts:
| ** **                            | ** ** | ** **    | ** ** | ** **           | ** ** | **Additional**      | ** ** | ** **     | ** ** | ** **  | ** ** |
|---------------------------------------|------------|---------------|------------|----------------------|------------|---------------------|------------|----------------|------------|-------------|------------|
| ** **                            | ** ** | ** **    | ** ** | **Acquisition**      | ** ** | **Charges to** | ** ** | **Deductions** | ** ** | ** **  | ** ** |
| ** **                            | ** ** | **Beginning** | ** ** | **and Related** | ** ** | **Costs and**  | ** ** | **from**       | ** ** | **Ending**  | ** ** |
| ** **                            | ** ** | **Balance**   | ** ** | **Adjustments**      | ** ** | **Expenses**        | ** ** | **Allowance**  | ** ** | **Balance** | ** ** |
|                                  |       |          |       |                 |       |                |       |           |       |        |       |
| Predecessor:                          |       |          |       |                 |       |                |       |           |       |        |       |
| Year ended  December 31, 2004         |       | $             | 14,000     |                 | $          | —              |       | $              | 3,300      |        | $          | (10,300 | ) | $ | 7,000 |   |
| Period from  January 1 to May 1, 2005 |       | 7,000         |       | —               |       | 1,000               |       | (2,800         | )          | 5,200       |       |
|                                  |       |          |       |                 |       |                |       |           |       |        |       |
| Company:                              |       |          |       |                 |       |                |       |           |       |        |       |
| Year ended  December 31, 2005         |       | —        |       | 7,854                |       | 5,827               |       | (3,964         | )          | 9,717       |       |
| Year ended December 31,  2006         |       | 9,717         |       | 2,000                |       | 25,563              |       | (7,095         | )          | 30,185      |       |
|                                       |            |               |            |                      |            |                     |            |                |            |             |            |  |  |  |  |  |

 

**5. Property, Plant and Equipment**

Property, plant and equipment consist of the following:
|                                                 | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2006**              | ** ** | **2005** | ** ** |
|                                            |       |                  |       |   |   |
| Land                                            |       | $                     | 57,997     |   | $ | 58,000 |   |
| Buildings                                       |       | 108,205               |       | 104,000 |   |
| Central office  equipment                       |       | 280,596               |       | 257,128 |   |
| Outside  communications plant                   |       | 375,366               |       | 359,455 |   |
| Furniture,  vehicles and other work equipment   |       | 27,453                |       | 14,614 |   |
| Construction in  progress                       |       | 35,810                |       | 15,714 |   |
| Software,  including under development          |       | 85,065                |       | 67,669 |   |
| Other                                           |       | 3,877                 |       | 3,605 |   |
|                                            |       | 974,369               |       | 880,185 |   |
| Less accumulated  depreciation and amortization |       | 156,197               |       | 62,852 |   |
|                                            |       |                  |       |   |   |
| Total property,  plant and equipment, net       |       | $                     | 818,172    |   | $ | 817,333 |   |

 

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**6. Goodwill and Intangible Assets**

The excess purchase price paid by the Company over itsestimates of the fair values of tangible assets and liabilities of Verizon’sHawaii Business amounted to $692,100 of identifiable intangible assets and$136,779 of goodwill.

The gross carrying amount and accumulated amortizationof identifiable intangible assets are as follows:
| ** **                        | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **Gross**                       | ** ** | ** **                      | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Carrying**                    | ** ** | **Accumulated**                 | ** ** | **Net Carrying** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Net Carrying** | ** ** |
| ** **                        | ** ** | **Value**                       | ** ** | **Amortization**                | ** ** | **Value** | ** ** | **Value** | ** ** | **Amortization** | ** ** | **Value** | ** ** |
|                              |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Subject to  amortization:         |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Customer relationships            |       | $                               | 561,100    |                            | $          | 105,547 |   | $ | 455,553 |   | $ | 561,100 |   | $ | 43,568 |   | $ | 517,532 |   |
| Covenant not to compete           |       | 4,000                           |       | 3,333                           |       | 667 |   | 4,000 |   | 1,333 |   | 2,667 |   |
|                              |       | 565,100                         |       | 108,880                         |       | 456,220 |   | 565,100 |   | 44,901 |   | 520,199 |   |
| Not subject to  amortization:     |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Franchise for street right of way |       | 88,400                          |       | —                          |       | 88,400 |   | 88,400 |   | — |   | 88,400 |   |
| Brand name                        |       | 38,600                          |       | —                          |       | 38,600 |   | 38,600 |   | — |   | 38,600 |   |
|                              |       | 127,000                         |       | —                          |       | 127,000 |   | 127,000 |   | — |   | 127,000 |   |
|                              |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
|                              |       | $                               | 692,100    |                            | $          | 108,880 |   | $ | 583,220 |   | $ | 692,100 |   | $ | 44,901 |   | $ | 647,199 |   |

 

The estimated usefullives for intangibles subject to amortization were as follows:
|                              | ** ** | ** **    | ** ** | **Weighted** | ** ** |
|------------------------------|------------|---------------|------------|--------------|------------|
| ** **                   | ** ** | ** **    | ** ** | **Average**  | ** ** |
| ** **                   | ** ** | **Life**      | ** ** | **Life**     | ** ** |
|                         |       |          |       |         |       |
| Customer  relationships      |       | 8 -  15 years |       | 13  years    |       |
| Covenant not to  compete     |       | 2  years      |       | 2  years     |       |
| All amortizable  intangibles |       |          |       | 13 years     |       |

 

The determination of useful lives for customerrelationships was made based on historical and expected customer attritionrates.

Amortization expense amounted to $63,979 and $44,901for the years ended December 31, 2006 and 2005, respectively. Estimatedamortization expense for the next five years and thereafter is:
| 2007       |   | $       | 57,911  |   |
|------------|--------|---------|---------|--------|
| 2008       |   | 52,961  |    |
| 2009       |   | 49,074  |    |
| 2010       |   | 45,539  |    |
| 2011       |   | 42,316  |    |
| Thereafter |   | 208,419 |    |
|       |   |    |    |
|       |   | $       | 456,220 |   |

 

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**7. Current Liabilities**

Accrued expenses consist of the following:
|                        | ** ** | **December 31,** | ** ** |
|------------------------|------------|-----------------------|------------|
| ** **             | ** ** | **2006**              | ** ** | **2005** | ** ** |
|                   |       |                  |       |   |   |
| Salaries and  benefits |       | $                     | 12,142     |   | $ | 13,273 |   |
| Other taxes            |       | 1,496                 |       | 1,738 |   |
| Interest               |       | 10,303                |       | 17,561 |   |
|                   |       |                  |       |   |   |
|                   |       | $                     | 23,941     |   | $ | 32,572 |   |

 

**8. Long-Term Debt**

Long-term debt is comprised of the following:
| ** **                                         | ** ** | **Interest**      | ** ** | ** **         | ** ** | ** **            | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|-------------------|------------|--------------------|------------|-----------------------|------------|------------|------------|
| ** **                                         | ** ** | **Rate at**  | ** ** | ** **         | ** ** | ** **            | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **December**      | ** ** | **Final**          | ** ** | **December 31,** | ** ** |
| ** **                                         | ** ** | **31, 2006** | ** ** | **Maturity**       | ** ** | **2006**              | ** ** | **2005**   | ** ** |
|                                               |       |              |       |               |       |                  |       |       |       |
| Notes payable to banks,  revolving credit facility |       | 7.60              | %          | April  30, 2012    |       | $                     | 160,000    |       | $          | 96,500 |   |
| Notes payable to banks,  Tranche A term loan       |       | 7.62              | %          | April  30, 2012    |       | 300,000               |       | —     |       |
| Notes payable to banks,  Tranche B term loan       |       | 7.62              | %          | October  31, 2012  |       | 447,000               |       | 450,000    |       |
| Existing debentures,  Series A                     |       | NA                |       | February  1, 2006  |       | —                |       | 150,000    |       |
| Existing debentures,  Series B                     |       | NA                |       | September  1, 2006 |       | —                |       | 150,000    |       |
| Senior floating rate  notes                        |       | 10.89             | %          | May  1, 2013       |       | 150,000               |       | 150,000    |       |
| Senior fixed rate notes                            |       | 9.75              | %          | May  1, 2013       |       | 200,000               |       | 200,000    |       |
| Senior subordinated  notes                         |       | 12.50             | %          | May  1, 2015       |       | 150,000               |       | 150,000    |       |
|                                               |       |              |       |               |       | 1,407,000             |       | 1,346,500  |       |
| Current portion                                    |       |              |       |               |       | 26,500                |       | 3,000      |       |
|                                               |       |              |       |               |       |                  |       |       |       |
|                                               |       |              |       |               |       | $                     | 1,380,500  |       | $          | 1,343,500 |   |

 

***Notes Payable to Banks***

The revolving credit facility has a principal balanceof $200,000 which will mature on April 30, 2012. As of December 31, 2006, theavailable balance on the facility amounted to $39,800 (subject to covenantsdescribed below and a $200 outstanding letter of credit).

The term loan facilities are comprised of a Tranche Aterm loan facility in a total principal amount of $300,000 and a Tranche B termloan facility in the total principal amount of $450,000. Borrowings under theTranche A term loan facility were used to fund the repayment of the ExistingDebentures. The Tranche A term loan facility will mature on April 30, 2012 andwill amortize with quarterly principal payments beginning June 30, 2007 rangingfrom $7,500 to $22,500. The Tranche B term loan facility will mature on October31, 2012 and amortizes with quarterly installments amounting to $1,000. TheCompany is required to prepay outstanding loans with the net proceeds ofcertain asset dispositions and incurrences of certain debt and 50% of theexcess cash flow unless a certain senior secured leverage ratio is met.

The obligations under the bank credit facilities areguaranteed by Holdco and each subsidiary with certain exceptions. In addition,the bank credit facilities are collateralized by substantially all of theCompany’s assets.

72

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Borrowings under the bank credit facilities bearinterest at a rate equal to the applicable margin plus, at the Company’soption, either: (i) a bank base rate determined by reference to the higher of aselected bank prime rate or the federal funds rate plus 1/2 of 1%; or (ii) aEurocurrency rate on deposits of one-, two-, three- or six-month periods. Theapplicable margin on loans under the revolving credit facility and the TrancheA term loan facility are subject to change depending on leverage ratios.

A commitment fee is payable to the lenders under therevolving credit facility. The commitment fee is subject to change depending onthe leverage ratio.

The bank credit facilities contain various negativeand affirmative covenants that restrict, among other things, incurrence ofadditional indebtedness, payment of dividends, redemptions of stock, otherdistributions to shareholders and sales of assets. In addition, there arefinancial covenants and ratios that include a leverage ratio, a senior securedleverage ratio, and an interest coverage ratio.

***Existing Debentures***

The Existing Debentures Series A matured on February1, 2006 and the Series B matured on September 1, 2006.  The Existing Debentures were repaid using theTranche A term loan facility.

***Senior Notes***

The senior floating rate notes in the aggregateprincipal amount of $150,000 mature on May 1, 2013 and bear interest at a ratereset and payable semi-annually at LIBOR, as defined, plus 5.50%. The seniorfixed rate notes in the aggregate principal amount of $200,000 mature on May 1,2013 and bear interest at a rate of 9.75% per year. The senior subordinatednotes in the aggregate principal amount of $150,000 will mature on May 1, 2015and bear interest at a rate of 12.50% per year. The senior notes are generalunsecured obligations. A portion or all of the senior notes may be redeemed atvarious dates beginning May 1, 2007 at certain premiums based on specifiedterms. The senior notes contain various covenants that restrict among otherthings incurrence of additional indebtedness, payment of dividends, redemptionsof stock, other distributions to shareholders and sales of assets. The seniornotes are guaranteed by each of the Company’s subsidiaries with certainexceptions.

In conjunction with the issuance of the senior notesin May 2005, certain underwriters provided a commitment to the Company for abridge loan which was available if the senior notes could not be placed. Thecommitment expired with the issuance of the notes. At that time, the relatedfee of $5,250 was recognized as a component of interest expense.

***Maturities***

The annual requirements for principal payments on suchlong-term debt are as follows:
| Year ended December 31, |   |      |      |
|-------------------------|--------|-----------|-----------|
| 2007                    |   | $         | 26,500    |   |
| 2008                    |   | 49,000    |      |
| 2009                    |   | 49,000    |      |
| 2010                    |   | 79,000    |      |
| 2011                    |   | 94,000    |      |
| Thereafter              |   | 1,109,500 |      |
|                    |   | $         | 1,407,000 |   |

 

***CapitalizedInterest***

Interest capitalized by the Company amounted to $2,775and $2,006 during the years ended December 31, 2006 and 2005, respectively.Interest capitalized by the Predecessor amounted to $100 during the period fromJanuary 1, 2005 to May 1, 2005, and $100 for the year ended December 31, 2004.

73

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**9. Derivative Instruments and HedgingActivities**

The Company utilizes a combination of fixed-rate andvariable-rate debt to finance its operations. The variable-rate debt exposesthe Company to variability in interest payments due to changes in interestrates.  Management believes that it isprudent to mitigate the interest rate risk on a portion of its variable-rateborrowings. To meet this objective, management entered into six interest rateswap agreements to manage fluctuations in cash flows resulting from adversechanges in interest rates on its term loans and notes. The interest rate swapseffectively change the variable-rate cash flow exposure on the debt obligationsto fixed cash flows. Under the terms of the interest rate swaps, the Companyreceives fluctuating interest rate payments and makes fixed rate payments,thereby creating the equivalent of fixed-rate interest payments. The Companydoes not enter into derivative instruments for any purpose other thancash-flow-hedging purposes and, accordingly, does not speculate usingderivative financial instruments.

The interest rate swap agreements have a cumulativenotional amount that ranges from $451,400 at June 30, 2005, to a high of$704,300 at September 30, 2006, to a balance of $252,975 at maturity onDecember 31, 2010.  The fixed rate is3.98% for the period from June 30, 2005 to December 30, 2006 and 4.36% fromDecember 31, 2006 to December 31, 2010.

Changes in the fair value of interest rate swapsdesignated as hedging instruments that effectively offset the variability ofcash flows associated with the Company’s variable-rate debt obligations arereported in accumulated other comprehensive income. These amounts aresubsequently reclassified into interest expense as a yield adjustment of thehedged interest payment in the same period in which the related interestpayments affect earnings. During the years ended December 31, 2006 and 2005,the Company had $228 and $11,387, respectively, of unrealized gains included inother comprehensive income. The fair value of the interest rate swap of $11,615and $11,387 is included in other assets on the consolidated balance sheet atDecember 31, 2006 and 2005, respectively. The estimated amount of pre tax gainsincluded in accumulated other comprehensive income as of December 31, 2006 thatis expected to be reclassified into earnings during the year ended December 31,2007 amounted to $5,667.

**10. Employee Benefit Plans**

***Pension and OtherPostretirement Benefits***

The Company sponsors a defined benefit pension planand postretirement medical and life insurance benefits for union employees. TheCompany also sponsors a cash balance pension plan for nonunion employees.  Nonunion Company employees with 10 or moreyears of service with Verizon as of January 1, 2002 will, upon retirement,receive the higher of the cash balance benefit or an actuarially determineddefined pension benefit.  NonunionCompany employees hired by Verizon prior to January 1, 2005 are also entitledto postretirement medical benefits.

The plans were all adopted effective May 2, 2005 withfeatures similar to those maintained by Verizon. All individuals who becameemployees of the Company in connection with the Acquisition and who previouslyparticipated in the Verizon plans now participate in the Company’s plans.Employees of Verizon’s Hawaii Business who retired prior to the date of theacquisition became retirees of Verizon and, as such, receive benefits under theVerizon plans. The actuarially determined liabilities of the Verizon unionpension plan amounting to approximately $200,000 attributable to individualsthat became employees of the Company as of the date of the Acquisition wereassumed by the Company’s union pension plan. Pension trust assets from theVerizon union pension plan in a like amount were transferred to the Company’sunion pension trust.

In February 2007, theCompany announced that it would freeze benefits in the cash balance pensionplan for nonunion employees effective April 1, 2007.

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The change in projectedbenefit obligation, change in plan assets, funded status and weighted averageactuarial assumptions for the Company were as follows:
| ** **                                                         | ** ** | **Pension Benefits** | ** ** | **Other Postretirement Benefits** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------|------------|---------------------------------------------|------------|
| ** **                                                         | ** ** | **December 31,**     | ** ** | **December 31,**                       | ** ** |
| ** **                                                         | ** ** | **2006**                  | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| Change in projected  benefit obligation:                           |       |                      |       |                                        |       |   |   |   |   |
| Obligation at beginning  of year                                   |       | $                         | 210,727    |                                        | $          | — |   | $ | 35,315 |   | $ | — |   |
| Obligation acquired                                                |       | —                    |       | 200,650                                     |       | — |   | 33,033 |   |
| Service cost                                                       |       | 12,158                    |       | 8,062                                       |       | 1,598 |   | 1,251 |   |
| Interest cost                                                      |       | 11,272                    |       | 7,158                                       |       | 1,943 |   | 1,206 |   |
| Actuarial (gain) loss                                              |       | (8,313                    | )          | —                                      |       | (773 | ) | (175 | ) |
| Benefits paid                                                      |       | (31,462                   | )          | (5,143                                      | )          | (431 | ) | — |   |
| Obligation at end of  year                                         |       | 194,382                   |       | 210,727                                     |       | 37,652 |   | 35,315 |   |
|                                                               |       |                      |       |                                        |       |   |   |   |   |
| Change in plan assets:                                             |       |                      |       |                                        |       |   |   |   |   |
| Fair value of plan  assets at beginning of year                    |       | 204,155                   |       | —                                      |       | — |   | — |   |
| Fair value of assets  transferred effective May 2, 2005            |       | —                    |       | 198,850                                     |       | — |   | — |   |
| Actual return on plan  assets                                      |       | 24,274                    |       | 10,434                                      |       | — |   | — |   |
| Employer contributions                                             |       | 1,608                     |       | 14                                          |       | — |   | — |   |
| Benefits paid                                                      |       | (31,462                   | )          | (5,143                                      | )          | — |   | — |   |
| Fair value of plan  assets at end of year                          |       | 198,575                   |       | 204,155                                     |       | — |   | — |   |
|                                                               |       |                      |       |                                        |       |   |   |   |   |
| Funded status:                                                     |       |                      |       |                                        |       |   |   |   |   |
| Plan assets greater  than (less than) projected benefit obligation |       | 4,193                     |       | (6,572                                      | )          | (37,652 | ) | (35,315 | ) |
| Unrecognized actuarial  gain                                       |       | (16,467                   | )          | (2,057                                      | )          | (948 | ) | (175 | ) |
|                                                               |       |                      |       |                                        |       |   |   |   |   |
| Net amount recognized  (as employee benefit obligation)            |       | $                         | (12,274    | )                                           | $          | (8,629 | ) | $ | (38,600 | ) | $ | (35,490 | ) |
|                                                               |       |                      |       |                                        |       |   |   |   |   |
| Actuarial assumptions:                                             |       |                      |       |                                        |       |   |   |   |   |
| Discount rate                                                      |       | 5.75                      | %          | 5.50                                        | %          | 5.75 | % | 5.50 | % |
| Rate of compensation increase                                      |       | 3.50% to 5.00             | %          | 3.50% to 5.00                               | %          | NA |   | NA |   |

 

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Components of Company’sbenefit costs and weighted average actuarial assumptions were as follows:
| ** **                                         | ** ** | **Pension Benefits**                  | ** ** | **Other Postretirement Benefits** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                         | ** ** | **Year Ended December 31,** | ** ** | **Year Ended December 31,**  | ** ** |
| ** **                                         | ** ** | **2006**                                   | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                               |       |                                       |       |                                        |       |   |   |   |   |
| Service cost                                       |       | $                                          | 12,158     |                                        | $          | 8,062 |   | $ | 1,598 |   | $ | 1,251 |   |
| Interest cost                                      |       | 11,272                                     |       | 7,158                                       |       | 1,943 |   | 1,206 |   |
| Expected asset return                              |       | (16,177                                    | )          | (8,378                                      | )          | — |   | — |   |
| Net periodic benefit  cost                         |       | 7,253                                      |       | 6,842                                       |       | 3,541 |   | 2,457 |   |
| Settlement gain                                    |       | (2,000                                     | )          | —                                      |       | — |   | — |   |
|                                               |       |                                       |       |                                        |       |   |   |   |   |
| Total benefit cost                                 |       | $                                          | 5,253      |                                        | $          | 6,842 |   | $ | 3,541 |   | $ | 2,457 |   |
|                                               |       |                                       |       |                                        |       |   |   |   |   |
| Actuarial assumptions:                             |       |                                       |       |                                        |       |   |   |   |   |
| Discount rate                                      |       | 5.50                                       | %          | 5.50                                        | %          | 5.50 | % | 5.50 | % |
| Expected return on plan  assets                    |       | 8.00                                       | %          | 8.00                                        | %          | NA |   | NA |   |
| Long-term rate of  compensation increase           |       | 3.50% to 5.00                              | %          | 3.50% to 5.00                               | %          | NA |   | NA |   |
| Assumed health care  cost trend rate, current      |       | NA                                         |       | NA                                          |       | 10.00 | % | 10.00 | % |
| Assumed health care  cost trend rate, ultimate     |       | NA                                         |       | NA                                          |       | 5.00 | % | 5.00 | % |
| Assumed health care cost trend rate, ultimate year |       | NA                                         |       | NA                                          |       | 2011 |   | 2010 |   |

 

Benefits paid during 2006included lump sum payments resulting in deemed settlements of $30,659 and again on settlement of $2,000.

