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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                 --------------

                                    FORM 10-K

|X|      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

                                       OR

| |      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                         COMMISSION FILE NUMBER: 0-29279

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                         CHOICE ONE COMMUNICATIONS INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

                  DELAWARE                                       16-1550742
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
       INCORPORATION OR ORGANIZATION)                       IDENTIFICATION NO.)

100 CHESTNUT STREET, SUITE 600, ROCHESTER, NY                      14604
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)                       (ZIP CODE)

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                                 (585) 246-4231

              (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: COMMON STOCK, $.01
                                                            PAR VALUE

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes | | No |X|

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

Aggregate market value of all Common Stock held by non-affiliates as of June 30,
2003, was $4,363,166.

44,138,010 shares of $.01 par value Common Stock were issued and outstanding as
of March 1, 2004.

The Index of Exhibits filed with this Report begins at page 80.

                      DOCUMENTS INCORPORATED BY REFERENCE:

Certain portions of our definitive proxy statement to be distributed in
connection with the 2004 annual meeting of stockholders are incorporated by
reference into Part III of this Form 10-K.

                                 90 Total pages

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                         CHOICE ONE COMMUNICATIONS INC.
                                TABLE OF CONTENTS

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PART I
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      Item 1.   Description of Business...............................................................................    1

      Item 2.   Properties............................................................................................   23

      Item 3.   Legal Proceedings.....................................................................................   23

      Item 4.   Submission of Matters to a Vote of Security Holders...................................................   24

      Item 4A.  Executive Officers of the Registrant..................................................................   24

PART II

      Item 5.   Market For Registrant's Common Equity and Related Stockholder Matters.................................   25

      Item 6.   Selected Financial Data...............................................................................   27

      Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations.................   30

      Item. 7A  Quantitative and Qualitative Disclosures about Market Risk............................................   44

      Item 8.   Financial Statements and Supplementary Data...........................................................   45

      Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................   45

      Item 9A.  Controls and Procedures...............................................................................   45

PART III

      Item 10.  Directors and Executive Officers of the Registrant....................................................   45

      Item 11.  Executive Compensation................................................................................   45

      Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters........   46

      Item 13.  Certain Relationships and Related Transactions........................................................   46

      Item 14.  Principal Accountant Fees and Services................................................................   46

PART IV

      Item 15.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................   46

Signatures............................................................................................................   79

Exhibit Index.........................................................................................................   80
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PART I

ITEM 1:  DESCRIPTION OF BUSINESS

CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

Certain statements contained in the "Description of Business", "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", and elsewhere in this Form 10-K and in other filings with the
Securities and Exchange Commission ("SEC") constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, and we intend that such forward-looking statements be subject to the
"safe harbor" provisions created thereby. The words "believes", "expects",
"estimates", "anticipates", "will", "will be", "could", "may" and "plans" and
the negative or other similar words or expressions identify forward-looking
statements made by or on behalf of the Company.

These forward-looking statements are subject to many uncertainties and factors
that may cause our actual results to be materially different from any future
results expressed or implied by such forward-looking statements. Examples of
such uncertainties and factors include, but are not limited to:

-     Continued compliance with covenants for borrowings under our senior credit
      facility and subordinated notes,

-     Availability of financing,

-     Availability of significant operating cash flows,

-     Continued availability of regulatory approvals,

-     The number of potential customers and average revenue for such customers
      in a market,

-     The existence of strategic alliances or relationships,

-     Technological, regulatory or other developments in our business,

-     Changes in the competitive climate in which we operate, and

-     The emergence of future opportunities.

All of these could cause our actual results and experiences to vary
significantly from our current business plan and to differ materially from
anticipated results and expectations expressed in the forward-looking statements
contained herein. These and other applicable risks are summarized under the
caption "Risk Factors" and elsewhere in this Form 10-K. You should consider all
of our written and oral forward-looking statements only in light of such
cautionary statements. You should not place undue reliance on these
forward-looking statements and you should understand that they represent
management's view only as of the dates we make them.