The measurement date forall plans was December 31, 2006 and 2005. The attributes of the Company’s pension plans were as follows:
| ** **                     | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **Plan Assets**            | ** ** | **Accumulated**                 | ** ** | ** ** | ** ** | **Plan Assets** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **in Excess of**      | ** ** | **Benefit**                     | ** ** | ** ** | ** ** | **in Excess of** | ** ** | **Benefit** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **Accumulated**                 | ** ** | **Obligation in**          | ** ** | ** ** | ** ** | **Accumulated** | ** ** | **Obligation in** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **Benefit**                     | ** ** | **Excess of**              | ** ** | ** ** | ** ** | **Benefit** | ** ** | **Excess of** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **Obligation**                  | ** ** | **Plan Assets**            | ** ** | **Total** | ** ** | **Obligation** | ** ** | **Plan Assets** | ** ** | **Total** | ** ** |
| Accumulated benefit obligation |       | $                          | 145,943    |                            | $     | 4,552 |   | $  | 150,495 |   | $  | 155,772 |   | $  | 1,453 |   | $  | 157,225 |   |
| Projected benefit obligation   |       | 188,955                         |       | 5,427                           |       | 194,382 |   | 207,084 |   | 3,643 |   | 210,727 |   |
| Fair value of plan assets      |       | 197,011                         |       | 1,564                           |       | 198,575 |   | 204,151 |   | 4 |   | 204,155 |   |
|                                |            |                                 |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The expected rate ofreturn on plan assets was based on various factors including historicalexperience and long-term inflation assumptions. The Company’s expectedlong-term rate of return on plan assets is determined using the targetallocation of assets which is based on the goal of earning the highest rate ofreturn while maintaining risk at acceptable levels. The plan strives to haveassets sufficiently diversified so that adverse or unexpected results from asecurity class will not have a significant adverse impact on the entireportfolio.

The weighted average actual asset allocations andweighted average target allocation by asset category for the Company’s pensionplans were as follows:
|                    | ** ** | ** **     | ** ** | **Allocation**       | ** ** | **Allocation**       | ** ** |
|--------------------|------------|----------------|------------|----------------------|------------|----------------------|------------|
| ** **         | ** ** | **Target**     | ** ** | **at December** | ** ** | **at December** | ** ** |
| ** **         | ** ** | **Allocation** | ** ** | **31, 2006**    | ** ** | **31, 2005**    | ** ** |
|  Equities     |       | 61             | %          | 62                   | %          | 59                   | %          |
|  Fixed income |       | 34             | %          | 33                   | %          | 32                   | %          |
|  Other        |       | 5              | %          | 5                    | %          | 9                    | %          |
|               |       |           |       |                 |       |                 |       |
|               |       | 100            | %          | 100                  | %          | 100                  | %          |

 

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The Company expects tocontribute $2,300 to its defined benefit pension plans in 2007.

The Company projects thatit will make the following benefit payments for the years ended December 31:
|                    | ** ** | ** **                   | ** ** | **Other**              | ** ** |
|--------------------|------------|------------------------------|------------|------------------------|------------|
| ** **         | ** ** | **Pension Plans’** | ** ** | **Postretirement**     | ** ** |
| ** **         | ** ** | **Benefits Paid**       | ** ** | **Benefits Paid** | ** ** |
|               |       |                         |       |                   |       |
| 2007               |       | $                            | 9,275      |                   | $          | 606 |   |
| 2008               |       | 10,921                       |       | 901                    |       |
| 2009               |       | 13,232                       |       | 1,232                  |       |
| 2010               |       | 15,319                       |       | 1,600                  |       |
| 2011               |       | 17,608                       |       | 1,990                  |       |
| 2012 through  2015 |       | 117,701                      |       | 14,944                 |       |
|               |       |                         |       |                   |       |
|               |       | $                            | 184,056    |                   | $          | 21,273 |   |

 

Assumed health care costtrend rates have a significant impact on the amounts reported for otherbenefits.  A one-percentage point changein the assumed health care cost trend rates would have the following annualeffects:
|                                                           | ** ** | **1-Percentage**        | ** ** | **1-Percentage**        | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                | ** ** | **Point Increase** | ** ** | **Point Decrease** | ** ** |
|                                                      |       |                    |       |                    |       |
| Effect on total  of service and interest costs components |       | $                       | 344        |                    | $          | (274 | ) |
| Effect on  postretirement benefit obligation              |       | 3,218                   |       | (2,595                  | )          |
|                                                           |            |                         |            |                         |            |  |  |

 

***PredecessorPension and Other Postretirement Benefits***

The structure of Verizon’sbenefit plans does not provide for separate determination of certaindisclosures for the Predecessor.

The components of thePredecessor’s pension benefit costs and weighted average actuarial assumptionsare summarized in the following table:
|                                     | ** ** | **Period From**       | ** ** | **Year Ended**   | ** ** |
|-------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **January 1 to** | ** ** | **December 31,** | ** ** |
| ** **                          | ** ** | **May 1, 2005**  | ** ** | **2004**              | ** ** |
|                                |       |                       |       |                  |       |
| Net periodic  benefit (income) cost |       | $                          | (6,089     | )                     | $          | (38,900 | ) |
| Settlement loss                     |       | —                     |       | 19,200                |       |
|                                |       |                       |       |                  |       |
| Total (income)  cost                |       | $                          | (6,089     | )                     | $          | (19,700 | ) |
|                                |       |                       |       |                  |       |
| Actuarial  assumptions:             |       |                       |       |                  |       |
| Discount rate                       |       | 5.75                       | %          | 6.25                  | %          |
| Expected return  on plan assets     |       | 8.50                       | %          | 8.50                  | %          |
| Rate of compensation  increase      |       | 5.00                       | %          | 5.00                  | %          |

 

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The components of thePredecessor’s other postretirement benefit costs and weighted average actuarialassumptions are summarized in the following table:
|                                                     | ** ** | **Period From**       | ** ** | **Year Ended**   | ** ** |
|-----------------------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | **January 1 to** | ** ** | **December 31,** | ** ** |
| ** **                                          | ** ** | **May 1, 2005**  | ** ** | **2004**              | ** ** |
|                                                |       |                       |       |                  |       |
| Total cost                                          |       | $                          | 5,839      |                  | $          | 16,300 |   |
|                                                |       |                       |       |                  |       |
| Actuarial  assumptions:                             |       |                       |       |                  |       |
| Discount rate                                       |       | 5.75                       | %          | 6.25                  | %          |
| Expected return  on plan assets                     |       | 8.00                       | %          | 8.00                  | %          |
| Rate of  compensation increase                      |       | 4.00                       | %          | 4.00                  | %          |
| Assumed health  care cost trend rate, current       |       | 10.00                      | %          | 10.00                 | %          |
| Assumed health  care cost trend rate, ultimate      |       | 5.00                       | %          | 5.00                  | %          |
| Assumed health care  cost trend rate, ultimate year |       | 2009                       |       | 2009                  |       |
|                                                     |            |                            |            |                       |            |  |  |

 

***401(k) Plan***

The Company participates in two 401(k) employeesavings plans which allow for voluntary contributions into designatedinvestment funds by eligible employees with the Company matching employeecontributions at the rate of 82% of the amount contributed up to a maximum of6% of compensation for union employees and 100% of the amount contributed to 4%of compensation and 50% of the amount contributed between 4% to 6% ofcompensation for non union employees. Company contributions were $3,978 and$1,881 for the years ended December 31, 2006 and 2005, respectively. For thePredecessor, contributions amounted to $960 for the period from January 1, 2005to May 1, 2005 and $3,200 for the year ended December 31, 2004.  The Company announced that it would freezebenefits in the cash balance pension plan effective April 1, 2007.  With this change, the Company will match nonunion employee contributions to the 401(k) plan at 100% up to a maximum of six6% of compensation.

**11.  Income Taxes**

The components of theincome tax provision are as follows:
|                                                         | ** ** | **Company**           | ** ** | **Predecessor**            | ** ** |
|---------------------------------------------------------|------------|-----------------------|------------|----------------------------|------------|
| ** **                                              | ** ** | **Year Ended**   | ** ** | **Period from**       | ** ** | **Year Ended** | ** ** |
| ** **                                              | ** ** | **December 31,** | ** ** | **January 1 to** | ** ** | **December 31,** | ** ** |
| ** **                                              | ** ** | **2006**              | ** ** | **2005**                   | ** ** | **May 1, 2005** | ** ** | **2004** | ** ** |
| Current                                                 |       |                  |       |                       |       |   |   |   |   |
| Federal                                                 |       | $                     | —     |                       | $          | — |   | $ | 17,200 |   | $ | 6,900 |   |
| State and local                                         |       | (118                  | )          | —                     |       | 3,200 |   | 5,500 |   |
|                                                    |       | (118                  | )          | —                     |       | 20,400 |   | 12,400 |   |
|                                                    |       |                  |       |                       |       |   |   |   |   |
| Deferred                                                |       |                  |       |                       |       |   |   |   |   |
| Federal                                                 |       | 5,200                 |       | 3,800                      |       | (9,000 | ) | 13,500 |   |
| State and local                                         |       | 1,000                 |       | 300                        |       | (2,000 | ) | (1,800 | ) |
|                                                    |       | 6,200                 |       | 4,100                      |       | (11,000 | ) | 11,700 |   |
| Total income tax  expense before investment tax credits |       | 6,082                 |       | 4,100                      |       | 9,400 |   | 24,100 |   |
| Investment tax  credits                                 |       | —                |       | —                     |       | (700 | ) | (3,600 | ) |
|                                                    |       |                  |       |                       |       |   |   |   |   |
| Total income tax  expense                               |       | $                     | 6,082      |                       | $          | 4,100 |   | $ | 8,700 |   | $ | 20,500 |   |

 

There was no tax provisionfor the Company for the period from May 21, 2004 to December 31, 2004.

78

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The provision for incometaxes differs from the amounts determined by applying the statutory federalincome tax rate of approximately 35% to income (loss) before income taxes forthe following reasons:
| ** **                                  | ** ** | **Company**           | ** ** | **Predecessor**         | ** ** |
|---------------------------------------------|------------|-----------------------|------------|-------------------------|------------|
| ** **                                  | ** ** | ** **            | ** ** | ** **              | ** ** | **Period from** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **Year Ended**   | ** ** | **May 21 to** | ** ** | **Period from** | ** ** | **Year Ended** | ** ** |
| ** **                                  | ** ** | **December 31,** | ** ** | **December 31,**   | ** ** | **January 1 to** | ** ** | **December 31,** | ** ** |
| ** **                                  | ** ** | **2006**              | ** ** | **2005**                | ** ** | **2004** | ** ** | **May 1, 2005** | ** ** | **2004** | ** ** |
|                                        |       |                  |       |                    |       |   |   |   |   |   |   |
| Expense (benefit) at  federal rate          |       | $                     | (48,494    | )                       | $          | (60,100 | ) | $ | (6,100 | ) | $ | 8,700 |   | $ | 20,100 |   |
| Increase (decrease)  resulting from:        |       |                  |       |                    |       |   |   |   |   |   |   |
| State income  taxes, net of federal benefit |       | (6,872                | )          | (5,100                  | )          | (500 | ) | 700 |   | 900 |   |
| Investment  credit                          |       | —                |       | —                  |       | — |   | — |   | (900 | ) |
| Other, net                                  |       | (552                  | )          | 300                     |       | — |   | — |   | 400 |   |
| Valuation  allowance                        |       | 62,000                |       | 69,000                  |       | 6,600 |   | (700 | ) | — |   |
|                                        |       |                  |       |                    |       |   |   |   |   |   |   |
| Total income tax expense                    |       | $                     | 6,082      |                    | $          | 4,100 |   | $ | — |   | $ | 8,700 |   | $ | 20,500 |   |

 

Deferred income taxes forthe Company consist of the following:
|                                           | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Deferred tax  liabilities:                |       |                  |       |   |   |   |   |   |   |
| Depreciation and amortization             |       |                  | $          | 44,200 |   |   |   | $ | 4,100 |   |   |
| Derivative financial instruments          |       |                  | 4,700      |   |   |   | 4,300 |   |   |
| Other basis differences                   |       |                  | 6,400      |   |   |   | — |   |   |
|                                      |       |                  | 55,300     |   |   |   | 8,400 |   |   |
|                                      |       |                  |       |   |   |   |   |   |   |
| Deferred tax  assets:                     |       |                  |       |   |   |   |   |   |   |
| Net operating loss carryforward           |       |                  | 116,600    |   |   |   | 41,700 |   |   |
| Depreciation and amortization             |       |                  | 34,000     |   |   |   | 16,000 |   |   |
| Other basis differences                   |       |                  | 19,300     |   |   |   | 13,300 |   |   |
| Non-deductible liabilities and allowances |       |                  | 16,900     |   |   |   | 8,500 |   |   |
|                                      |       |                  | 186,800    |   |   |   | 79,500 |   |   |
| Valuation allowance                       |       |                  | (141,800   | ) |   |   | (75,200 | ) |   |
|                                      |       |                  | 45,000     |   |   |   | 4,300 |   |   |
|                                      |       |                  |       |   |   |   |   |   |   |
| Deferred tax liability,  net              |       |                  | $          | 10,300 |   |   |   | $ | 4,100 |   |   |

 

At December 31, 2006, theCompany had unused tax net operating loss carryforwards of approximately$289,000 which expire through 2026.

A valuation allowance has been provided at December31, 2006 and 2005 by the Company for the deferred tax assets because of theuncertainty of future realization of such amounts. The Company will continue toassess the recoverability of deferred tax assets and the related valuationallowance. To the extent that the Company generates taxable income in futureyears and it determines that such valuation allowance is no longer required,the tax benefit of the remaining deferred tax assets will be recognized at thattime.

79

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**12. Stock Option Plan**

On November 8, 2005, Holdco adopted the Stock OptionPlan of Hawaiian Telcom Holdco, Inc. (the “Plan”) that permits the grant ofoptions to its key employees and independent directors and those of its whollyowned subsidiaries. The total number of shares of Holdco that were reserved forissuance under the Plan was 37,217 or 8.7% of the Holdco shares currentlyoutstanding. The purpose of the Plan is primarily to align compensation for keyexecutives with the performance of the Company. All options are to be grantedat an exercise price that is equal to the fair value of the common stock ofHoldco on the date the stock option is granted.

In November 2005, Holdco awarded options to variouskey employees and independent directors for an aggregate of 35,532 shares.  The grants were subject to the definitivePlan terms which were approved by the Board of Holdco on November 8, 2005. Theoptions were granted at an exercise price of $1,000 per share.

During 2006, options for an additional 4,070 shareswere granted at an exercise price of $1,000 per share. The Company recognized$118 of compensation expense during the year ended December 31, 2006 related tothese option grants.

Outstanding options for key employees under the Planwill vest in two segments. Subject to the optionee’s continued employment withthe Company, 25% of the options granted generally will vest automatically inequal annual installments of 5% on each anniversary of the optionee’s hire and75% will vest in full on the day immediately preceding the eighth anniversaryof the grant date subject to earlier vesting if certain performance conditionsare met. The performance condition component of the Plan provides that aninstallment equal to 5% (15% if all three targets are met) of the option willvest for each fiscal year, beginning with the year of grant and ending with thefourth year thereafter, for the following three targets, as defined in thePlan: Revenue, EBITDA (Earnings Before Interest, Taxes, Depreciation andAmortization), and Free Cash-Flow. Options granted to independent directorsexclude a performance component and vest automatically in equal annualinstallments on each anniversary of the grant date up to and including theanniversary in 2010.

A summary of option activity under the Plan for theyears ended December 31, 2006 and 2005 is as follows:   
|                                   | ** ** | ** ** | ** ** | **Weighted-** | ** ** | **Average**     | ** ** | ** **    | ** ** |
|-----------------------------------|------------|------------|------------|---------------|------------|-----------------|------------|---------------|------------|
| ** **                        | ** ** | ** ** | ** ** | **Average**   | ** ** | **Remaining**   | ** ** | **Average**   | ** ** |
| ** **                        | ** ** | ** ** | ** ** | **Exercise**  | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                        | ** ** | **Shares** | ** ** | **Price**     | ** ** | **Term**        | ** ** | **Value**     | ** ** |
|                              |       |       |       |          |       |            |       |          |       |
| Outstanding at  January 1, 2005   |       | —     |       | $             | —     |            |       |          |       |   |
| Granted                           |       | 35,532     |       | 1,000         |       |            |       |          |       |
| Outstanding at  December 31, 2005 |       | 35,532     |       | 1,000         |       |            |       |          |       |
| Granted                           |       | 4,070      |       | 1,000         |       |            |       |          |       |
| Exercised                         |       | —     |       | —        |       |            |       |          |       |
| Forfeited or  expired             |       | (2,622     | )          | 1,000         |       |            |       |          |       |
| Outstanding at  December 31, 2006 |       | 36,980     |       | $             | 1,000      |            | 9.0        |          | $          | — |   |
| Exercisable at December  31, 2006 |       | 7,701      |       | $             | 1,000      |            | 8.9        |          | $          | — |   |

 

80

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A summary of the status of the Company’s nonvestedshares for the years ended December 31, 2006 and 2005 is as follows:
|                                 | ** ** | ** ** | ** ** | **Weighted-**       | ** ** |
|---------------------------------|------------|------------|------------|---------------------|------------|
| ** **                      | ** ** | ** ** | ** ** | **Average**         | ** ** |
| ** **                      | ** ** | ** ** | ** ** | **Grant-Date**      | ** ** |
| ** **                      | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
|                            |       |       |       |                |       |
| Nonvested at  January 1, 2005   |       | —     |       | $                   | —     |   |
| Granted                         |       | 35,532     |       | 400                 |       |
| Vested                          |       | (6,338     | )          | 400                 |       |
| Nonvested at  December 31, 2005 |       | 29,194     |       | 400                 |       |
| Granted                         |       | 4,070      |       | 400                 |       |
| Vested                          |       | (6,558     | )          | 400                 |       |
| Forfeited                       |       | (2,622     | )          | 400                 |       |
| Nonvested at December  31, 2006 |       | 24,084     |       | $                   | 400        |   |

 

As of December 31, 2006, there was $1,510 of totalunrecognized compensation cost related to nonvested share-based compensationarrangements granted under the plan.  Thecost is expected to be recognized over a weighted-average period of 6 years.