GENERAL DEVELOPMENTS

We are an integrated communications provider offering facilities-based voice and
data telecommunications services. We market and provide these services primarily
to small and medium-sized businesses in 29 second and third tier markets in 12
states in the northeastern and midwestern United States. Our services include:

      -     local exchange and long distance service; and

      -     high-speed data and Internet service.

In January 2004, we began offering residential voice telecommunication services
in selected markets within our footprint. Our residential services include local
exchange and long-distance service as well as a number of value added
telecommunication options such as voice mail and caller ID.

We offer a single source for competitively priced, high quality, customized
telecommunications. We achieve comprehensive coverage in the markets we serve by
installing both voice and data equipment in multiple established telephone
company central offices, a process known as collocation.

We have connected approximately 94% of our clients directly to our own switches,
which allows us to more efficiently route traffic, ensure quality of service and
control costs. Our networks reach approximately 5.7 million business lines,
which constitute approximately 72% of the estimated business lines in the
markets we serve, and approximately 9.7 million residential lines constituting
approximately 70% of the estimated residential lines in these markets. While our
network allows us to reach this number of business and residential lines, the
number of business


                                      -1-
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and residential lines that we actually service will depend on our ability to
sell telecommunications services to customers and our success in winning market
share from our competitors.

We have no current plans to expand into additional markets or close existing
markets. As of December 31, 2003, we had our network equipment collocated in 505
established telephone company central offices in our markets. All of our
collocations also include equipment to provide digital subscriber loop ("DSL")
services. As of December 31, 2003, we were providing service to 515,715 access
lines.

We have a flexible network which allows us to achieve cost efficiencies and
leverage rapidly evolving telecommunications technology and build for growth. In
most of our markets, we have deployed our own digital switching platforms and
have leased network capacity to connect our switch with our transmission
equipment collocated in central offices of the established telephone companies.
This allowed us to enter our markets more rapidly and with lower initial costs
than if we had acquired or built capacity.

We obtained fiber capacity in certain markets when economically justified by
traffic volume growth in order to reduce the overall cost of local transport and
reduce our reliance on the established telephone company. Fiber deployment
provides the bandwidth necessary to support substantial incremental growth and
allows us to reduce our network costs and enhance the quality and reliability of
our network, which strengthens our competitive advantage in the markets we
serve. We currently have or plan to have fiber capacity in 22 markets. As of
December 31, 2003, 19 of our markets had operational intra-city fiber miles with
plans to add intra-city fiber miles in 3 additional markets during 2004. As of
December 31, 2003, we had operational inter-city fiber capacity in five states
in which we operate.

We were incorporated under the laws of the State of Delaware on June 2, 1998. We
began generating revenue from business clients in 1999 when our first markets,
Albany and Buffalo, New York, became operational. Soon after, markets in
Pennsylvania, New Hampshire, Massachusetts and Rhode Island became operational
for a total of nine markets at the end of 1999. We continued to expand into new
markets in eastern Pennsylvania and Connecticut in 2000, and added nine markets
in the midwest with our acquisition of US Xchange, Inc. ("US Xchange") in August
2000. In 2001, we substantially completed our market expansion into thirty
markets, with new markets in Ohio. We ended 2002 with 29 markets after ceasing
operations in the Ann Arbor and Lansing, Michigan market in December 2002.

      GOING CONCERN MATTER

Our financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. Our auditors' opinion notes that we have suffered
recurring losses from operations and have a net capital deficiency that raises
substantial doubt about our ability to continue as a going concern.