The fair value of each stock option granted isestimated on the date of grant using the Black-Scholes option-pricing model.The following weighted average assumptions were used in determining the fairvalue for all grants (both those in November 2005, see Note 3, and those in2006): dividend yield of 0%; expected volatility of 33%; risk-free interestrate of 4.5%; expected term to exercise of 6.5 years; and forfeiture rate of2%. The fair value for each individual option granted during 2006 and 2005amounted to $400.

**13. Leases**

The Company leases certain facilities and equipmentfor use in the Company’s operations under several operating agreements. Certainof the leases provide for escalation or renegotiation of rental rates, and forextension of lease terms. Total rent expense for the Company amounted to $5,293and $3,457 for the years ended December 31, 2006 and 2005, respectively. Totalrent expense for the Predecessor, including allocated charges from Verizon,amounted to $11,450 and $32,000 for the period January 1, 2005 to May 1, 2005and for the year ended December 31, 2004, respectively.

Information on theaggregate minimum rental commitments under noncancelable operating leases is asfollows:
| Years ended, December 31: |   |   |   |
|---------------------------|--------|--------|--------|
| 2007                      |   | $      | 3,267  |   |
| 2008                      |   | 2,673  |   |
| 2009                      |   | 2,501  |   |
| 2010                      |   | 2,368  |   |
| 2011                      |   | 2,005  |   |
| Thereafter                |   | 7,509  |   |
|                      |   |   |   |
|                      |   | $      | 20,323 |   |

 

81

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**14.Accumulated Other Comprehensive Income**

Thecomponents of accumulated other comprehensive income are as follows:
|                                        | ** ** | **Gain on Cash  Flow Hedging  of Derivatives** | ** ** | **Unrealized  Gain (Loss) on  Investments** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------|------------|
|                                        |       |                                                               |       |                                                  |       |      |       |
| January 1, 2005                             |       | $                                                                  | —     |                                                  | $          | —    |       | $ | — |   |
| Other  comprehensive income (loss) for 2005 |       | 11,387                                                             |       | (112                                                  | )          | 11,275    |       |
| December 31,  2005                          |       | 11,387                                                             |       | (112                                                  | )          | 11,275    |       |
| Other  comprehensive income for 2006        |       | 228                                                                |       | 133                                                   |       | 361       |       |
| December 31, 2006                           |       | $                                                                  | 11,615     |                                                  | $          | 21        |       | $ | 11,636 |   |

 

Theunrealized gain on the changes in assets and liabilities related to the Company’sinterest rate swap derivatives includes a reclassification adjustment forrealized net gains included in income of $6,784 and $505 for the years endedDecember 31, 2006 and 2005, respectively.

Theunrealized loss on investments relates to activity of the insurancesubsidiary.  The investments of thesubsidiary are included in deferred financing and other assets and are notsignificant at December 31, 2006.

**15.Commitments and Contingencies**

***BearingPoint,Accenture and Other Long-Term Fixed Supplier Commitments***

The Company had previously engaged BearingPoint tobuild and operate an information technology solution environment includingsoftware applications and systems and hardware that the Company uses in itsbusiness.  The Company had agreed to afixed fee for build-services and operate-services. On February 7, 2007, theCompany and BearingPoint reached an agreement to settle disputes between themand to transition the work to a third party. The settlement provides for a payment to the Company of $52,000 whichwas received in March 2007 as well as waiving obligations to pay alloutstanding BearingPoint invoices (amounting to approximately $38,600 atDecember 31, 2006 including certain accrued costs) and to provide transitionservices to the Company at no cost.  TheCompany and BearingPoint will continue to work together during a transitionperiod that will end on May 2, 2007, unless extended by the Company for up toan additional 60 days.

On February 5, 2007, theCompany entered into an agreement with Accenture to complete the developmentand deployment of the Company’s key customer service and business supportsystems.  The agreement includes fixeddevelopment fees of $21,700 and operate fees of $1,100 per month through May2008.

During the year endedDecember 31, 2006, the Company recorded a recovery contractually due under theBearingPoint agreement amounting to $24,129. The remaining settlement consideration will be recognized in the first quarterof 2007.

The Company has also entered into agreements withother entities under long-term fixed contractual commitments primarily fornetwork related services.

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Annual fixed fee commitments for agreements in effectat December 31, 2006 (not subsequently terminated), amounted to the following:
| Years ended, December 31: | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|
| 2007                                     |       | $          | 11,210     |   |
| 2008                                     |       | 10,668     |       |
| 2009                                     |       | 2,000      |       |
| 2010                                     |       | 2,000      |       |
| 2011                                     |       | 167        |       |
|                                     |       |       |       |
|                                          |       | $          | 26,045     |   |

 

During the years endedDecember 31, 2006 and 2005, the Company incurred fees under the BearingPointagreement amounting to $24,033 and $67,746, respectively.  Under the other long-term agreements, theCompany incurred fees amounting to $2,660 and $1,714 for the years endedDecember 31, 2006 and 2005, respectively.

***LM Berry***

The Company has a publishing agreement with LM Berryfor the Company’s directories business. The agreement provides for LM Berry tohave responsibility for the sales, publishing, printing and distributions forthe 2006 through 2010 directories for a percentage of revenue actuallycollected from the sale of advertising for print directories and Internet.  LM Berry is also providing billing andcollection services for non-local exchange carrier billed customers.

***CollectiveBargaining Agreement***

The Company has a collective bargaining agreement withthe Local 1357 of the International Brotherhood of Electrical Workers. Theagreement expires on September 1, 2007 and covers about 63% of theworkforce.  Subject to ratification byunion members and the Company’s Board of Directors, a tentative agreement wasannounced on March 27, 2007 to extend the term until August 31, 2008.

***Litigation***

The Company is involved in litigation arising in thenormal course of business. The outcome of this litigation is not expected tohave a material adverse impact on the Company’s financial statements.

**16. Transactions with Verizon**

Historically, the Predecessor was allocated charges forvarious centralized services including network related services, and overheadand support services. Costs may have been directly assigned or allocated.

***Transition ServicesAgreement***

In conjunction with the Acquisition, the Companyentered into a Transition Services Agreement with Verizon to provideinformation technology services, customer support, customer billing,accounting, network operations, call center, plant engineering and Internetsupport. The agreement was for an initial term of nine months and could beextended under certain circumstances. In December 2005, the Company arrangedwith Verizon to extend the agreement for a two month period through March 31,2006. Expenses incurred under the Transition Services Agreement amounted to$29,497 and $69,824 for the years ended December 31, 2006 and 2005,respectively.

83

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***Long Distance***

Also in conjunction with the Acquisition, the Companyentered into an agreement with Verizon to provide long distance services.Expenses under the long distance agreement amounted to $4,917 and $7,105 forthe years ended December 31, 2006 and 2005, respectively.

***Predecessor***

Transactions with Verizonare summarized as follows:
|                                             | ** ** | **Period from  January 1 to  May 1, 2005** | ** ** | **Year Ended  December 31,  2004** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------------------------|------------|----------------------------------------------|------------|
|                                        |       |                                                                |       |                                         |       |
| Operating  revenues                         |       | $                                                                   | 4,900      |                                         | $          | 13,600 |   |
| Operating  expenses                         |       | 31,600                                                              |       | 101,900                                      |       |
| Other income and  (expense), net            |       | 100                                                                 |       | 300                                          |       |
| Interest expense                            |       | 3,700                                                               |       | 6,200                                        |       |
| Plant, property and  equipment acquisitions |       | —                                                              |       | 6,300                                        |       |
|                                             |            |                                                                     |            |                                              |            |  |  |

 

**17. Transactions with the Sponsor**

In connection with the Acquisition, the Companyentered into a management consulting agreement with the Sponsor. The agreementallows the Company access to the Sponsor’s expertise in areas such as corporatemanagement, financial transactions, product strategy, investment, acquisitionsand other matters that relate to the Company’s business, administration andpolicies. Under the agreement, the Company will pay an annual advisory fee of$1,000 to the Sponsor.

The Company also paid the Sponsor a one-time fee of$16,000 on May 2, 2005 which was directly related to structuring theAcquisition transaction and was capitalized as part of direct acquisitioncosts.

**18. Fair Value of FinancialInstruments**

The following method and assumptions were used toestimate the fair value of each class of financial instruments for which it ispractical to estimate the fair value.

Cash and cash equivalents – The carrying amountapproximates fair value because of the short maturities of these instruments.

Debt – The fair value of senior debt and existingdebentures is based on quoted market values or discounted cash flows to theextent that recent quoted values are not available.

Interest rate swap – The fair value was determined byspecialists based on yield curves and expectations as to future interest rates.

84

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The estimated fair valueof financial instruments is as follows:
|                                               | ** ** | **Carrying   Value** | ** ** | **Fair   Value** | ** ** |
|-----------------------------------------------|------------|---------------------------|------------|-----------------------|------------|
|                                          |       |                      |       |                  |       |
| Company –  December 31, 2006             |       |                      |       |                  |       |
| Financial assets -                            |       |                      |       |                  |       |
| Interest rate swap agreement                  |       | $                         | 11,615     |                  | $          | 11,615 |   |
| Financial liabilities -                       |       |                      |       |                  |       |
| Long-term debt, including current maturities  |       | 1,407,000                 |       | 1,399,147             |       |
|                                          |       |                      |       |                  |       |
| Company –  December 31, 2005             |       |                      |       |                  |       |
| Financial assets -                            |       |                      |       |                  |       |
| Interest rate swap agreement                  |       | $                         | 11,387     |                  | $          | 11,387 |   |
| Financial liabilities -                       |       |                      |       |                  |       |
| Long-term debt,  including current maturities |       | 1,346,500                 |       | 1,338,475             |       |

 

**19.Cash Flow Information**

Supplemental cash flow information is as follows:
| ** **                                                                                                | ** ** | **Company**           | ** ** | **Predecessor**         | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|
| ** **                                                                                                | ** ** | ** **            | ** ** | **Period from**    | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                | ** ** | **Year Ended**   | ** ** | **May 21 to** | ** ** | **Period from** | ** ** | **Year Ended** | ** ** |
| ** **                                                                                                | ** ** | **December 31,** | ** ** | **December**            | ** ** | **January 1 to** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                | ** ** | **2006**              | ** ** | **2005**                | ** ** | **31, 2004** | ** ** | **May 1, 2005** | ** ** | **2004** | ** ** |
|                                                                                                      |       |                  |       |                    |       |   |   |   |   |   |   |
| Cash paid during the  year:                                                                               |       |                  |       |                    |       |   |   |   |   |   |   |
| Income taxes  paid, net of refunds                                                                        |       | $                     | —     |                    | $          | — |   | $ | — |   | $ | 4,400 |   | $ | (6,100 | ) |
| Interest paid,  net of amounts capitalized                                                                |       | 118,353               |       | 57,786                  |       | — |   | 18,800 |   | 35,900 |   |
|                                                                                                      |       |                  |       |                    |       |   |   |   |   |   |   |
| Non-cash financing  activity:                                                                             |       |                  |       |                    |       |   |   |   |   |   |   |
| Assumption of  existing debentures in connection with acquisition of Verizon’s Hawaii  Business      |       | $                     | —     |                    | $          | 300,000 |   | $ | — |   | $ | — |   | $ | — |   |
| Advance from Parent  company for deferred acquisition and financing costs and software under  development |       | —                |       | —                  |       | 6,734 |   | — |   | — |   |

 

**20.  Segment Information**

The Company has two reportable segments consisting oftelecommunications services and publishing based on how the Company’s chiefoperating decision maker makes decisions about allocating resources andassessing performance. The telecommunications services segment provides localtelephone service including voice and data transport, enhanced custom callingfeatures, network access, directory assistance and private lines. In addition,the telecommunications services segment provides High Speed Internet, videoservices (in development), long distance services, customer premise equipmentdistribution, data solutions and systems integration, billing and collection,logistics, pay telephone services, and wireless services. The publishingbusiness includes the sale of advertising in printed and electronic directoriesin Hawaii.  The Company did not have anyseparate segments prior to the Acquisition.

85

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The following tablesprovide operating financial information for the Company’s and Predecessor’s tworeportable segments:

|                                                                | ** ** | **Telecom-  munications** | ** ** | **Publishing** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------|------------|---------------------------|------------|----------------|------------|-----------|------------|
|                                                           |       |                      |       |           |       |      |       |
| Company – For the year  ended and as of December 31, 2006 |       |                      |       |           |       |      |       |
| Operating  revenues                                            |       | $                         | 503,135    |           | $          | 67,033    |       | $ | 570,168 |   |
| Depreciation and  amortization                                 |       | 163,967                   |       | 8,765          |       | 172,732   |       |
| Net income  (loss)                                             |       | (170,792                  | )          | 26,155         |       | (144,637  | )          |
| Capital  expenditures                                          |       | 106,868                   |       | —         |       | 106,868   |       |
| Assets                                                         |       | 1,531,872                 |       | 180,292        |       | 1,712,164 |       |
|                                                           |       |                      |       |           |       |      |       |
| Company – For the year  ended and as of December 31, 2005 |       |                      |       |           |       |      |       |
| Operating  revenues                                            |       | $                         | 326,311    |           | $          | 11,106    |       | $ | 337,417 |   |
| Depreciation and  amortization                                 |       | 101,402                   |       | 6,351          |       | 107,753   |       |
| Net income  (loss)                                             |       | (169,077                  | )          | (6,628         | )          | (175,705  | )          |
| Capital  expenditures                                          |       | 112,680                   |       | —         |       | 112,680   |       |
| Assets                                                         |       | 1,556,820                 |       | 199,734        |       | 1,756,554 |       |
|                                                           |       |                      |       |           |       |      |       |
| Predecessor – January  1, 2005 to May 1, 2005             |       |                      |       |           |       |      |       |
| Operating  revenues                                            |       | $                         | 178,700    |           | $          | 22,000    |       | $ | 200,700 |   |
| Depreciation and  amortization                                 |       | 39,500                    |       | 100            |       | 39,600    |       |
| Net income                                                     |       | 7,700                     |       | 8,400          |       | 16,100    |       |
| Capital  expenditures                                          |       | 22,800                    |       | —         |       | 22,800    |       |
|                                                           |       |                      |       |           |       |      |       |
| Predecessor – For the  year ended December 31, 2004       |       |                      |       |           |       |      |       |
| Operating  revenues                                            |       | $                         | 561,400    |           | $          | 66,100    |       | $ | 627,500 |   |
| Depreciation and  amortization                                 |       | 114,700                   |       | 100            |       | 114,800   |       |
| Net income                                                     |       | 11,300                    |       | 25,600         |       | 36,900    |       |
| Capital expenditures                                           |       | 63,500                    |       | 200            |       | 63,700    |       |

 

For the Predecessor, forthe year ended December 31, 2004, operating revenues for total reportablesegments amounted to $627,500, intersegment eliminations amounted to $31,900and the consolidated financial statements reflected operating revenues of$595,600.

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**21.****       Quarterly FinancialInformation (Unaudited)**

The Company’s quarterlyoperating results are presented in the following table:
| ** **                                | ** ** | **Operating  Revenues** | ** ** | **Operating  Income (Loss)** | ** ** | **Net Loss** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|-----------------------------------|------------|-------------------|------------|
| Year Ended December 31,  2006:            |       |                    |       |                              |       |              |       |
| First Quarter                             |       | $                       | 141,519    |                              | $          | (10,063           | )          | $ | (38,591 | ) |
| Second Quarter                            |       | 144,674                 |       | (1,579                            | )          | (32,230           | )          |
| Third Quarter                             |       | 141,653                 |       | (13,004                           | )          | (43,934           | )          |
| Fourth Quarter                            |       | 142,322                 |       | 1,434                             |       | (29,882           | )          |
|                                      |       |                    |       |                              |       |              |       |
| Total                                     |       | $                       | 570,168    |                              | $          | (23,212           | )          | $ | (144,637 | ) |
|                                      |       |                    |       |                              |       |              |       |
| Year Ended December 31,  2005:            |       |                    |       |                              |       |              |       |
| First Quarter                             |       | $                       | —     |                              | $          | (15,657           | )          | $ | (15,657 | ) |
| Second Quarter                            |       | 81,023                  |       | (31,793                           | )          | (56,745           | )          |
| Third Quarter                             |       | 120,756                 |       | (29,946                           | )          | (59,032           | )          |
| Fourth Quarter                            |       | 135,638                 |       | (15,876                           | )          | (44,271           | )          |
|                                      |       |                    |       |                              |       |              |       |
| Total                                     |       | $                       | 337,417    |                              | $          | (93,272           | )          | $ | (175,705 | ) |
|                                      |       |                    |       |                              |       |              |       |
| Period from May 21 to  December 31, 2004: |       |                    |       |                              |       |              |       |
| Second Quarter  (May 21 to June 30, 2004) |       | $                       | —     |                              | (425       | )                 | (425       | ) |
| Third Quarter                             |       | —                  |       | (3,005                            | )          | (3,005            | )          |
| Fourth Quarter                            |       | —                  |       | (13,943                           | )          | (13,943           | )          |
|                                      |       |                    |       |                              |       |              |       |
| Total                                     |       | $                       | —     |                              | $          | (17,373           | )          | $ | (17,373 | ) |

 

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**Item 9. Changes in and Disagreementswith Accountants on Accounting and Financial Disclosure**

None.

**Item 9A. Controls and Procedures**

We havedisclosed to the auditors and to the Audit Committee of the Board of Directorsof the Company a material weakness in the design or operation of internalcontrols which could adversely affect our ability to record, process,summarize, and report financial data. As previously disclosed in our Form 10-Qfiled May 15, 2006, our Form 10- Q filed August 14, 2006 and our Form 10-Qfiled November 14, 2006 there was a significant change in our internal controlover financial reporting (as defined in Rule 13a-15(e) under the Exchange Act)as of March 31, 2006 that did not materially affect our internal controlover financial reporting during the fiscal quarter ended March 31, 2006.However, the significant change affected our internal control over financialreporting for the fiscal periods thereafter and deficiencies in changemanagement controls may have resulted in a change in internal control overfinancial reporting during the three months ended December 31, 2006. Wepreviously disclosed in the November 14, 2006 Form 10-Q filing a significantdeficiency in internal control over financial reporting and that we are stillin the process of evaluating and adjusting the functionality of all new systemsand making modifications and enhancements to internal control processesassociated with these new systems. Specifically, the Company began processing transactions utilizing newlyimplemented operating, financial and administrative information technologysystems during 2006.  BearingPoint builtor converted our back-office and IT infrastructure necessary to replace systemspreviously provided by Verizon but not all of these systems are functioning orfunctioning in an acceptable manner for our business. The Company has beenusing new processes, procedures and controls associated with these new systemsfor a short period of time.