At December 31, 2003, we had $16.2 million in cash and cash equivalents and all
available commitments under our senior credit facility were outstanding. We
generated positive cash flows from operating activities during the final two
fiscal quarters of 2003 and positive adjusted EBITDA during each of the fiscal
quarters in 2003. (Refer to Item 6, note (7) for further details on adjusted
EBITDA.) Although not necessarily indicative of future results, the final two
fiscal quarters of 2003 represented the first time in our history that we
generated positive cash flows from operating activities during reporting
periods. Our viability is dependent upon our ability to continue to generate and
grow positive cash flows from operating activities. The success of our business
strategy necessitates obtaining and retaining a significant number of customers,
generating significant and sustained growth in our cash flows from operating
activities, and managing our costs and capital expenditures to be able to meet
our debt service obligations, including the repayment of principal beginning on
June 30, 2004.

Our senior credit facility contains certain covenants that are customary for
credit facilities of this nature. These covenants require us to maintain an
aggregate minimum amount of cash and committed financing of $10.0 million
through June 30, 2004 and, commencing on September 30, 2004, require us to
maintain certain leverage, fixed charges and interest coverage ratios as
described in the senior credit facility. Our ability to comply with these
covenants will primarily depend on our operating results, which are subject to
the uncertainties described above. A breach in observance of any of these
covenants, if unremedied in three business days, would cause an event of default
under the senior credit facilities and an event of default under our
subordinated debt. An event of default would permit our obligations under our
senior credit facility and our subordinated debt to be declared to be
immediately payable. If the lenders so accelerate our obligations, then we can
make no assurances that we would be able to obtain additional or substitute
financing. An acceleration of our obligations would have a material adverse


                                      -2-
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effect on our business, financial condition and results of operations.

As of December 31, 2003, and from then through the date of filing of this
report, we were and are in compliance with all covenants under our senior credit
facility. However, it is reasonably likely, without covenant relief or
modification or other action, that we will be in breach of one or more
applicable covenants at some point during 2004. With respect to this situation,
we intend to pursue a variety of matters including changes to our operating
plans to enable us to remain in compliance, discussions with lenders to gain
certain waivers or modifications regarding our covenants which will enable us to
remain in compliance, and other possible actions and strategic alternatives. To
help guide and facilitate this effort, we have engaged consultants to provide us
with a broad range of financial advisory services. We can make no assurances
that we will be successful in any or all of these efforts.

BUSINESS STRATEGY

Our strategy is to be the telecommunications provider of choice, offering
one-stop communications solutions to clients in our markets. Our success will
depend upon our ability to continue to increase penetration in our 29 markets to
achieve profitability. The key elements of our business strategy are to:

      ATTRACT AND RETAIN CLIENTS

We continue to target small and medium-sized businesses primarily in the 29
markets we serve in the northeastern and midwestern United States. Additionally,
we have expanded to offer residential services in select markets within our
footprint. The markets we serve were selected for the high concentration of
potential business clients and demand for the types of services we offer. We
continue to attract and retain clients in these areas by offering a simplified,
comprehensive package of services and a high level of client care. Further,
clients who purchase multiple services from us may have additional discounts
available to them. Our services are priced competitively compared to the
established telephone companies, providing savings to our clients.

      OFFER BROAD COVERAGE

We provide broad geographic coverage within our markets by collocating in
multiple central office locations to reach both central business districts and
outlying residential areas. While other companies often limit their network
buildout to highly concentrated downtown areas, our collocation strategy has
been designed to reach 70% to 80% of the business lines within each market. As a
result, we are one of a few competitors to the established telephone company to
offer integrated services to small and medium-sized businesses at many of our
collocation sites. An additional benefit of this broad coverage is the ability
to reach approximately 70% of the residential lines in our markets.

      OFFER BUNDLED SERVICES WITH A SINGLE POINT OF CONTACT

We attract new clients and retain established clients by offering bundled
services with a single point of contact for sales and convenient, integrated
billing. Our clients may bundle local exchange service, long distance service,
high-speed data and Internet service principally utilizing DSL technology,
e-mail, voicemail and other enhanced services. In addition, our billing system
provides our clients with a single, easy to understand statement covering all of
their services.

      INCREASE OUR MARKET SHARE BY PROVIDING SERVICE-DRIVEN CLIENT RELATIONSHIPS
      AND A LOCAL PRESENCE

We attract and retain clients by providing local sales offices in each of our
markets with an experienced account management team that provides face-to-face
sales and personalized client care for our business clients. We focus on
building long-term relationships with our clients, who we believe have not
typically received a satisfying level of local support from the established
telephone companies. We believe that our local presence builds strong, positive
Choice One name recognition within these communities.

      LEAD COMPETITION IN PROVIDING DSL SERVICES

We provide dedicated, high-speed digital communications services using DSL
technology. DSL technology permits broadband transmissions over existing copper
telephone lines, allowing us to provide high-speed services economically.
High-speed connectivity is becoming increasingly important to small and
medium-sized businesses due to the dramatic growth in Internet and electronic
business applications. We have installed DSL equipment in all of our existing
collocations.


                                      -3-
<PAGE>
      MAINTAIN OUR FLEXIBLE NETWORK BUILDOUT STRATEGY

Our flexible network buildout strategy allows us to achieve speed to market
while taking advantage of cost efficiencies and leveraging rapidly evolving
telecommunications technology. In most of our markets we have deployed digital
switching platforms and have leased network capacity to connect our switch with
our transmission equipment collocated in central offices of the established
telephone companies. This allowed us to enter our markets more rapidly and with
lower initial costs than if we had acquired or built transport capacity. We
lease network capacity and we acquire fiber capacity when and where traffic
volumes and other conditions make this alternative more cost efficient. We have
deployed fiber in many of our markets, which replaced the leased local network
facilities and decreased our network leasing costs. At December 31, 2003, we had
deployed fiber in 19 of our markets with plans to deploy fiber in 3 additional
markets during 2004. The benefits of this fiber include network redundancy,
reduced provisioning intervals (provisioning onto our own network, versus
relying exclusively on the established telephone company for provisioning),
reduced per unit costs with additional product offerings, and guaranteed
available capacity to meet our demands. Future fiber network capacity will be
deployed when technologically feasible and economically justified. We seek to
provision service in the most cost-effective manner. For instance, when using
leased facilities from the established telephone company, we service our
clients, when their needs require it, with an integrated access device installed
at their location for providing packetized voice and data services.

      UTILIZE EFFICIENT AUTOMATED AND INTEGRATED BACK OFFICE SYSTEMS

Our management team is committed to having efficient operations support systems
and other back office systems that can support rapid and sustained growth. To
realize this objective, we have a team of engineering and information technology
professionals experienced in the telecommunications industry. We have automated
most of our back office systems into a seamless end-to-end system that
synchronizes multiple activities, including installation, billing and client
care. We integrated our order management and billing systems in a manner that
enables us to transmit client information directly from the order management and
service fulfillment systems into the billing system. This allows us to eliminate
redundant keying, reducing the potential for errors, and to share information
between the various components of our systems. Unlike the legacy systems
currently employed by many established telephone companies and competitive local
exchange carriers, which require multiple entries of client information to
synchronize multiple tasks, our system requires only a single entry to transfer
client information from sales to service to billing. Our customized system also
integrates our back office systems to minimize the time between client order and
service installation and to reduce our costs.

      GROWTH THROUGH ACQUISITIONS

In past years, we have completed acquisitions of businesses or purchases of
other businesses' assets that have been integrated into our operations. We
currently have no definitive agreements relating to any material acquisitions,
nor do we have any current plans relating to a material acquisition.

      LEVERAGE MANAGEMENT EXPERIENCE

Our management team has extensive experience and success in the
telecommunications industry, especially in our 29 markets. We believe that our
ability to draw upon the collective talent and expertise of our senior
management gives us a competitive advantage in the execution of network
optimization, sales and marketing, service installation, billing and collection,
back office and operations support systems, finance, regulatory affairs and
client care.

OUR BUSINESS TELECOMMUNICATIONS SERVICES

Our service offerings are tailored to meet the specific needs of small and
medium-sized businesses in our markets. In all of our markets, we offer both
voice and data services, which can be purchased by our clients either as a
bundled package or as individual services.