Amaterial weakness in internal control over financial reporting exists becausethere is more than a remote likelihood that a material misstatement of theannual or interim financial statements will not be prevented and detected.  The material weakness results from significantweaknesses in several information technology system and change managementcontrols, as well as operating processes and controls needed to fully record,process, summarize and report financial data after our March 31, 2006transition. These system deficiencies relate to (but are not limited to) thefollowing:

·                  Accountsreceivable balances/subsidiary ledger support,

·                  Billingand revenue assurance,

·                  Cashaccount reconciliations,

·                  Distributionof expenses and capital,

·                  Fixedassets and project costing,

·                  Managementreporting,

·                  Orderaccuracy and system processing,

·                  Procurement(including accounts payable) and inventory valuation, and

·                  Tax andsurcharge accuracy.

To helpremediate deficiencies in these areas, we engaged the services of aninternational information technology consulting firm as a strategic partnerwith expertise in general computer controls and change management as well asspecific expertise with information technology process controls.  In addition, we formed a stabilizationproject team to perform an assessment of our control environment after theMarch 31, 2006 transition.  FTIConsulting was hired in the third quarter of 2006 to project manage this team,which includes external resources with significant telecommunicationsexperience.  These activities, whichcontinue in part, are intended to facilitate improvement in the design oroperation of internal controls.

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**Disclosure Controls and Procedures**

Underthe supervision of our Chief Executive Officer and Chief Financial Officer, weevaluated the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Rule 13a-15(e) under the Exchange Act)as of December 31, 2006 (the “Evaluation Date”). Based upon that evaluation,the Chief Executive Officer and Chief Financial Officer concluded that, as ofthe Evaluation Date, our disclosure controls and procedures were effective toensure that information required to be disclosed by us in the reports we fileor submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission rules and forms.

**Changes in Internal Controls**

Therewas a change in our internal control over financial reporting (as defined inRule 13a-15(e) under the Exchange Act) as of March 31, 2006 that didmaterially affect our internal control over financial reporting during thefiscal periods thereafter and is reasonably likely to affect our internalcontrol over financial reporting in the future. Such deficiencies in change management controls have resulted in changesin internal control over financial reporting during the three months endedDecember 31, 2006.

Inorder to facilitate our transition to becoming a stand-alone provider ofcommunication services, Verizon and its affiliates provided us from May 2,2005 to March 31, 2006 with services pursuant to the Transition ServicesAgreement. Under such agreement, Verizon and its affiliates provided us withservices that were critical to the ongoing operation including, among otherthings:

·                  accessto certain existing IT systems and applications;

·                  maintenanceand support of certain IT applications and systems;

·                  supportfor our residential and business customers;

·                  accounting,payroll, accounts payable and transaction tax preparation services;

·                  customerbilling operation services;

·                  networksurveillance, maintenance and technical support of switches, relays, DSL andother Internet operations;

·                  callcenter support, systems and related services;

·                  infrastructuremaintenance work for inside and outside plant engineering; and

·                  Internetoperations and related support.

TheVerizon Transition Services Agreement, including accounting services, ended onMarch 31, 2006 (Hawaii Time).

Subsequently,we began processing transactions utilizing the information technology systemsthat BearingPoint assisted us in building, which includes with few exceptions,our operating, financial and administrative systems.  We are still in the process of evaluating andadjusting the functionality of all new systems and making modifications andenhancements in internal control processes associated with these systems.  We disclosed previously a material weaknessin internal control over financial reporting because of the high number of newsystems implemented after March 31, 2006 and the short duration that theCompany has been using associated new processes, procedures and controls.

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Amaterial weakness in internal control over financial reporting exists becausethere is more than a remote likelihood that a material misstatement of the annualor interim financial statements will not be prevented and detected.  The material weakness results fromsignificant weaknesses in several information technology system and changemanagement controls, as well as operating processes and controls needed tofully record, process, summarize and report financial data after our March 31,2006 transition. These system deficiencies relate to (but are not limited to)the following:

·                  Accountsreceivable balances/subsidiary ledger support,

·                  Billingand revenue assurance,

·                  Cashaccount reconciliations,

·                  Distributionof expenses and capital,

·                  Fixedassets and project costing,

·                  Managementreporting,

·                  Orderaccuracy and system processing,

·                  Procurement(including accounts payable) and inventory valuation,

·                  Tax andsurcharge accuracy.

To helpremediate deficiencies in these areas we engaged the services of aninternational information technology consulting firm as a strategic partnerwith expertise in general computer controls and change management as well asspecific expertise with information technology process controls.  In addition, we formed a stabilizationproject team to perform an assessment of our environment after the March 31,2006 transition.  FTI Consulting washired in the third quarter of 2006 to project manage this team which includesexternal resources with significant telecommunications experience.   These activities, which continue in part,are intended to facilitate improvement in the design or operation of internalcontrols.

**Item 9B. Other Information**

None.

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**PART III**

**Item 10. Directors,Executive Officers and Corporate Governance**

Thefollowing table provides information regarding our executive officers and directors as of the date of this annual report:
| **Name**               | ** ** | **Age** | ** ** | **Position(s)**                                                        |
|------------------------|------------|---------|------------|------------------------------------------------------------------------|
| Michael S. Ruley       |       | 47      |       | Chief Executive Officer and Director                                   |
| Michael T. Brown       |       | 47      |       | Senior Vice President, Customer Contact Centers and  Wholesale Markets |
| Michael J. McHale, Jr. |       | 50      |       | Senior Vice President and Chief Marketing Officer                      |
| Daniel P. O’Brien |       | 52      |       | Senior Vice President and Chief Financial Officer                      |
| Alan M. Oshima         |       | 60      |       | Senior Vice President and General Counsel                              |
| Harvey A. Plummer      |       | 56      |       | Senior Vice President, Operations and Engineering                      |
| David A. Torline       |       | 57      |       | Senior Vice President and Chief Information Officer                    |
| Claire K.S. Cooper     |       | 58      |       | Vice President, Human Resources                                        |
| Patrick T. Hogan       |       | 39      |       | Vice President, Finance and Controller                                 |
| Ron Montgomery         |       | 54      |       | Vice President and General Manager, Directories                        |
| Daniel F. Akerson      |       | 58      |       | Chairman of the Board of Directors                                     |
| James A. Attwood, Jr.  |       | 48      |       | Director                                                               |
| Matthew P. Boyer       |       | 41      |       | Director                                                               |
| Walter A. Dods, Jr.    |       | 65      |       | Director                                                               |
| Stephen C. Gray        |       | 48      |       | Director                                                               |
| William E. Kennard     |       | 50      |       | Director                                                               |
| Raymond A. Ranelli     |       | 59      |       | Director                                                               |

 

*Michael S. Ruley* became our Chief Executive Officer in October 2004 and Director on May 2, 2005. Mr. Ruley has morethan 20 years of experience in thetelecommunications and technologysectors. He was formerly the Presidentand Chief Executive Officer of NextiraOne, a privately held North American communicationssolutions provider with approximately$1 billion of sales, from 2003 to 2004. Prior to NextiraOne, Mr. Ruley held numerous management positions at XO Communications,Inc. from 1998 to 2003 culminatingin his role as the President of Market Sales Operations wherehe was responsible for sales, sales operations, sales engineering and customercare. XO Communications filed apetition to reorganize underChapter 11 of the U.S. BankruptcyCode in June 2002 andcompleted its restructuring and emerged from Chapter 11 in January 2003. Prior to XO Communications, heserved in several senior capacities at Teleport Communications Group Inc. (now part of AT&T).

*Michael T. Brown* became our Vice Presidentin charge of Sales Operations and Process Engineering in December 2004.Effective December 17, 2006, Mr. Brown was promoted to Senior Vice President,Customer Contact Centers and Wholesale Markets. Mr. Brown has extensive technology and telecommunications experience, which includes16 years with various divisions ofLucent Technologies from 1986 to 2002 where he served,among

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other roles, as a Sales Vice President for Optical, Services and Software. He was alsoregional Vice President of Sales with Voxpath Networks, Inc. Prior to joining us, Mr. Brown was Vice President of SalesOperations with NextiraOne, LLC, a major reseller of Nortel and Cisco solutions, from 2003 to2004 where he ran the daily sales operations of a 400-person North American sales team, managing services to top Fortune 500 companies.

*MichaelJ. McHale, Jr.*became our Senior Vice President and ChiefMarketing Officer in September 2006.  In December 2006, his duties wereexpanded to include Business Sales, Customer Relations and CorporateCommunications.  From 2002 to 2005, Mr. McHale was Chief Executive Officerof Telespectra, a business broadband service provider in the Southwest UnitedStates, and led a successful turnaround of the company.  Prior to that, heheld senior executive positions including President and Chief Operating Officerof Telseon, a startup Metro Gigabit Ethernet provider; Chief Marketing Officerand President of National Services at XO-NextLink Communications; VicePresident/General Manager and Regional Vice President at TeleportCommunications; and Vice President of Marketing at MFS.  Earlier, Mr.McHale spent 14 years in various management, sales, technical and productmanagement roles at IBM.

*Daniel P. O’Brien* became our Senior Vice President and ChiefFinancial Officer on May 9, 2005. Prior to joining us, Mr. O’Brienserved as Executive Vice President and Chief Financial Officer ofGlobal Crossing Limited from 2003 to 2005 where he led the Global Crossing financial team through intensive external audits and SEC filings and managed shareholder and creditor relations resulting in the company’spublic listing with NASDAQ in 2004.From 2000 to 2003, Mr. O’Brien was the Executive Vice President and Chief Financial Officer of Genuity Corporation.Genuity, Inc. (a business unit of Genuity Corp.) filed a voluntary petition under Chapter 11of the U.S. Bankruptcy Code in 2002,as part of a plan negotiated with its significant creditors. GenuityInc.’s assets were acquired by Level 3 Communications in early 2003. Prior to Genuity, Mr. O’Brien spent 17 years in various roles at GTE Corporation. From May 1998to June 2000, he was GTE’s Executive Vice President and Chief Financial Officer. In that capacity, Mr. O’Brienwas centrally involved in the strategic evaluations and the integration and structuringactivities leading to the merger ofGTE and Bell Atlantic Corp., which formed Verizon. In March 2007, weannounced Mr. O’Brien will be leaving us and will work to transition his dutiesto a successor Chief Financial Officer.

*Alan M. Oshima* became our Senior Vice President and GeneralCounsel in February 2005. Mr. Oshima,a founding partner in the Honolulu law firm, Oshima Chun Fong & Chung, LLP, has extensive regulatory and legal experience in Hawaii and served as lead counsel inHawaiian Telcom’s acquisition of Verizon’sHawaii Business. He has beenrecognized as one of “America’s Best Lawyers” in the field of public utilities. In addition to his work in telecommunications, Mr. Oshima has served as the regulatory attorney for the Kauai IslandUtility Cooperative, The Gas Company, various water and sewer companies and other utility-related businesses in Hawaii. Mr. Oshima received a degree in marketing from Northwestern University and his law degree from University of California, Hastings College of Law. He served as a Supply Corps Officer with the U.S. Navy in, among other places, Pearl Harbor and San Diego.

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*Harvey A. Plummer*became our Senior Vice President in charge of Operations and Engineering in December 2004. He has more than 35 years of planning, operations, public policy andstrategy development experience in the domestic and international telecommunications and consulting industries. Prior to joiningus, Mr. Plummer was Senior VicePresident and Regional ManagingDirector for Southeast Asia with BearingPoint, based in Sydney,Australia, from 2002 to 2004. While at BearingPoint, he was responsiblefor managing the regional consultingbusinesses in Australia, New Zealand, Singapore, Malaysia and Thailand. From 1998 to 2000, he was VicePresident for Technology Strategy and a corporate officer ofMediaOne International, based in London,with responsibility for telecommunications, cable, Internet and wireless ventures in 14 countries throughoutEurope, Asia and Russia. From 1983 to 1998, Mr. Plummer worked for U.S. West, Inc. and his 15-year tenure culminated with his appointment as a corporate officer and Vice Presidentof Engineering, Construction andProcurement for a 14-state operation that served 16 million subscribers.

*David A. Torline*became our Senior Vice President and Chief Information Officer in September 2004. Prior to joining us, he served as an independent consultant working for Carlyle from January 2004 through September 2004. Prior to that, Mr. Torline held numerous executive management and IT positions throughout his 33-year career atCincinnati Bell/Broadwing. From 1999 to 2003, he was the Chief InformationOfficer of Broadwing Inc., the parent corporation of Broadwing Communications and Cincinnati Bell. Mr. Torline also served as the CIO of Broadwing Communications, the nationalbroadband network of BroadwingInc. Prior to that position, Mr.Torline served as the senior Information Technology executive for Cincinnati Bell TelephoneCo. from 1995 to 1999. In that capacity,he was responsible for the strategicdirection of Cincinnati Bell’s systems andfor the development and implementation ofthe many business critical platforms that Cincinnati Bell utilized to deliver the outstanding customer service for which it has received international recognition. From 1992 to 1994, Mr. Torline also served as President of Cincinnati Bell Supply, a formerCincinnati Bell Inc. subsidiary involved in desktop computer services and secondary telecommunications markets.

*Claire K.S. Cooper*became our Human Resources Vice President in December 2004. Ms. Cooper has more than 20 yearsof human resource experience with large companies, specializing in change management,leadership and organizationdevelopment, collaborative strategic planning, and training and development. Prior to joining us, she served as a principal consultant with EMA, Inc., a nationwideconsulting firm, for clients in Hawaii andon the mainland United States since 1999. Prior to that, she served as Vice President of Human Resources with Tesoro HawaiiCorporation, and Vice President and Manager of Organization Staff Planning and Development for First Hawaiian Bank. Ms. Cooper also served invarious human resource roles for BHP Hawaii Inc., formerly Pacific Resources,Inc., where she was partof the global leadership team with counterparts in London, Houston and Melbourne, Australia.

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*Patrick T. Hogan*became our Vice President, Finance and Controller in July 2005. ACPA and an attorney withnearly 20 years of financial experience, Mr. Hoganhas held public company positions asPrincipal Accounting Officer, VP - Capital Markets, Chief Financial Officer and Treasurer. Most recently from 2003 to 2005, he led a successful financial restructuring (via voluntary petition under Chapter 11of the U.S. Bankruptcy Code) and public NASDAQ listing of RCN Corporation, serving as Executive VicePresident and Chief Financial Officer of the bundled provider of voice, video and data services. Mr. Hogan served from 2001-2002 as Vice President andChief Financial Officer of Alexander’s Inc. (an affiliate of Vornado Realty Trust), while also serving as Vice President—Finance and Capital Markets at Vornado from2001-2003. His prior experience since1996 has included oversight responsibility for SEC filings, audit and taxrelationships, several public debt and equitytransactions and investor relations. Mr. Hogan gained his public accounting experience with Coopers & Lybrand (now PricewaterhouseCoopers). Mr. Hogan recently announced he would be leaving the Company toaccept a new position as senior vice president of a public telecommunicationscompany.  He will be succeeded by Mr. Robert F. Reich, currently the VicePresident, Controller and Treasurer of McLeodUSA, Inc., who will become our VicePresident and Controller effective as of April 16, 2007.

*Ron Montgomery* became our Vice Presidentand General Manager in charge ofDirectories in January 2005. He has extensive experience in the directorypublishing industry. Prior to joining us, he served as President of Net-Linx Americas, Inc., aleading software developer and provider to the yellow page publishing industry, from 2003 to 2004. He also served as a group Vice President for Publishing, Printing and Distribution of Verizon Information Services Inc. from 1998 to 2002,where he was responsible for the production and distribution of 1300 titles and 130 million directories annually. He alsoserved in various senior positions including Chief Operating Officer ofTrend Offset Printing and its affiliate United Publishers, a California based yellow pages publisher, from 1991 to 1998.

*Daniel F. Akerson*became the Chairman of our Board of Directorson May 2, 2005. Mr. Akersonhas been a Managing Director of Carlyle since 2003 and is Co-Head of the U.S. Buyout fund. He has extensive operating and management experience intelecommunications and technology. Prior to joining Carlyle, Mr. Akerson served as chairman and chief executive officer of threecompanies. From late 1999 untilJanuary 2003, Mr. Akerson served asChairman and Chief Executive Officerof XO Communications, Inc. XO Communications filed a petition to reorganize under Chapter 11 of the U.S. Bankruptcy Code in June 2002, and Mr. Akerson led thesuccessful restructuring of the companyand emergence from Chapter 11 in January 2003. At NextelCommunications, Inc., Mr. Akersonserved as Chairman from 1996 to 2001 andChief Executive Officer from 1996 to1999 where he transitioned the company from a regional analog walkie/talkie provider into a unique, leading edge national digital wireless competitor. In 1993, he became General Partner of Forstmann Little & Company, during which time he served as Chairman and Chief Executive Officer of General Instrument Company from 1993 to 1995. While at General Instrument, he led a successfuleffort to develop and deploy the first digital video, satellite and cablesystems domestically and internationally. From 1983 to 1993, Mr.Akerson served in several key roles at MCICommunications Corporation including Executive Vice Presidentand Chief Financial Officer from 1987to 1990 and President and Chief Operating Officer from 1992 to 1993. Mr. Akerson is amember of the Boards of Directors ofthe American Express Company, United Components, Inc. and Willcom, Inc. He also serves as a member of the Board ofDirectors of the U.S. Naval AcademyFoundation.

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*James A. Attwood, Jr.*became a Director in May 2004. Mr. Attwood has been a Managing Director ofCarlyle and head of the Global Telecommunications and Media groupsince November 2000. Prior tojoining Carlyle, he served as Executive Vice President—Strategy, Development and Planning for Verizon Communications,Inc. He served as Executive Vice President—StrategicDevelopment and Planning at GTECorporation prior to that. Mr.Attwood joined GTE Corporation in 1996 as VicePresident— Corporate Planning and Development after more than ten years in the investment banking division of Goldman, Sachs & Co. Mr. Attwood is a member of the Boards ofDirectors of Willcom, Inc. and Insight Communications Company,Inc.

*Matthew P. Boyer*became a Director in May 2004. Mr. Boyer has been aManaging Director of Carlyle since 2005, and is focused on U.S.buyout transactions in the telecommunications sector witha particular focus on the wireline and wireless industries. He was integrally involvedin the execution of Carlyle’sinvestment in Dex Media, Inc. and Hawaiian Telcom Communications, Inc. Prior to joining Carlyle, Mr. Boyer was Senior Vice President at Lehman Brothers and one of the founding members of the Lehman Brothers Communications Fund, an $800 million private equity fund focused on early stage investments in communications companies. Prior to that, he was an investment banker at Lehman Brothers in the Communications and Media Group where he focusedon wireless and emerging wireline communications companies.

*Walter A. Dods, Jr.*became a Director on May 2, 2005. Mr. Dods has been the non-executive Chairman of the Board of BancWest Corporation, a $50 billion bank holding company based in Honolulu, Hawaii, since January 2005 and a director since 1983. BancWest, a wholly-owned subsidiary of BNP Paribas, is comprised of two major subsidiaries: First Hawaiian Bankand Bank of the West. He has also been the non-executive Chairman of the Board of First Hawaiian Bank since January 2005 and a director since 1979, as well as Vice Chairman of Bank of the West since 1998. Mr. Dods was Chairman of the Board and Chief ExecutiveOfficer of BancWest and First Hawaiian Bank from1989 to 2004. From 1996 to 1997, Mr.Dods served as the National President of the American Bankers Association and was a member of the Federal Advisory Council of the Federal Reserve System, representing the 12th districtof the Federal Reserve from 1999 to2000. Mr. Dods also serves on the Boards of Directors of Alexander & Baldwin, Inc. (and its Matson Navigationsubsidiary), First Insurance Companyof Hawaii, Grace Pacific Corporation, Pacific Guardian Life Insurance Company, MauiLand & Pineapple Company, Inc. andServco Pacific, Inc. Mr. Dods is adirector of numerous community and civic organizations and serves as a Trustee of the Estate of SamuelMills Damon.

*Stephen C. Gray* becamea Director on November 7, 2006. Mr. Gray has been Executive Chairman ofImOn Communications, LLC, a full service cable, telecommunications and Internetservice provider located in Cedar Rapids, Iowa, since October 2006.  He has also served as Executive Chairman ofSecurityCoverage, a provider of fully automated computer security services forhomes and small businesses, since October 2005.  From April 2002 until hisretirement in December 2004, Mr. Gray served as president of McLeodUSA, whichprovides facilities-based integrated voice and data services in more than 490US cities.  He oversaw

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McLeodUSA’sprimary business units consisting of its CLEC (competitive local exchangecarrier), ILEC (incumbent local exchange carrier), Directory Publishing andCable/Telephony divisions.  He also led development of the company’soverall strategy and its merger/acquisition efforts.  Mr. Gray had become one of the originalfounders of McLeodUSA in 1992, and initially served as its chief operatingofficer. Mr. Gray also previously served as Vice President of Business Servicesat MCI and Senior Vice President of National Accounts and Carrier Services forTelecom USA. Mr. Gray also serves on the Board of Directors of InsightCommunications, Inc.

*William E. Kennard* became a Director on May 2, 2005. Mr. Kennard is a Managing Director of Carlyle. Since joiningCarlyle in 2001, he has played key roles in the investments in Dex Media, Inc., Casema Holding, BV, Insight CommunicationsCompany, Inc. and Hawaiian Telcom Communications,Inc. Mr. Kennard also is a member of the Boards of Directors of The NewYork Times Company and InsightCommunications, Inc. Prior to joiningCarlyle, Mr. Kennard served as Chairman of the U.S. Federal CommunicationsCommission from 1997 to 2001. Mr.Kennard served as the FCC’s general counselfrom December 1993 to November 1997. Before serving in government, he was a partner and member of the Board of Directorsof the law firm of Verner,Liipfert, Bernhard, McPherson and Hand.

*Raymond A. Ranelli* becamea Director on May 2, 2005. Mr. Ranelli retired from PricewaterhouseCoopers in 2003where he was a partner for over 25 years. Mr. Ranelli held severalpositions at PricewaterhouseCoopers includingVice Chairman and Global Leader of the Financial Advisory Services practice. Mr. Ranelli is also adirector of AmeriPath, Inc., UnitedComponents Inc. and Centennial Communications Corp.

**Committees of the Board of Directors**

OurBoard of Directors has an Audit Committee, Compensation Committee, Nominating and Governance Committee, and Executive Committee.The duties and responsibilities of the Audit Committee include recommendingthe appointment or termination of the engagement of independent accountants, otherwise overseeing the independent auditor relationship and reviewing significantaccounting policies and controls. The duties and responsibilities of the Compensation Committee include reviewing and approving the compensation of officers and reviewing and making recommendations to the Board of Directorsconcerning the compensation of theindependent directors. The duties and responsibilities of the Nominating and Governance Committee includemaking recommendations regarding individuals qualified to become directors, thestructure and composition of the Board of Directors and committees of the Board, and corporate governance policies and practices. The purpose of the Executive Committee is to act for the Board of Directors in theevent formal action is required betweenBoard meetings. Affiliates of Carlyle control substantially all of the common stock of our parent, Hawaiian Telcom Holdco, Inc., and therefore have the power tocontrol our affairs and policies.Carlyle also controls the election of our directors. Since November 7, 2006, half of the members of our Board of Directors are representatives of Carlyle.

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The Board of Directors has determined that the AuditCommittee includes an “audit committee financial expert”, Raymond A. Ranelli,as that term is defined in SEC regulations. Mr. Ranelli also is “independent”under the NASDAQ independence standards. Inaddition, the Board of Directors believes that each of theother current members of the Audit Committee is fully qualifiedto address any issues that are likely to comebefore the Committee, including theevaluation of our financial statementsand supervision of our independentauditors.

**Procedures for Nominationsby Security Holders**

TheNominating and Governance Committee does not have a policy with regard to theconsideration of any director candidates recommended by security holders,because our common stock is not publicly held.

**Code of****BusinessConduct**

We have adopted a Code ofBusiness Conduct that sets forth legal, ethical and other obligations that apply to all of our officers and employees, as well as all partieswho work on behalf of Hawaiian Telcom, including but not limited toconsultants, in-house contractors, employees of subsidiaries and affiliates,and representatives. The Code of BusinessConduct is posted in the “Investor Relations – Governance” section of ourwebsite at www.hawaiiantel.com. In the eventthat we make any amendment to, or grant any waiver of, a provision of the Code of Business Conduct that applies to our principal executive officer, principal financial officer, principalaccounting officer or controller, weintend to disclose such amendment or waiver.

**Item 11.Executive Compensation**

**Compensation Discussion andAnalysis**

The primaryobjectives of the Compensation Committee with respect to executive compensationinclude: attracting and retaining the most talented executives; tying annualand long-term compensation to the achievement of specific meaningfulperformance objectives; and aligning the executives’ interests with creation ofshareholder value.  To achieve theseobjectives, the Compensation Committee implements a total compensation programthat ties a substantial portion of each executive’s overall compensation to keyperformance metrics. Our named executiveofficers’ compensation currently consists of the following components:

***Base Salary.***  Base salariesfor our named executive officers are based on the scope of theirresponsibilities, taking into account competitive market compensation paid bycomparable companies for similar positions. To assist with developing our namedexecutive officer base salary ranges, in 2006 we engaged an independentconsulting firm to conduct a market compensation study of 17 top executivepositions (Vice President and higher) at telecommunications companies ofcomparable revenue size. For the top five executive positions, peer group dataalso was analyzed.  The peer groupconsisted of 14 telecommunications companies of comparable revenue size and otherbusiness characteristics. That study determined that our executive basesalaries overall are

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at the market median although there was variance byposition and level. Base salary merit increases for named executive officers areconsidered each year and are based on the individual performance appraisals ofthe executives and on the amount of the merit increase pool budgeted bymanagement for the year in question. The performance of the Chief ExecutiveOfficer is reviewed by the Compensation Committee. Merit increases were awardedin 2006 to the named executive officers.

***Non-Union Bonus Plan. ***The Non-UnionBonus Plan provides our executive officers and other key employees with the opportunity to obtain, in addition to their base salary, an annual cash bonusthat is dependent upon achieving stated corporate and personal performancegoals for the year in question.  For2006, the corporate performance metricsconsisted of EBITDA, revenue, and free cash flow. The performance-basedbonus is calculated as a percentage of the employee’s base salary. For our namedexecutive officers for 2006, the percentages of base salary used to determinethe bonus ranged from 75% to 100%. In addition, corporate performance generallyis a greater factor for executive officers than it is for non-executiveemployees.  For 2006, the bonuses forexecutive officers were based 80% on corporate performance and 20% onindividual performance. Not all 2006 corporate performance metrics were met,and as a result the bonuses for 2006 for the named executive officers were betweenthe threshold and target amounts indicated in the section entitled “Grants ofPlan-Based Awards.” Solely at our discretion, additional performance-based compensation may be paid toour executive officers and other key employees. No such additional bonuswas paid in 2006. The Compensation Committee approves the annual bonus awardsfor the Chief Executive Officer and other executive officers. Depending on theachievement of the predetermined targets, the annual bonus may be less than orgreater than the target bonus. The Non-UnionBonus Plan is reviewed annually and its terms may be modified from time to timeto reflect changes in the Company’s business strategies and focus.

***Stock Option Plan.  ***The StockOption Plan of Hawaiian Telcom Holdco, Inc. serves (1) to provide additional long term incentives to our named executive officers, other key employees, and the directors of Hawaiian Telcom Holdco, Inc. and itssubsidiaries and (2) to obtain and retain executives, other key employees, anddirectors. As a privately-held company, we do not make annual grants ofstock option. Instead, stock option grants generally are made at thecommencement of service. The sizes of these option grants vary with the titleand position, with higher-ranked executive officers receiving larger grants.Occasionally, an option is granted to an executive following a significantchange in job responsibilities or in connection with special retention orperformance objectives. One such grant was made in 2006 to a named executiveofficer in the amount indicated in the section entitled “Grants of Plan-BasedAwards.” No other options were granted in 2006 to our named executive officers.

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***Other Compensation.***  Our namedexecutive officers are eligible to participate in all of our standard employeebenefits plans, such as 401(k), medical, dental, vision, group life,disability, and accidental death and dismemberment insurance plans.  In addition, named executive officers havesupplemental plans that provide additional life, long-term disability, andaccidental death and dismemberment insurance and additional medicalbenefits.  While we intend to continue tomaintain our current benefits and perquisites for our named executive officers,we have discretion to revise, amend or add to them. We believe these benefitsand perquisites are at competitive levels for comparable companies.

**Summary Compensation Table**

Thefollowing table sets forth information regarding compensation earned by our Chief Executive Officer, ChiefFinancial Officer, and three other mosthighly compensated executive officers (the “Named Executive Officers”) during2006.

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**Summary Compensation Table**
| **Name and Principal  Position**                                 | ** ** | **Year** | ** ** | **Salary  ($)** | ** ** | **Bonus  ($)** | ** ** | **Stock  Awards   ($)** | ** ** | **Option  Awards  ($)** | ** ** | **Non-Equity  Incentive Plan  Compensation  ($)** | ** ** | **Change in  Pension  Value and  Nonqualified  Deferred  Compensation  Earnings  ($)(5)** | ** ** | **All Other  Compensation  ($)(6)** | ** ** | **Total  ($)** | ** ** |
|----------------------------------------------------------------------------|------------|----------|------------|-----------------|------------|----------------|------------|------------------------------|------------|-------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|----------------|------------|
| **(a)**                                                                    | ** ** | **(b)**  | ** ** | **(c)**         | ** ** | **(d)**        | ** ** | **(e)**                      | ** ** | **(f)**                 | ** ** | **(g)**                                                | ** ** | **(h)**                                                                                             | ** ** | **(i)**                                  | ** ** | **(j)**        | ** ** |
| Michael  S. Ruley  Chief Executive Officer and Director                    |       | 2006     |       | 527,423         |       | —         |       | —                       |       | —                  |       | 207,256(3)                                             |       | 2,584                                                                                               |       | 406,425                                  |       | 1,143,688      |       |
|                                                                       |       |     |       |            |       |           |       |                         |       |                    |       |                                                   |       |                                                                                                |       |                                     |       |           |       |
| Daniel  P. O’Brien  Senior Vice President and Chief Financial Officer |       | 2006     |       | 362,000         |       | —         |       | —                       |       | —                  |       | 86,880(3)                                              |       | 8,909                                                                                               |       | 293,807                                  |       | 751,596        |       |
|                                                                       |       |     |       |            |       |           |       |                         |       |                    |       |                                                   |       |                                                                                                |       |                                     |       |           |       |
| Linda  D. Frank(1)  Former Senior Vice President, Sales                    |       | 2006     |       | 230,615         |       | —         |       | —                       |       | —                  |       | 174,225(4)                                             |       | 13,388                                                                                              |       | 619,726                                  |       | 1,037,954      |       |
|                                                                       |       |     |       |            |       |           |       |                         |       |                    |       |                                                   |       |                                                                                                |       |                                     |       |           |       |
| David  A. Torline  Senior Vice President and Chief Information Officer     |       | 2006     |       | 360,077         |       | —         |       | —                       |       | —                  |       | 86,420(3)                                              |       | 8,453                                                                                               |       | 164,142                                  |       | 619,092        |       |
|                                                                       |       |     |       |            |       |           |       |                         |       |                    |       |                                                   |       |                                                                                                |       |                                     |       |           |       |
| Harvey A. Plummer  Senior Vice President, Operations and Engineering       |       | 2006     |       | 282,692         |       | —         |       | —                       |       | 40,154(2)               |       | 50,880(3)                                              |       | 13,418                                                                                              |       | 205,726                                  |       | 592,870        |       |

 

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(1)  Ms. Frank left the Companyeffective December 31, 2006.  

(2)  Represents the dollar valuerecognized for financial statement reporting purposes for the fiscal yearidentified in column (b) in accordance with SFAS No. 123(R). The assumptionsused in these calculations are set forth in Note 12 to the Company’sconsolidated financial statements included in this annual report on Form 10-K.

(3) This amount represents a cash performance bonus earned for 2006under the Company’s Non-Union Bonus Plan. 

(4) This amount represents a target bonus payout for 2006 pursuant toterms of severance provision in Ms. Frank’s employment agreement.  

(5) The amounts shown in this column represent the aggregate change inthe actuarial present value of the Named Executive Officer’s accumulatedbenefit under the Hawaiian Telcom Management Pension Plan during 2006.  The Company does not offer any above market orpreferential earnings on compensation that is deferred on a tax-qualifiedbasis.

(6) “All OtherCompensation” includes: (i) amounts contributed by the Company to its 401(k)plan (Mr. Ruley -$11,231, Mr. O’Brien -$11,033, Ms. Frank - $10,617, Mr.Torline -$11,103, and Mr. Plummer -$11,077), (ii) amounts of  premiums paid with respect to supplementalterm life, accidental death and dismemberment, disability and health benefitsfor the benefit of the Named Executive Officer (Mr. Ruley -$33,021, Mr. O’Brien-$6,452, Ms. Frank -$5,082, Mr. Torline -$6,433 and Mr. Plummer-$5,624), (iii)amounts paid or accrued pursuant to employment agreements in connection withtermination of employment  (Ms. Frank - $396,323),(iv) amounts reimbursed to the named executive officers for their estimatedincome tax liability by reason of the Company’s payments for relocation costsand housing allowances  (Mr. Ruley-$123,668, Mr. O’Brien -$92,911, Ms. Frank-$34,320, Mr. Torline -$55,776, andMr. Plummer -$60,144) and the Company’s payments in connection with severance (Ms.Frank -$114,669), (v) costs relating to relocation to Hawaii (Mr. Ruley-$88,840, Mr. O’Brien -$102,607, and Mr. Plummer -$63,157), (vi) housingallowances  (Mr. Ruley - $125,004, Mr.O’Brien -$78,000, Ms. Frank - $48,000, Mr. Torline -$78,000 and Mr. Plummer-$59,250), (vii) amounts reimbursed for personal travel (Mr. Torline -$10,647),and (viii) reimbursement of out-of-pocket medical expenses.

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**Employment Agreements**

Each of Messrs. Ruley, O’Brien, Torline,Plummer and Ms. Frank had entered into an employment agreement with us.  As aresult of Ms. Frank’s termination of employment effective December 31, 2006,her employment agreement has terminated.  Each agreement has a three-year term and will be extended automatically for successive one-year periods thereafter unless either party delivers noticewithin specified notice periods. Under the terms of the agreement,each executive is eligible to receive an annual bonus under the terms of our Non-Union Bonus Plan, pursuant to whichthe bonus will be tied to achievingcertain levels of revenue, EBITDA and free cash-flow, with a target bonus payment of 100% of base salary for Messrs. Ruley, Torline and O’Brien and75% of base salary for Mr. Plummer and Ms. Frank. In addition, Mr. Ruley received a bonus of $300,000 upon executionof his employment agreement and an additional bonus of $450,000 on the closing of the 2005 Acquisition,and Mr. Torline received a bonus of$175,000 upon closing of the 2005 Acquisition.Each executive is also entitled to participate in our stock option plan and will be granted options to purchase shares of stock pursuant to the terms of our stock option plan and stock option agreement. Each executive is entitled to participate inour employee benefit plans, programs and arrangements currently in effectand will be entitled to reimbursementfor relocation expenses from themainland United States to Hawaii. Additionally, each executive shall beentitled to a monthly housing allowanceat a level determined appropriate by us subject to a stated maximum. Executives receiving such housing allowance are also entitled to an additional payment in an amount such that, after payment by each executive of all income taxes imposedon the housing allowance and theadditional payment, the executivewould retain an amount equal to the original housing allowance.

Each employment agreementprovides that upon termination of anexecutive’s employment, he or she will be entitled to receive the sum of his or herunpaid annual base salary through the date of termination, and bonus if declaredor earned but not yet paid, any unpaidexpenses, any unpaid accrued vacation pay, andany amount arising from hisparticipation in, or benefits under, any of our employee benefits plans, programs or arrangements.