Our bundled service offering, Select Savings, allows clients to bundle local,
long distance and high-speed Internet services in a variety of combinations to
meet their particular needs. Local and long distance calling plans are bundled
in a variety of sizes, enabling clients to customize plans that correspond with
the specific calling patterns of their business.


                                      -4-
<PAGE>
Our bundled plans can provide our clients substantial savings as compared to the
same services offered by established telephone companies. Our Select Savings
plans provide our clients with a cost-effective alternative to the traditional
pricing plans offered by local telephone companies. Operational efficiencies,
technological advancements, utilization of lower cost access technologies and
the breadth of our operating footprint have allowed us to substantially reduce
our network costs. Our bundled offerings enable us to share these savings with
clients.

As part of our Select Savings plans, our clients can choose from the following
services:

      Local Calling Services. Our local exchange services are offered through
      our ChoiceXchangeSM service plan. This service includes dialing parity,
      simplified local rates, local number portability, listing in white and
      yellow page directories and access to 911 and directory assistance. Also
      available through the service are enhanced features, such as three-way
      conference calling, line rollover, call forwarding, call waiting, caller
      identification, voice mail, call pickup, and distinctive ring. Our voice
      mail service, known as ChoiceMessageSM, includes remote access, paging
      notification, personalized greetings and password protection. In certain
      markets we also originate and terminate interexchange calls placed or
      received by our clients at no additional charge and offer free local
      calling between client locations.

      Long Distance Services. Through our ChoiceOnePlusSM service, we offer a
      full range of domestic and international long distance services, including
      "1+" outbound calling, inbound toll free service, and complementary
      services such as calling cards with operator assistance and conference
      calling. To provide easy to understand billing to our clients, we also
      offer one rate on any calls within the U.S.

      Internet Access and DSL High-speed Data Services. Our comprehensive suite
      of Internet services provides our clients with a total solution for all of
      their data needs. These services include high-speed Internet access,
      e-mail, web hosting, domain name hosting and other value-added services.
      We offer Internet access via DSL technology and dedicated digital
      transmission links with a capacity equivalent to 24 standard telephone
      lines, known as T-1 connections. We provide high-speed data communications
      and Internet access to our targeted small and medium-sized businesses at
      rates that we believe are very attractive when compared to the cost and
      performance of other available data service offerings.

The above services may also be purchased by our clients on an individual basis.

Select Savings.free. Our bundled service offering provides free high-speed
Internet access to clients subscribing to a minimum level of voice services.
Clients have the option of upgrading their data speeds for an additional monthly
fee. Enhanced data services, including firewall, network access translation or
web hosting, are also available at no additional charge for clients subscribing
to a minimum number of voice lines.

Dedicated T-1 Services. We offer ChoicePathSM dedicated T-1 services as an
integrated low cost solution for dedicated access for bundling Internet/data,
local and long distance services over a single connection. ChoicePathSM permits
digital connections to be purchased in blocks of 24 channels or on an individual
basis.

Virtual Private Network Services. Our Virtual Private Network (VPN) services
allow businesses with multiple locations to securely connect these locations for
high-speed data transmission. We combine our DSL and dedicated T-1 access
services with our virtual private network service to provide clients with
high-speed and secure connections to their corporate local area network and the
Internet. This flexible and cost-effective solution supports both telecommuters
and site-to-site connections.

Enhanced Data Features. We offer a full array of Enhanced Data Features
products. The product set includes network address translation that enables
computers to connect simultaneously to the Internet without additional costs,
and firewall security that protects electronic files from network intruders.
These products eliminate the need for businesses to purchase, configure and
maintain their own equipment typically associated with these applications.

Web Hosting. We offer a range of shared web hosting products targeted to meet
the needs of small to medium-sized businesses. We provide clients with a
reliable web presence to meet their Internet-related objectives without the
initial capital expense required to purchase and maintain their own equipment.
We also provide e-mail hosting solutions and domain name registration and
hosting.