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**Grants of Plan-Based Awards**

The following table summarizes pertinent information concerning plan-based awards granted to theNamed Executive Officers during 2006:

**Grants of Plan-Based Awards**
| ** **                                                                | ** ** | ** **      | ** ** | ** **                                                                                     | ** ** | ** **                                                                                 | ** ** | **All  Other  Stock **                        | ** ** | ** **                                                                  | ** ** | ** **                                | ** ** | **Grant**                             | ** ** |
|---------------------------------------------------------------------------|------------|-----------------|------------|------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                | ** ** | ** **      | ** ** | **Estimated Future Payouts  Under Non-Equity Incentive  Plan Awards** | ** ** | **Estimated Future Payouts  Under Equity Incentive Plan  Awards** | ** ** | **Awards:  Number  of  Shares  or Stock  or** | ** ** | **All Other  Option  Awards:  Number of  Securities  Underlying** | ** ** | **Exercise  or  Base  Price  of  Option** | ** ** | **date  fair  value  of  stock  and** | ** ** |
| **Name**                                                                  | ** ** | **Grant  Date** | ** ** | **Threshold  ($)**                                                                             | ** ** | **Target  ($)**                                                                            | ** ** | **Maximum  ($)**                                   | ** ** | **Threshold  (#)**                                                          | ** ** | **Target  (#)**                           | ** ** | **Maximum  (#)**                      | ** ** | **Units  (#)** | ** ** | **Options  (#)** | ** ** | **Awards  ($/Sh)** | ** ** | **Option  Awards** | ** ** |
| **(a)**                                                                   | ** ** | **(b)**         | ** ** | **(c)**                                                                                        | ** ** | **(d)**                                                                                    | ** ** | **(e)**                                            | ** ** | **(f)**                                                                     | ** ** | **(g)**                                   | ** ** | **(h)**                               | ** ** | **(i)** | ** ** | **(j)** | ** ** | **(k)** | ** ** | **(l)** | ** ** |
|                                                                      |       |            |       |                                                                                           |       |                                                                                       |       |                                               |       |                                                                        |       |                                      |       |                                  |       |   |   |   |   |   |   |   |   |
| Michael S. Ruley  Chief Executive Officer and Director                    |       | N/A             |       | 100,716                                                                                        |       | 537,150                                                                                    |       | 644,580                                            |       | N/A                                                                         |       | N/A                                       |       | N/A                                   |       | N/A |   | N/A |   | N/A |   | 0 |   |
|                                                                      |       |            |       |                                                                                           |       |                                                                                       |       |                                               |       |                                                                        |       |                                      |       |                                  |       |   |   |   |   |   |   |   |   |
| Daniel P. O’Brien  Senior Vice President and Chief Financial Officer |       | N/A             |       | 67,875                                                                                         |       | 362,000                                                                                    |       | 434,400                                            |       | N/A                                                                         |       | N/A                                       |       | N/A                                   |       | N/A |   | N/A |   | N/A |   | 0 |   |
|                                                                      |       |            |       |                                                                                           |       |                                                                                       |       |                                               |       |                                                                        |       |                                      |       |                                  |       |   |   |   |   |   |   |   |   |
| Linda D. Frank  Former Senior Vice President, Sales                       |       | N/A             |       | 32,667                                                                                         |       | 174,225                                                                                    |       | 209,070                                            |       | N/A                                                                         |       | N/A                                       |       | N/A                                   |       | N/A |   | N/A |   | N/A |   | 0 |   |
|                                                                      |       |            |       |                                                                                           |       |                                                                                       |       |                                               |       |                                                                        |       |                                      |       |                                  |       |   |   |   |   |   |   |   |   |
| David A. Torline  Senior Vice President and Chief Information Officer     |       | N/A             |       | 67,514                                                                                         |       | 360,077                                                                                    |       | 432,092                                            |       | N/A                                                                         |       | N/A                                       |       | N/A                                   |       | N/A |   | N/A |   | N/A |   | 0 |   |
|                                                                      |       |            |       |                                                                                           |       |                                                                                       |       |                                               |       |                                                                        |       |                                      |       |                                  |       |   |   |   |   |   |   |   |   |
| Harvey A. Plummer  Senior Vice President, Operations and Engineering      |       | 3/08/06         |       | 39,754                                                                                         |       | 212,019                                                                                    |       | 254,423                                            |       | N/A                                                                         |       | N/A                                       |       | N/A                                   |       | N/A |   | 783 |   | $ | 1,000 |   | 313,200 |   |
|                                                                           |            |                 |            |                                                                                                |            |                                                                                            |            |                                                    |            |                                                                             |            |                                           |            |                                       |            |  |  |  |  |  |  |  |  |  |

 

*Exercisability of Options.*Subject to the NamedExecutive Officer’s continued employment with the Company, 25% of the optionsgranted generally will vest automatically in equal annual installments of 5% oneach anniversary of the option holder’s hire and 75% will vest in full on theday immediately preceding the eighth anniversary of the grant date subject toearlier vesting if certain performance conditions are met. The performancecondition component of the Plan provides that an installment equal to 5% (15%if all three targets are met) of the option will vest for each fiscal year,beginning with the year of grant and ending with the fourth year thereafter,for the following three targets, as defined in the Plan: Revenue, EBITDA(Earnings Before Interest, Taxes, Depreciation and Amortization), and FreeCash-Flow.

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*Expiration of Stock Options*. The termof an option is set by the Compensation Committee of Hawaiian Telcom Holdco,Inc. (or the Boardof Directors of Hawaiian Telcom Holdco,Inc. in the case of options grantedto independent directors), provided the option term is not longer than ten years from the date of grant.

*Corporate Event*. Unless otherwise provided bythe terms of outstanding awards, if a corporate event (as definedin the Stock Option Plan to include any unusual or nonrecurring transaction or event)occurs, then the Compensation Committeeof Hawaiian Telcom Holdco, Inc. (or the Board of Directors of Hawaiian Telcom Holdco, Inc. in the case of options granted to independent directors) may take one or more of the following actions to prevent dilution or enlargement of benefits or potential benefits under the Stock Option Plan: (i) purchaseoutstanding options for an amount ofcash, securities or propertyor replace outstanding options with other rights or property; (ii) terminate the award upon the occurrence of suchevent; (iii) provide that only for a specified period of time prior to the occurrence of such event, options will beexercisable, notwithstanding any other provision in the Stock Option Plan or option award agreementto the contrary; (iv) providethat each award will be assumed orsubstituted for an equivalent award by any successor or survivor corporation; or (v) make adjustments in the number and types of awards, the terms and conditions of awards and any performancecriteria included in awards.

**Outstanding Equity Awards at Fiscal Year-End**

The following tablesummarizes the outstanding equity award holdings held by the Named ExecutiveOfficers at the end of 2006. There was no public trading market for the common stock ofHawaiian Telcom Holdco, Inc. as of December 31, 2006.

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**OutstandingEquity Awards at Fiscal Year-End**
| ** **                                                                   | ** ** | **Option Awards**                                           | ** ** | **Stock Awards**                                            | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **Number of  Securities  Underlying  Unexercised  Options** | ** ** | **Number of  Securities  Underlying  Unexercised  Options** | ** ** | **Equity  Incentive  Plan  Awards:  Number of  Securities  Underlying  Unexercised  Unearned** | ** ** | **Option  Exercise** | ** ** | **Option** | ** ** | **Number  of  Shares  or Units  of  Stock  That  Have  Not** | ** ** | **Market  Value  of  Shares  or  Units  of  Stock  That  Have  Not** | ** ** | **Equity  Incentive  Plan  Awards:  Number  of  Unearned  Shares,  Units or  Other  Rights  That  Have Not** | ** ** | **Equity  Incentive  Plan  Awards:  Market  or Payout  Value of  Unearned  Shares,  Units or  Other  Rights  That  Have Not** | ** ** |
| **Name**                                                                     | ** ** | **(#)  Exercisable**                                             | ** ** | **(#)(2)  Unexercisable**                                        | ** ** | **Options  (#)** | ** ** | **Price  ($)** | ** ** | **Expiration  Date** | ** ** | **Vested  (#)** | ** ** | **Vested  ($)** | ** ** | **Vested  (#)** | ** ** | **Vested  ($)** | ** ** |
| **(a)**                                                                      | ** ** | **(b)**                                                          | ** ** | **(c)**                                                          | ** ** | **(d)** | ** ** | **(e)** | ** ** | **(f)** | ** ** | **(g)** | ** ** | **(h)** | ** ** | **(i)** | ** ** | **(j)** | ** ** |
| Michael  S. Ruley  Chief Executive Officer  and Director                     |       | 2,641                                                            |       | 1,586                                                            |       | 6,340 |   | 1,000 |   | 9/30/2014 |   | N/A |   | N/A |   | N/A |   | N/A |   |
|                                                                         |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Daniel  P. O’Brien  Senior Vice President  and Chief Financial  Officer |       | 1,095                                                            |       | 1,096                                                            |       | 3,288 |   | 1,000 |   | 5/01/2015 |   | N/A |   | N/A |   | N/A |   | N/A |   |
|                                                                         |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Linda  D. Frank (1)  Former Senior Vice  President, Sales                    |       | 587                                                              |       | 352                                                              |       | 1,409 |   | 1,000 |   | 5/01/2015 |   | N/A |   | N/A |   | N/A |   | N/A |   |
|                                                                         |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| David  A. Torline  Senior Vice President  and Chief Information  Officer     |       | 1,369                                                            |       | 822                                                              |       | 3,288 |   | 1,000 |   | 9/28/2014 |   | N/A |   | N/A |   | N/A |   | N/A |   |
|                                                                         |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Harvey  A. Plummer  Senior Vice President,  Operations and  Engineering      |       | 587  0                                                           |       | 352  196                                                         |       | 1,409  587 |   | 1,000  1,000 |   | 5/01/2015  3/07/2016 |   | N/A |   | N/A |   | N/A |   | N/A |   |

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(1)             Alloptions held by Ms. Frank expired 30 days following her termination ofemployment effective December 31, 2006.

(2)             25%of each option is subject to time vesting (5% on each anniversary of the grantdate), and the other 75% is performance-based and becomes exercisable whencertain EBITDA, revenue, and free cash flow targets are met (up to 15% eachyear beginning with the year of grant). The grant dates for these options are:Mr. Ruley - 10/01/2004, Mr. O’Brien - 5/02/2005, Ms. Frank -5/02/2005, Mr. Torline - 9/29/2004, and Mr. Plummer - 5/02/2005 (forthe option expiring 5/01/2015) and 3/08/2006 (for the option expiring3/07/2016).

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**OptionExercises and Stock Vested**

There were noexercises of stock options or vesting of stock by the Named Executive Officersduring 2006.

**Pension Benefits**

Our Named Executive Officers are eligible to participate in the Hawaiian Telcom Management Pension Plan asdescribed below. The following tablecontains information concerning pension benefits for the Named ExecutiveOfficers at the end of 2006.

**Pension Benefits**
| **Name**                                                                  | ** ** | **Plan Name**                        | ** ** | **Number of  Years Credited  Service  (#)** | ** ** | **Present  Value of  Accumulated  Benefit  ($) (1)** | ** ** | **Payments  During Last   Fiscal Year  ($)** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| **(a)**                                                                   | ** ** | **(b)**                                   | ** ** | **(c)**                                               | ** ** | **(d)**                                                        | ** ** | **(e)**                                                     | ** ** |
| Michael S. Ruley  Chief Executive Officer and Director                    |       | Hawaiian  Telcom  Management Pension Plan |       | 1.7                                                   |       | 18,914                                                         |       | 0                                                           |       |
|                                                                      |       |                                      |       |                                                  |       |                                                           |       |                                                        |       |
| Daniel P. O’Brien  Senior Vice President and Chief Financial Officer |       | Hawaiian  Telcom  Management Pension Plan |       | 1.7                                                   |       | 22,627                                                         |       | 0                                                           |       |
|                                                                      |       |                                      |       |                                                  |       |                                                           |       |                                                        |       |
| Linda D. Frank  Former Senior Vice President, Sales                       |       | Hawaiian  Telcom  Management Pension Plan |       | 1.7                                                   |       | 22,504                                                         |       | 0                                                           |       |
|                                                                      |       |                                      |       |                                                  |       |                                                           |       |                                                        |       |
| David A. Torline  Senior Vice President and Chief Information Officer     |       | Hawaiian  Telcom  Management Pension Plan |       | 1.7                                                   |       | 22,634                                                         |       | 0                                                           |       |
|                                                                      |       |                                      |       |                                                  |       |                                                           |       |                                                        |       |
| Harvey A.  Plummer  Senior Vice President, Operations and Engineering     |       | Hawaiian Telcom  Management Pension Plan  |       | 1.7                                                   |       | 22,534                                                         |       | 0                                                           |       |

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(1)             TheHawaiian Telcom Management Pension Plan is a cash balance plan, therefore, noassumptions are used to determine the present value, and the amounts shown inthis column are the total cash balances of the Named Executive Officers’accounts under the Plan as of December 31, 2006.

The Hawaii Telcom Management Pension Plan is anoncontributory, tax-qualified pension plan for salaried employees that provides for distribution of benefits in alump sum or an annuity, at the participant’s election. Pension benefits under this plan are calculated using a cash balance formula that provides for paycredits equal to four to seven percent(depending on age and service) of annual eligible pay up to the IRS limit on compensation ($225,000 in 2007). The pay credits accrue to participants’ accounts on a monthly basis. eligible pay includes base salary, certain sales commissions and bonuses, certain short term incentive pay, differentials, premiums,single sum merit payments, corporate profit sharing awards, and any back pay awards. The amounts do not give effect tosocial security offsets.

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Additionally,monthly interest credits are made to theparticipant’s account balance basedupon the prevailing market yields on certain U.S. Treasury obligations. In orderto record these pay and interest credits, the plan administratormaintains a hypothetical account balance for each participant.

EffectiveApril 1, 2007, the Hawaii Telcom Management Pension Plan will be “frozen”.  As a result, plan participants will not earnany additional contributions to their cash balance accounts and the plan willbe closed to employees hired on or after April 1, 2007.  Participants will become 100% vested in theirpension benefits accrued through April 1, 2007, and will continue to earninterest credits on account balances as long as such balances remain in theplan.

**Nonqualified Deferred Compensation**

None of the Named Executive Officers participate in orhave account balances in a non-qualified defined contribution plan or otherdeferred compensation plans maintained by the Company.

**Potential Payments on Termination orChange in Control**

Theemployment agreement of each Named Executive Officer provides that upon termination of the executive’s employment, he or she will be entitled to receive the sum of his or herunpaid annual base salary through the date of termination, and bonus if declaredor earned but not yet paid, any unpaidexpenses, any unpaid accrued vacation pay, andany amount arising from hisparticipation in, or benefits under, any of our employee benefits plans, programs or arrangements. The quantities stated below assumetermination as of December 31, 2006.

Upon termination of Mr. Ruley’semployment either by us without cause or by him for good reason, he is entitled to a lump sum amount equal to $900,000 and, for thelonger of the remainder of the term of employment or 12 months, continued coverage under all of our group health benefit plans in which he and any of his dependents were entitled to participate immediately prior to termination. The agreement also provides that upon terminationof Mr. Ruley’s employment due to his death or disability, he or his estate shall be entitled to 12 months of his annual base salary ($537,150) and a pro rata portion of his annual bonus, to be determined in good faith by ourCompensation Committee. Upon termination of his employment dueto non-extension of the employmentagreement by us, Mr. Ruley shall be entitled to six months of his annual base salary ($268,575) and a pro rata portion of his annual bonus, to be determined in good faith by our Compensation Committee.

Upon termination of Mr. Torline’semployment either by us without cause or by him for good reason, he is entitled to a lump sum amount equal to his stated annual base salary for 12months ($363,100), a lump sum payment of the pro rata portion of his target level bonus with a minimum payment of $200,000 and, for thelonger of the remainder of the term of employment or 12 months, continued coverageunder all of our group health benefit plans in which he and any of his dependents were entitled to participate immediately prior to termination. The agreement also provides that upon termination of Mr. Torline’s employment

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dueto his death or disability, he or his estate shall be entitled to 12 months of his annual base salary($363,100) and a pro rata portion of his annual bonus, to be determined in good faith by our CompensationCommittee. Upon termination of hisemployment due to non-extension of theemployment agreement by us, Mr.Torline shall be entitled to six months of his annual base salary ($181,550) and a pro rata portion of his annual bonus, to be determined in good faith by our Compensation Committee.

Upon termination of Mr. O’Brien’semployment either by us without cause or by him for good reason, he is entitled to an amount equal to his stated annual base salary for 12 months ($365,600), a pro-ratedbonus for the year of termination(but not less than one-half of his target level bonus) and, for12 months following termination, continued coverage under all of our grouphealth benefit plans in which he and any of his dependents were entitled to participate immediately prior totermination. The agreement also provides that upon termination of his employment due to his death or disability, he or his estateshall be entitled to six months of his annual base salary ($182,800) and thepro rata portion of his annual bonus,to be determined in good faith by our Compensation Committee. Upon termination of his employment due to non-extension of the employment agreement by us, Mr. O’Brien shallbe entitled to six months of hisannual base salary ($182,800) and a pro rataportion of his annual bonus, to be determined in good faith by ourCompensation Committee.

Upon termination of Mr. Plummer’semployment either by us without cause or by him for good reason, he is entitled to an amount equal to his stated annual base salary for six months ($150,000) and,for six months following termination, continued coverage under all of our group health benefit plans in which he and any of his dependents were entitledto participate immediately prior totermination. The agreement also provides that upon termination of Mr. Plummer’s employment due to his death or disability, he or his estate shall be entitled to six monthsof his annual base salary ($150,000)and thepro rata portion of his annual bonus, to be determined in good faith by our Compensation Committee.

Upon termination of Ms. Frank’semployment effective December 31,2006, she received the amountsentitled to her under the terms of her employment agreement for termination without cause, including an amount equal to her stated annual base salary for nine months ($174,225), a lump sum payment of hertarget level bonus ($174,225), and, for ninemonths following termination, continued coverage under all of our group healthbenefit plans in which she andany of her dependents were entitled to participate immediately prior to termination.

Each executive is prohibited from competing with us during the term of his or her employment and for one year following thetermination of his or her employmentor the expiration of his term of employment, whichever is longer. Each employment agreement also places restrictions on the disseminationby the executives of proprietary informationand establishes our exclusive property right in intellectual property directly relatedto our company which is discovered, invented or originated by the executives during his or her term of employment.

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**Director Compensation**

Directorswho are employed either by us or byCarlyle are not separately compensated for their service as directors.Independent directors receive an annualcash retainer of $50,000 and anadditional $5,000 if also serving asChairperson of a Committee. The independent directors also receive an attendance fee of $1,500 per Board meeting attended in person and, if longer than three hours, $1,000 per Board meeting attendedtelephonically. In addition, we granted non-qualified stock optionsto purchase shares of common stock of Hawaiian Telcom Holdco, Inc. to eachindependent director upon commencement of service pursuant to our stock option plan. The exercise price per sharefor these options is greater than or equal tothe fair market value of the common stock of Hawaiian Telcom Holdco, Inc. on the grant date, and each option will expire 10 yearsfrom the date of grant, or earlier if the optionee ceasesto be a director. Each option currently outstanding becomes exercisable in equalannual installments through 2010, beginning one year after the grant date.

The following table sets forth a summary of the compensation we paid to our directors during 2006.

**Director Compensation**
| **Name**              | ** ** | **Fees Earned  or Paid  in Cash  ($)** | ** ** | **Stock  Awards  ($)** | ** ** | **Option  Awards  ($)** | ** ** | **Non-Equity  Incentive  Plan  Compensation  ($)** | ** ** | **Change in  Pension  Value  and  Nonqualified  Deferred  Compensation  Earnings** | ** ** | **All  Other  Compensation  ($)** | ** ** | **Total  ($)** | ** ** |
|-----------------------|------------|-------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|-----------------------------------|------------|----------------|------------|
| **(a)**               | ** ** | **(b)**                                               | ** ** | **(c)**                | ** ** | **(d)**                 | ** ** | **(e)**                                            | ** ** | **(f)**                                                                                 | ** ** | **(g)**                           | ** ** | **(h)**        | ** ** |
| Daniel F. Akerson     |       | 0                                                     |       | N/A                    |       | 0                       |       | N/A                                                |       | N/A                                                                                     |       | 0                                 |       | 0              |       |
| James A. Attwood, Jr. |       | 0                                                     |       | N/A                    |       | 0                       |       | N/A                                                |       | N/A                                                                                     |       | 0                                 |       | 0              |       |
| Matthew P. Boyer      |       | 0                                                     |       | N/A                    |       | 0                       |       | N/A                                                |       | N/A                                                                                     |       | 0                                 |       | 0              |       |
| Walter A. Dods, Jr.   |       | 56,000                                                |       | N/A                    |       | 0                       |       | N/A                                                |       | N/A                                                                                     |       | 0                                 |       | 56,000         |       |
| Stephen C. Gray       |       | 14,000                                                |       | N/A                    |       | 1,610(1)                |       | N/A                                                |       | N/A                                                                                     |       | 0                                 |       | 14,000         |       |
| William E. Kennard    |       | 0                                                     |       | N/A                    |       | 0                       |       | N/A                                                |       | N/A                                                                                     |       | 0                                 |       | 0              |       |
| Raymond A. Ranelli    |       | 61,000                                                |       | N/A                    |       | 0                       |       | N/A                                                |       | N/A                                                                                     |       | 0                                 |       | 61,000         |       |

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(1)  Represents the dollar value recognized forfinancial statement reporting purposes for the fiscal year identified in column(b) in accordance with SFAS No. 123R. The assumptions used in this calculationare set forth in Note 12 to the Company’s consolidated financialstatements included in this annual report on Form 10-K. The grantdate fair value of the option is $62,800. The aggregate number of option sharesoutstanding at year-end is 157.

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**Compensation Committee Interlocks and Insider Participation**

The current members of our Compensation Committee members are Messrs. Kennard (Chairman), Attwood, Boyer, and Dods. None ofthe members of our Compensation Committee serves, or has served,as an officer or employee of the Company. None of our executive officers currently serves, or in the pastyear has served, as a member of theBoard of Directors or Compensation Committee of any entity that has one or more executive officers who serve on ourBoard of Directors or Compensation Committee. Messrs. Kennard, Attwood,and Boyer are associated with Carlyle. Affiliates of Carlyle control a majority of the common stock of Hawaiian Telcom Holdco, Inc. and therefore have the power tocontrol our affairs and policies. In addition, Carlyle and its affiliates entered into a management agreement with us relating to the provision of certain financial and strategic advisory servicesand consulting services. SeeItem 13, “Certain Relationships and Related Transactions, andDirector Independence.”

**Compensation Committee Report**

The CompensationCommittee has reviewed and discussed the Compensation Discussionand Analysis section of this annual report with management and, based onthe review and these discussions, has recommended to the Board of Directorsthat the Compensation Discussion and Analysis disclosure be included inthis annual report on Form 10-K.

William E. Kennard (Chairman)

James A. Attwood, Jr.

Matthew P. Boyer

Walter A. Dods, Jr.

**Item 12.Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters**

Allof our common stock is held by Hawaiian Telcom Holdco, Inc. and its address is c/o TheCarlyle Group, 520 Madison Avenue, 41st Floor, New York, NY 10022. The following table sets forthinformation with respect to thebeneficial ownership of the common stock of Hawaiian Telcom Holdco, Inc., as of March 15, 2007, by:

·                  each person that is a beneficialowner of more than 5% of the commonstock;

·                  each of our directors and Named Executive Officers; and

·                  all of our directors and executive officers as a group.

The amounts and percentages of common stock beneficially owned are reported on the basis ofregulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or sharesvoting power, which includes the power to vote or direct the voting of a security, or investment power, which includes thepower to dispose ofor to direct the disposition of a security. A person is also deemed tobe a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Securities that can be so acquired are deemed to be outstanding for purposes of computing such person’sownership percentage, but not for purposes of computing any other person’s percentage. Under these rules, more thanone person may be deemed a beneficial owner of the

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same securities and a personmay be deemed to be a beneficial owner of securities as to whichsuch person has no economic interest.

Except as otherwiseindicated in these footnotes, each ofthe beneficial owners listed has, to our knowledge, sole voting andinvestment power with respect to the indicated shares of common stock.
| ** **                                                             | ** ** | **Beneficial Ownership of Holdings**   | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| **Name of Beneficial Owner**                            | ** ** | **Number of  Shares of  Common Stock** | ** ** | **Percentage of  Outstanding  Common Stock** | ** ** |
| TCG Holdings,  L.L.C. (1)(2)                                      |       | 428,000                                               |       | 100 |   |
| Michael S. Ruley (3) (4)                                          |       | 2,641                                                 |       | * |   |
| David A. Torline (3) (4)                                          |       | 1,369                                                 |       | * |   |
| Daniel P.  O’Brien (3) (4)                                   |       | 1,095                                                 |       | * |   |
| Harvey A.  Plummer (3) (4)                                        |       | 626                                                   |       | * |   |
| Linda D. Frank (3) (4)                                            |       | 0                                                     |       | * |   |
| Daniel F.  Akerson (5)                                                 |       | —                                                |       | — |   |
| James A.  Attwood, Jr. (5)                                        |       | —                                                |       | — |   |
| Matthew P. Boyer (5)                                              |       | —                                                |       | — |   |
| Walter A. Dods,  Jr. (3) (6)                                      |       | 78                                                    |       | * |   |
| Stephen C. Gray (4)                                                    |       | 0                                                     |       | 0 |   |
| William E.  Kennard (5)                                           |       | —                                                |       | — |   |
| Raymond A.  Ranelli (3) (4)                                       |       | 78                                                    |       | * |   |
| All executive officers  and directors as a group (18 persons) (3) |       | 6,901                                                 |       | 1.6 |   |

----

* Signifies less than 1%.

(1)                   Sharesshown as beneficially owned by TCG Holdings, L.L.C. are held directly byCarlyle Partners III Hawaii, L.P., CP III Coinvestment, L.P. and Carlyle HawaiiPartners, L.P., which we collectively refer to as the Carlyle Funds. TC Group,L.L.C. exercises investment discretion and control over the shares indirectlyheld by each of the Carlyle Funds through its indirect subsidiary TC Group III,L.P., which is the sole general partner of each the Carlyle Funds. TCGHoldings, L.L.C. is the sole managing member of TC Group, L.L.C. TC GroupL.L.C. is the sole managing member of TC Group III, L.L.C. TC Group III, L.L.C.is the sole general partner of TC Group III, L.P. TCG Holdings, L.L.C., aDelaware limited liability company, in the capacity as sole managing member ofTC Group, L.L.C., exercises investment discretion and control of the sharesbeneficially owned by TC Group, L.L.C. TCG Holdings, L.L.C. is managed by athree-person managing board, and all board action relating to the voting ordisposition of these shares requires approval of a majority of the board. Themembers of the managing board are William E. Conway, Jr., Daniel A. D’Anielloand David Rubenstein, all of whom disclaim beneficial ownership of theseshares.

(2)                   Eachof Carlyle Partners III Hawaii, L.P., CP III Coinvestment, L.P. and CarlyleHawaii Partners, L.P. has an address c/o The Carlyle Group, 520 Madison Avenue,41st Floor, New York, New York 10022.

(3)                   Representsshares of common stock that are issuable upon the exercise of options or willbecome vested within 60 days of March 15, 2007.

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(4)                   Thebusiness address for Michael S. Ruley, David A. Torline, Daniel P. O’Brien,Harvey A. Plummer, Stephen C. Gray, and Raymond A. Ranelli is c/o GeneralCounsel, Hawaiian Telcom Communications, Inc., 1177 Bishop Street, Honolulu,Hawaii 96813.

(5)                   Thebusiness address for each such person is c/o The Carlyle Group 520 MadisonAvenue, 41st Floor, New York, New York 10022.

(6)                   Thebusiness address for such person is c/o First Hawaiian Bank, 999 Bishop Street,Suite 2828, Honolulu HI 96813.

**Securities Authorizedfor Issuance Under Equity Compensation Plans**

We donot have any compensation plans underwhich our equity securities are authorized for issuance.

**Item 13.Certain Relationships and RelatedTransactions, and Director Independence**

The Company’s Codeof Business Conduct requires employees to disclose any actual or perceivedconflict of interest and any material transaction that could be expected togive rise to a conflict of interest, including a potential related partytransaction. Any potential conflict of interest must be approved by the ChiefExecutive Officer, or if the conflict of interest involves a material amount,by the Board of Directors. Directors also are required, pursuant to the Code ofConduct for the Directors of the Company, to disclose any situation thatinvolves, or may reasonably be expected to involve, a conflict of interest withthe Company.  Such disclosure must bemade promptly to the Chairman of the Nominating and Governance Committee.  In addition, the Charter of the AuditCommittee requires the Audit Committee to review reports and disclosures ofrelated party transactions.

**Management Agreement**

In connection with the 2005 Acquisition, weentered into a management consulting agreement with Carlyle for the provision of certain financial and strategic advisory servicesand consulting services. Wehave agreed to pay Carlyle an annual monitoring fee equal to $1.0 million commencing in 2005 and continuing until such time as the agreement is terminated. In addition, wepaid Carlyle a one-time transaction fee for structuring the 2005 Acquisition and related transactions. The agreement also provides forreimbursement of fees and expensespaid by Carlyle for our account.In addition, under the terms of the agreement, Carlyle has the right toact, in return for additional fees, as our financial advisor or investment banker forany merger, acquisition, disposition,finance or the like if we decide we need to engage someone to fill such a role.We have agreed to indemnify Carlyle and its officers and representatives for losses relating to the servicescontemplated by the agreement and the engagement of affiliates of Carlyle pursuant to, and the performance by them of theservices contemplated by, the agreement. The agreement shall continue until such timeas Carlyle or one or more of its affiliates collectively control, in the aggregate, less than 10% of our equity interests, or such earlier time as we and Carlyle may mutually agree.

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**Management Rights Agreement**

Inconnection with the 2005 Acquisition, the Company, Hawaiian Telcom Holdco, Inc., affiliates of Carlyle, and our two directsubsidiaries (Hawaiian Telcom, Inc. andHawaiian Telcom Services Company, Inc.), entered into a management rights agreement.Among other things, the Company andHawaiian Telcom Holdco, Inc. agreed to the following:

·                  to grant Carlyle the right to nominate onedirector to serve on the Board of Directors of Hawaiian Telcom Holdco, Inc.;

·                  to grant Carlyle the right to nominate one director to serve onthe Board of Directors of each of Hawaiian Telcom, Inc. andHawaiian Telcom Services Company,Inc.;

·                  to vote all of their beneficially owned voting securities in Hawaiian Telcom, Inc. and Hawaiian Telcom Services Company, Inc. to elect the director nominated by Carlyle toserve as a member of each of the Board of Directors of Hawaiian Telcom, Inc. and Hawaiian Telcom ServicesCompany, Inc.; and

·                  to grant an irrevocable proxy to Carlyle to vote their voting securities in Hawaiian Telcom, Inc. and Hawaiian TelcomServices Company, Inc. toelect the director nominated by Carlyle to serve as amember of each of the Board ofDirectors of Hawaiian Telcom, Inc. and Hawaiian Telcom Services Company, Inc.

The term of the management rights agreementwith respect to our two direct subsidiaries will terminate when Carlyle and its affiliates collectively no longer beneficially own anyvoting securities of such subsidiaries. The termof the management rights agreementwith respect to Hawaiian Telcom Holdco,Inc. will terminate when Carlyle and its affiliates collectively no longer beneficially own any voting securities of Hawaiian Telcom Holdco, Inc.

The Board of Directorshas determined that Messrs. Ranelli, Dods, and Gray are independent based onthe NASDAQ rules.  In making suchdetermination, the Board considered the Company’s banking relationship withFirst Hawaiian Bank, of which Mr. Dods is the non-executive Chairman of the Board.

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**Item 14. Principal Accountant Fees and Services**

Deloitte & Touche LLP serves as our independent registered publicaccounting firm. The following table presents fees for professional servicesrendered by Deloitte & Touche LLP for theaudit of our annual financial statementsfor the years ended December 31, 2006and December 31, 2005, and fees forother services rendered by Deloitte & Touche LLP during those periods.
| ** **              | ** ** | **(In Thousands)** | ** ** |
|-------------------------|------------|-------------------------|------------|
| ** **              | ** ** | **2006**                | ** ** | **2005** | ** ** |
| Audit fees (1)          |       | $                       | 807        |   | $ | 878 |   |
| Audit-related  fees (2) |       | 339                     |       | 859 |   |
| Tax fees (3)            |       | 5                       |       | 121 |   |
| All other fees  (4)     |       | —                  |       | 5,418 |   |
|                    |       | $                       | 1,151      |   | $ | 7,276 |   |
| Total fees              |       |                    |       |   |   |

----

(1)             Audit fees consisted principally of feesfor the audit of the annual financial statements and reviews of the quarterlyfinancial statements, including fees relating to the filing of our registrationStatement on Form S-4.

(2)             Audit-related feesconsisted principally of fees for other audits (i.e., publishing division, benefitplans and insurance subsidiary audits) not included under audit fees, and feesfor acquisition due diligence.

(3)             Tax fees consistedprincipally of fees for tax compliance, tax advice and tax planning.

(4)             Allother fees consisted principally of fees for human capital and other transitionadvisory services.

**Engagement of the Independent RegisteredPublic Accounting Firm and Pre-approval Policy**

In accordance withits Charter, the Audit Committee has the sole authority and responsibility toappoint, compensate, oversee, and if necessary, replace the independent registeredpublic accounting firm.  The AuditCommittee also has the sole authority to approve all audit engagement fees andterms.  In addition, the Audit Committeemust pre-approve all services provided to the Company by the Company’sindependent registered public accounting firm.

Pursuant toSection 202 of the Sarbanes-Oxley Act of 2002, the Audit Committee pre-approvedevery engagement of the Company’s independent registered public accounting firm,Deloitte & Touche LLP, to perform audit or non-audit services on behalf ofthe Company or any of its subsidiaries since May 2005.

 

**PART IV**

**Item 15. Exhibitsand Financial Statement Schedule**

(a) The following documents arebeing filed as part of this report.

1.               Consolidated Financial Statements. Financial statements and supplementary data required by this Item 15 are set forthat the pages indicated in Item 8 above.

2.               FinancialStatement Schedules. All schedules forwhich provision is made in the applicable accounting regulations of theSEC are not required under the relatedinstructions, are inapplicable or notmaterial, or the information called for thereby is otherwise included in thefinancial statements and therefore has been omitted.

3.               Exhibits required by Item 601 of Regulation S-K.

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| Exhibit No. | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                          |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                |
| 2.1†   |       | Amended and Restated Agreement of Merger among GTE  Corporation, Verizon HoldCo LLC and  Hawaiian Telcom Holdco, Inc. and Hawaiian Telcom Communications, Inc.’s, dated as of April 8, 2005 (incorporated by  reference to Exhibit 2.1 on Hawaiian Telcom Communications, Inc. Form  S-4, filed with the SEC on January 19, 2006, File No. 333-131152).                                        |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.1†   |       | Certificate of Incorporation  of Hawaiian Telcom Communications, Inc. (f/k/a Paradise MergerSub, Inc.), filed May 19,2004 (incorporated by reference to Exhibit 3.1 on Hawaiian Telcom Communications,  Inc.’s Form S-4, filed with the SEC on January 19, 2006, File No.  333-131152).                                                                                                        |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.2†   |       | Certificate of Amendment  to Certificate of Incorporation of Hawaiian Telcom Communications, Inc. (f/k/a Paradise MergerSub, Inc.), filed October  27, 2004 (incorporated by reference to Exhibit 3.2 on Hawaiian Telcom Communications,  Inc.’s Form S-4, filed with the SEC on January 19, 2006, File No. 333-131152).                                                                       |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.3†   |       | Certificate of Amendment  to Certificate of Incorporation of Hawaiian Telcom Communications, Inc. (f/k/a Hawaiian Telcom MergerSub, Inc.), filed March 1, 2005 (incorporated by reference to Exhibit 3.3 on Hawaiian  Telcom Communications, Inc.’s Form S-4,  filed with the SEC on January 19, 2006, File No. 333-131152).                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.4†   |       | Certificate of Correction to Certificate  of Amendment to Certificate of Incorporation of Hawaiian  Telcom Communications, Inc. (f/k/a Hawaiian Telcom MergerSub, Inc.) filed  October 27 2004, filed April 15, 2005 (incorporated by reference to Exhibit 3.4 on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006, File No. 333-131152).               |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.5†   |       | Bylaws of Hawaiian Telcom Communications, Inc.  (f/k/a Paradise MergerSub, Inc.), adopted on May 19, 2004 (incorporated by reference to Exhibit 3.12 on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006, File No. 333-131152).                                                                                                                         |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.6†   |       | Certificate of Merger  of Verizon HoldCo LLC into Hawaiian Telcom Communications, Inc., filed May 2, 2005 (incorporated by reference to Exhibit 3.5 on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006, File No. 333-131152).                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.1†   |       | Indenture with respect to the Senior Floating Rate Notes due 2013 and the 9.75% Senior Fixed Rate Notes due 2013 between Hawaiian Telcom  Communications, Inc. and U.S. Bank  National Association, as trustee, dated  May 2, 2005 (incorporated by reference to Exhibit 4.1 on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006, File No. 333-131152). |

 

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| 4.2†  |   | Form of Senior Floating Rate Notes due 2013 (included in exhibit 4.1) (incorporated by reference  to Exhibit 4.2 on Hawaiian Telcom Communications, Inc.’s Form  S-4, filed with the  SEC on January 19, 2006, File No. 333-131152).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.3†  |   | Form of 9.75% Senior Fixed Rate Notes due 2013 (included in exhibit 4.1) (incorporated by reference to Exhibit 4.3 on Hawaiian  Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006, File  No. 333-131152).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.4†  |   | Indenture with respect to the 12 1/2% Senior  Subordinated Notes due 2015 between  Hawaiian Telcom Communications, Inc. and U.S. Bank National Association, as trustee, dated May 2,  2005 (incorporated by reference to Exhibit 4.4 on Hawaiian Telcom Communications, Inc.’s Form  S-4, filed with the  SEC on January 19, 2006, File No. 333-131152).                                                                                                                                                                                                                                                                                                                                                                                                                              |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.5†  |   | Form of 12  1/2% Senior Subordinated Notes due  2015 (included in exhibit 4.4) (incorporated by reference to Exhibit 4.5 on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006, File No.  333-131152).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.6†  |   | Exchange and Registration Rights Agreement among Hawaiian Telcom Communications, Inc., Hawaiian Telcom,  Inc., Hawaiian Telcom Services  Company, Inc. and Goldman, Sachs &  Co., J.P. Morgan Securities Inc., Lehman Brothers Inc., ABN AMRO Incorporated and Wachovia Capital Markets LLC, dated May 2, 2005 (incorporated by reference to Exhibit 4.6 on Hawaiian Telecom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006, File No. 333-131152).                                                                                                                                                                                                                                                                                                       |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.1† |   | Credit Agreement, dated as of  May 2, 2005, among Hawaiian Telcom Holdco, Inc., Hawaiian  Telcom Communications, Inc., JPMorgan  Chase Bank, N.A., as administrative  agent, J.P. Morgan Securities Inc. and Goldman Sachs Credit Partners L.P., as joint lead arrangers, J.P. Morgan Securities Inc., Goldman Sachs Credit Partners L.P. and Lehman Commercial Paper Inc., as joint book runners, Goldman Sachs Credit Partners L.P., as syndication agent,  Lehman Commercial Paper Inc., as documentation  agent, ABN AMRO Bank, N.V. and Wachovia Bank, N.A., as co- documentation agents and CoBank, ACB, as agent (incorporated by reference to Exhibit 10.1 on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006, File No.  333-131152). |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.2† |   | Guarantee and Collateral Agreement, dated as of May 2, 2005, among Hawaiian Telcom Holdco, Inc., Hawaiian Telcom  Communications, Inc., Hawaiian Telcom, Inc., Hawaiian Telcom Services Company,  Inc. and JPMorgan Chase Bank, N.A., as collateral agent (incorporated by reference to Exhibit 10.2 on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006, File  No. 333-131152).                                                                                                                                                                                                                                                                                                                                                               |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.3† |   | Shared Collateral Agreement, dated as of May 2, 2005, between  Hawaiian Telcom, Inc. and JPMorgan Chase  Bank, N.A., as Collateral Agent  (incorporated by reference to Exhibit 10.3 on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the  SEC on January 19, 2006, File No. 333-131152).                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

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| 10.4†   |   | Directory Services Agreement by and between Hawaiian Telcom Communications, Inc. (f/k/a Hawaiian Telcom Merger  Sub, Inc.) and L. M. Berry and Company, effective as of February 4, 2005 (incorporated by reference to Exhibit 10.8 on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006, File  No. 333-131152).                    |
|--------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 10.5         |   | Amendment Two to Directory  Services Agreement by and between Hawaiian Telcom Communications, Inc. (f/k/a Hawaiian Telcom Merger Sub, Inc.) and L. M. Berry  and Company, dated December 21, 2005.                                                                                                                                                                             |
|         |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 10.6         |   | Amendment Three to Directory  Services Agreement by and between Hawaiian Telcom Communications, Inc. (f/k/a Hawaiian Telcom Merger Sub, Inc.) and L. M. Berry  and Company, effective as of September 29, 2006.                                                                                                                                                                |
|         |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 10.7         |   | Amendment Four to Directory  Services Agreement by and between Hawaiian Telcom Communications, Inc. (f/k/a Hawaiian Telcom Merger Sub, Inc.) and L. M. Berry  and Company, effective as of January 1, 2007.                                                                                                                                                                    |
|         |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 10.8†   |   | Master Services Agreement, dated as of August 6, 2004, by and between Hawaiian Telcom  Communications, Inc. (f/k/a Hawaiian Telcom MergerSub, Inc.) and BearingPoint,  Inc (incorporated by reference  to Exhibit 10.5 on Hawaiian Telcom Communications, Inc.’s Amendment No. 1 to Form S-4, filed with  the SEC on March  31, 2006, File No. 333-131152).               |
|         |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 10.9 †  |   | Amendment No. 1 dated December 15, 2005 to  Master Services Agreement, dated as of August 6, 2004, by and between  Hawaiian Telcom Communications, Inc. (f/k/a Hawaiian Telcom MergerSub, Inc.)  and BearingPoint, Inc. (incorporated by reference  to Exhibit 10.30 on Hawaiian Telcom Communications, Inc.’s Form 10-Q for the quarter ended June 30,  2006). |
|         |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 10.10 † |   | Amendment No. 2 dated April 1, 2006 to Master  Services Agreement by and between Hawaiian Telcom Services Company, Inc. and  Verizon Select Services, Inc. dated December 1, 2005 (incorporated by reference to Exhibit 10.33 on Hawaiian  Telcom Communications, Inc.’s Form  10-Q for the quarter ended June 30, 2006).                                                 |
|         |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 10.11 † |   | Amendment No. 3 dated June 23, 2006 to Master  Services Agreement by and between Hawaiian Telcom Services Company, Inc. and  Verizon Select Services, Inc. dated December 1, 2005 (incorporated by reference to Exhibit 10.34 on Hawaiian  Telcom Communications, Inc.’s Form  10-Q for the quarter ended June 30, 2006).                                                 |

 

116

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| 10.12†  |   | Supply Chain Services Agreement by and between Hawaiian Telcom Communications,  Inc. (f/k/a Hawaiian Telcom MergerSub, Inc.) and Sprint North Supply Company, dated December 10, 2004 (incorporated by reference to Exhibit 10.6 on Hawaiian Telcom Communications, Inc.’s Amendment No. 1 to  Form S-4, filed with the SEC on March [29], 2006, File No. 333-131152).                                                        |
|--------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.13 † |   | Amendment One effective April 28, 2005 to Supply  Chain Services Agreement by and between Hawaiian Telcom Communications, Inc.  (f/k/a Hawaiian Telcom MergerSub, Inc.) and Sprint North Supply Company,  dated December 10, 2004 (incorporated by reference  to Exhibit 10.31 on Hawaiian Telcom Communications, Inc.’s Form 10-Q for the quarter ended June 30,  2006).                                                     |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.14 † |   | Amendment Two effective June 5, 2006 to Supply Chain  Services Agreement by and between Hawaiian Telcom Communications, Inc. (f/k/a  Hawaiian Telcom MergerSub, Inc.) and Sprint North Supply Company, dated  December 10, 2004 (incorporated by reference  to Exhibit 10.32 on Hawaiian Telcom Communications, Inc.’s Form 10-Q for the quarter ended June 30,  2006).                                                       |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.15†  |   | Intellectual Property Agreement between GTE Corporation, Hawaiian Telcom  Holdco, Inc., Verizon HoldCo LLC and  Hawaiian Telcom Communications, Inc., dated May 2, 2005 (incorporated by reference to Exhibit 10.11 on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006, File  No. 333-131152).                                                                                        |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.16†  |   | Verizon Proprietary Software License Agreement between GTE  Corporation and Hawaiian Telcom Communications, Inc., effective as of May  2, 2005 (incorporated by reference to Exhibit 10.12 on Hawaiian Telcom Communications, Inc.’s  Form S-4, filed with the SEC on January 19, 2006, File No. 333-131152).                                                                                                                 |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.17        |   | Amendment No. 1, dated March 5, 2007, to the Verizon Proprietary Software License Agreement  between GTE Corporation and Hawaiian Telcom Communications, Inc., effective as of May 2, 2005.                                                                                                                                                                                                                                        |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.18†  |   | Transition Services Agreement by and among Verizon Information Technologies LLC, Hawaiian Telcom Holdco, Inc. (f/k/a Paradise HoldCo, Inc.), Hawaiian Telcom Communications, Inc. (f/k/a Paradise MergerSub, Inc.) and Verizon Hawaii Inc. dated May 21, 2004 (incorporated by reference to Exhibit 10.13 on Hawaiian Telcom  Communications, Inc.’s Form S-4,  filed with the SEC on January 19, 2006, File No. 333-131152). |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.19†  |   | Amendment No. 1,  dated August 30, 2004, to the Transition  Services Agreement by and among Verizon Information Technologies LLC, Hawaiian Telcom Holdco, Inc. (f/k/a Paradise HoldCo, Inc.), Hawaiian Telcom  Communications, Inc. (f/k/a Paradise  MergerSub, Inc.) and Verizon Hawaii                                                                                                                                           |

 

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|             |   | Inc. dated May 21, 2004 (incorporated by reference to Exhibit 10.14 on Hawaiian Telcom Communications, Inc.’s Form  S-4, filed with the  SEC on January 19, 2006, File No. 333-131152).                                                                                                                                                                                                                                                                                              |
|-------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.20† |   | Amendment No. 2,  dated April 8, 2005, to the Transition Services Agreement by and among Verizon Information Technologies LLC, Hawaiian  Telcom Holdco, Inc. (f/k/a Paradise HoldCo, Inc.), Hawaiian Telcom  Communications, Inc. (f/k/a Paradise  MergerSub, Inc.) and Verizon Hawaii Inc. dated May 21, 2004 (incorporated by reference to Exhibit 10.15 on Hawaiian Telcom Communications, Inc.’s Form  S-4, filed with the  SEC on January 19, 2006, File No. 333-131152).       |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.21† |   | Amendment No. 3,  dated April 28, 2005, to the  Transition Services Agreement by and among Verizon Information Technologies LLC, Hawaiian Telcom Holdco, Inc. (f/k/a Paradise HoldCo, Inc.), Hawaiian Telcom  Communications, Inc. (f/k/a Paradise  MergerSub, Inc.) and Verizon Hawaii Inc. dated May 21, 2004 (incorporated by reference to Exhibit 10.16 on Hawaiian Telcom Communications, Inc.’s Form  S-4, filed with the  SEC on January 19, 2006, File No. 333-131152).      |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.22† |   | Amendment No. 4,  dated August 29, 2005, to the Transition  Services Agreement by and among Verizon Information Technologies LLC, Hawaiian Telcom Holdco, Inc. (f/k/a Paradise HoldCo, Inc.), Hawaiian Telcom  Communications, Inc. (f/k/a Paradise  MergerSub, Inc.) and Verizon Hawaii Inc. dated May 21, 2004 (incorporated by reference to Exhibit 10.17 on Hawaiian Telcom Communications, Inc.’s Form  S-4, filed with the  SEC on January 19, 2006, File No. 333-131152).     |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.23† |   | Amendment No. 5,  dated September 30, 2005, to the  Transition Services Agreement by and  among Verizon Information Technologies LLC, Hawaiian Telcom Holdco, Inc. (f/k/a Paradise HoldCo, Inc.), Hawaiian Telcom  Communications, Inc. (f/k/a Paradise  MergerSub, Inc.) and Verizon Hawaii Inc. dated May 21, 2004 (incorporated by reference to Exhibit 10.18 on Hawaiian Telcom Communications, Inc.’s Form  S-4, filed with the  SEC on January 19, 2006, File No. 333-131152). |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.24† |   | Amendment No. 6,  dated December 15, 2005, to the  Transition Services Agreement by and  among Verizon Information  Technologies LLC, Hawaiian Telcom Holdco,  Inc. (f/k/a Paradise HoldCo, Inc.), Hawaiian Telcom Communications, Inc. (f/k/a Paradise MergerSub, Inc.) and Verizon Hawaii Inc. dated May 21, 2004 (incorporated by reference to Exhibit 10.19 on Hawaiian Telcom Communications, Inc.’s Form  S-4, filed with the  SEC on January 19, 2006, File No. 333-131152).  |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.25† |   | Master Services Agreement by and between Hawaiian Telcom Services Company and Verizon Select Services Inc.,  effective as of May 2, 2005                                                                                                                                                                                                                                                                                                                                                  |

 

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|              |   | (incorporated by reference to  Exhibit 10.16 on Hawaiian Telcom  Communications, Inc.’s Amendment No. 1 to Form S-4, filed with the  SEC on March 31, 2006, File No. 333-131152).                                                                                                                                                                                                                                                    |
|--------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.26†  |   | Amendment No. 1 to Master Services Agreement by and  between Hawaiian Telcom Services Company and Verizon Select Services, Inc., dated December 1, 2005  (incorporated by reference to Exhibit 10.17 on Hawaiian Telcom Communications, Inc.’s Amendment No. 1 to  Form S-4, filed with the SEC on March 31, 2006, File No. 333-131152).                                                                                             |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.27†  |   | Management Consulting Agreement between Hawaiian Telcom  Communications, Inc. and TC Group, L.L.C., dated as of April 13, 2005 (incorporated by reference to Exhibit 10.22 on Hawaiian Telcom Communications, Inc.’s Form S-4,  filed with the SEC on January 19, 2006, File No. 333-131152).                                                                                                                                        |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.28*† |   | Management Rights Agreement among Carlyle Partners III Hawaii,  L.P., CP III Coinvestment, L.P., Carlyle Hawaii Partners, L.P.,  Hawaiian Telcom Holdco, Inc., Hawaiian Telcom Communications, Inc., Hawaiian Telcom, Inc. and Hawaiian Telcom Services Company, Inc. (incorporated by reference to Exhibit 10.23 on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006, File No.  333-131152). |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.29†  |   | Production Agreement between Dataprose, Inc. and Hawaiian Telcom Communications, Inc., dated as of October  15, 2005 (incorporated by reference to Exhibit 10.24 on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006, File No. 333-131152).                                                                                                                                                   |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.30†  |   | Sprint Wholesale Master Services Agreement between Sprint Communications Company L.P. and Hawaiian Telcom Communications, Inc., dated December 5, 2005 (incorporated by reference to Exhibit 10.21 on Hawaiian Telcom Communications,  Inc.’s Amendment No. 1 to Form S-4, filed with the SEC on March 31, 2006, File No.  333-131152).                                                                                              |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.31 † |   | First Amendment dated March 16, 2006 to Sprint Wholesale  Master Services Agreement between Sprint Communications Company L.P. and  Hawaiian Telcom Communications, Inc., dated December 5, 2005 (incorporated by reference to Exhibit 10.35 on Hawaiian  Telcom Communications, Inc.’s Form  10-Q for the quarter ended June 30, 2006).                                                                                             |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.32†  |   | Settlement Agreement effective as of February 6,  2007, by and among Hawaiian Telcom Communications, Inc, TC Group III,  L.P., and BearingPoint, Inc. (incorporated by reference  to Exhibit 10.1 on Hawaiian Telcom Communications, Inc.’s Form 8-K, filed with the SEC on February 8, 2007).                                                                                                                                  |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.33†  |   | Transition Agreement effective as of February 6,  2007, by and between Hawaiian Telcom Communications, Inc. and BearingPoint,  Inc. (incorporated by reference                                                                                                                                                                                                                                                                            |

 

119

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|              |   | to Exhibit 10.2 on Hawaiian  Telcom Communications, Inc.’s Form  8-K, filed with the SEC on February  8, 2007).                                                                                                                                                                                                                              |
|--------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.34†  |   | Application Services Agreement effective as of  February 5, 2007, by and between Hawaiian Telcom Communications, Inc. and Accenture  LLP (incorporated by reference  to Exhibit 10.3 on Hawaiian Telcom Communications, Inc.’s Form 8-K, filed with the SEC on February 8, 2007).                                                            |
|         |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.35*† |   | Employment Agreement, effective  as of October 1, 2004, by and between Michael S. Ruley and Hawaiian Telcom Holdco, Inc. (f/k/a Paradise  HoldCo, Inc.) (incorporated by reference to Exhibit 10.27 on Hawaiian Telcom  Communications, Inc.’s Form S-4,  filed with the SEC on January 19, 2006, File No. 333-131152).                      |
|         |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.36*† |   | Employment Agreement, effective  as of September 29, 2004, by and between David A. Torline and Hawaiian Telcom Holdco, Inc. (f/k/a Paradise HoldCo, Inc.) (incorporated by reference  to Exhibit 10.28 on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006, File No.  333-131152).                    |
|         |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.37*† |   | Employment Agreement, effective  as of February 1, 2005, by and  between Alan M. Oshima and  Hawaiian Telcom Communications, Inc. (f/k/a Hawaiian Telcom MergerSub, Inc.)  (incorporated by reference to Exhibit 10.29 on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006, File  No. 333-131152).    |
|         |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.38*† |   | Employment Agreement, effective  as of May 3, 2005, by and between Daniel P. O’Brien and Hawaiian Telcom Communications, Inc. (incorporated by  reference to Exhibit 10.30 on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006, File No. 333-131152).                                            |
|         |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.39*† |   | Employment Agreement, effective as of December 13, 2004, by and between  Harvey A. Plummer and Hawaiian  Telcom Communications, Inc. (f/k/a Hawaiian Telcom MergerSub, Inc.)  (incorporated by reference to Exhibit 10.31 on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006, File  No. 333-131152). |
|         |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.40*† |   | Employment Agreement, effective  as of December 15, 2004, by  and between Linda D. Frank and Hawaiian Telcom Communications, Inc. (f/k/a Hawaiian Telcom MergerSub, Inc.) (incorporated by reference to Exhibit 10.32 on Hawaiian Telcom Communications,  Inc.’s Form S-4, filed with the SEC on January 19, 2006, File  No. 333-131152).    |

 

120

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| 10.41*† |   | Employment letter agreement,  effective as of March 8, 2007, by  and between Robert F. Reich and  Hawaiian Telcom Communications, Inc.   (incorporated by reference to Exhibit 10.1 on Hawaiian Telcom Communications, Inc.’s Form  8-K, filed with the  SEC on March 28, 2007).         |
|--------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                               |
| 10.42*† |   | Stock Option Plan of Hawaiian Telcom Holdco, Inc., dated as of November 8, 2005 (incorporated by reference to Exhibit 10.33 on Hawaiian Telcom Communications, Inc.’s Form  S-4, filed with the  SEC on January 19, 2006, File No. 333-131152).                                               |
|         |   |                                                                                                                                                                                                                                                                                               |
| 10.43*† |   | Amendment No. 1, dated September 22, 2006,  to the Stock Option Plan of Hawaiian Telcom Holdco, Inc. dated as of  November 8, 2005 (incorporated by reference  to Exhibit 10.1 on Hawaiian Telcom Communications, Inc.’s Form 8-K, filed with the SEC on September 27, 2006).  |
|         |   |                                                                                                                                                                                                                                                                                               |
| 10.44*† |   | Form of Non-Qualified Stock Option Agreement  pursuant to the Stock Option Plan of Hawaiian Telcom Holdco, Inc. dated as of  November 8, 2005 (incorporated by reference  to Exhibit 10.2 on Hawaiian Telcom Communications, Inc.’s Form 8-K, filed with the SEC on September 27, 2006). |
|         |   |                                                                                                                                                                                                                                                                                               |
| 12.1         |   | Statement Regarding Computation  of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                            |
|         |   |                                                                                                                                                                                                                                                                                               |
| 21.1†   |   | List of Subsidiaries  (incorporated by reference to  Exhibit 21.1 on Hawaiian Telcom  Communications, Inc.’s Form S-4,  filed with the SEC on January 19, 2006, File No. 333-131152).                                                                                                         |
|         |   |                                                                                                                                                                                                                                                                                               |
| 31.1         |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                               |
|         |   |                                                                                                                                                                                                                                                                                               |
| 31.2         |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                               |
|         |   |                                                                                                                                                                                                                                                                                               |
| 32.1         |   | Certification of Chief Executive Officer and Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                   |

 

----

†  Incorporated herein by reference as indicated.

* Identifies each management contract or compensatory plan or arrangement.

121

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**SIGNATURES**

Pursuant to therequirements 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 theundersigned, thereunto dulyauthorized.
|                      |   | HAWAIIAN TELCOM COMMUNICATIONS,   INC. |
|----------------------|--------|----------------------------------------|
|                 |   |                                   |
| Dated: April 2, 2007 |   | By:                                    | /s/ Michael S. Ruley |   |
|                 |   |                                   | Michael S. Ruley |
|                 |   |                                   | Chief Executive Officer and Director |

 

Pursuant to therequirements of the SecuritiesExchange 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:
| Signature                  | ** ** | **Title** | ** **                           | **Date** |
|----------------------------|------------|-----------|--------------------------------------|----------|
|                       |       |      |                                 |     |
| /s/ Michael S. Ruley       |       |      | Chief Executive Officer and Director |     | April 2, 2007 |
| Michael S. Ruley           |       |      | (Principal Executive Officer)        |     |   |
|                       |       |      |                                 |     |   |
| /s/ Daniel P. O’Brien |       |      | Chief Financial Officer              |     | April 2, 2007 |
| Daniel P. O’Brien     |       |      | (Principal Financial Officer)        |     |   |
|                       |       |      |                                 |     |   |
| /s/ Patrick T. Hogan       |       |      | Controller                           |     | April 2, 2007 |
| Patrick T. Hogan           |       |      | (Principal Accounting Officer)       |     |   |
|                       |       |      |                                 |     |   |
| /s/ Daniel F. Akerson      |       |      | Director                             |     | April 2, 2007 |
| Daniel F. Akerson          |       |      |                                 |     |   |
|                       |       |      |                                 |     |   |
| /s/ James A. Attwood, Jr.  |       |      | Director                             |     | April 2, 2007 |
| James A. Attwood, Jr.      |       |      |                                 |     |   |
|                       |       |      |                                 |     |   |
| /s/ Matthew P. Boyer       |       |      | Director                             |     | April 2, 2007 |
| Matthew P. Boyer           |       |      |                                 |     |   |
|                       |       |      |                                 |     |   |
| /s/ Walter A. Dods, Jr.    |       |      | Director                             |     | April 2, 2007 |
| Walter A. Dods, Jr.        |       |      |                                 |     |   |
|                       |       |      |                                 |     |   |
| /s/ Stephen C. Gray        |       |      | Director                             |     | April 2, 2007 |
| Stephen C. Gray            |       |      |                                 |     |   |
|                       |       |      |                                 |     |   |
| /s/ William E. Kennard     |       |      | Director                             |     | April 2, 2007 |
| William E. Kennard         |       |      |                                 |     |   |
|                       |       |      |                                 |     |   |
| /s/ Raymond A. Ranelli     |       |      | Director                             |     | April 2, 2007 |
| Raymond A. Ranelli         |       |      |                                 |     |   |

 

122

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**SUPPLEMENTAL INFORMATIONTO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACTBY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT**

The registrant has not sent to itssole security holder an annual reportto security holders covering theregistrant’s last fiscal year or any proxystatement, form of proxy or other proxy soliciting material with respectto any annual or other meeting of security holders.

123

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