Web Design Services. We offer web design solutions that accommodate a range of
client needs, from establishing a simple web presence to creating sophisticated
web sites. We offer web design options that combine the economy of a packaged
design product with the flexibility to create a customized look. Our clients can
choose the layouts, colors, and content they desire to create a web site
suitable to their particular needs. When clients are ready to expand their web
presence, we also offer custom web design services for higher-end applications.


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Private Line Services. Our Choice Path Private Line (or often referred to as
"Point-to-Point") service is a dedicated circuit that enables the efficient
transmission of high volumes of voice and data traffic between service locations
and business partners. Importantly, the Choice Path Private Line provides
clients with the flexibility to allocate individual T-1 channels for voice
and/or data transmission as dictated by their specific business needs. Clients
pay a fixed monthly price for this service and can potentially realize
substantial savings compared with traditional usage-based services.

Conference Calling. We offer a full suite of conference calling services to our
clients. Our on-demand conferencing allows clients to convene teleconferences
any time of the day or night and requires no reservations. Our event
conferencing option allows clients to host scheduled teleconferences that can
accommodate thousands of simultaneous users. Choice One web conferencing allows
real-time collaboration via the Internet.

Technical Services. We offer a one-source solution to our clients for a variety
of technical services including installation services, inside wiring for voice
and data services, Local Area Network (LAN) wiring and help desk support for
Choice One applications.

OUR RESIDENTIAL TELECOMMUNICATIONS SERVICES

In January 2004, we began offering residential voice services in selected
markets. We have initially introduced residential services throughout our New
York State markets. Choice One@home bundled local and long distance service is
available in two different plans designed to meet the needs of households with
different calling patterns.

SALES AND CLIENT CARE

In each of our markets, we have a locally based sales force as well as dedicated
client care representatives. In addition to our direct sales force, we use third
party agencies to sell our services. These agencies include telecommunications
equipment vendors, consultants, systems integrators and cellular phone
retailers.

We market to business clients by providing local sales offices in each of our
markets with a highly trained, dedicated account management team that personally
meets with each prospective new client during the sales process. This local
sales force uses a consultative selling approach and offers clients a full range
of sophisticated and cost-effective telecommunications solutions. Sales teams
use a variety of methods to qualify leads and set up initial appointments.

Each market's account management team is led by a general manager who is
responsible for selling to and retaining business clients which generate
profitable margins in that market. The general manager oversees a local sales
team that is composed of direct salespersons and an indirect sales force. The
indirect sales force consists of alternate channel managers and various sales
agents. There is no direct sales force for our residential services.

As of December 31, 2003, we had 313 employees in our direct sales staff, not
including our independent third-party sales agents, as compared to 391 employees
at December 31, 2002.

Our client services organization is composed of a client care team, who handles
routine client inquiries, and dedicated client development representatives
(CDRs), who focus on client retention and selling additional services to
existing clients.

Members of the client care team are located in one of our two centralized client
care facilities, located in Rochester, New York and Green Bay, Wisconsin. These
facilities are staffed to maximize coverage during the business week and to
extend coverage beyond normal business hours to better serve our clients.
Additionally, these facilities utilize common operating systems, which provides
redundancy and automatically route callers to the next available representative,
regardless of location.

Members of the client development organization are located in each market and
work alongside the sales organization. The CDRs provide one-on-one client
service to our larger clients and assist these clients in finding ways to best
utilize their telecommunications services.

NEW PRODUCTS AND SERVICES DEVELOPMENT

Our sales, marketing and engineering departments are responsible for new product
development, quality assurance, and engineering. Our new product development
process ensures input from consumers, clients, and internal functional areas
before a new product or service is brought to market. We also focus on the
development of related products and services, as well as modifications of
existing products and services. The amount expensed during the


                                      -6-
<PAGE>
last three fiscal years on company-sponsored and customer-sponsored research
activities related to the development of new products and services or the
improvement of existing products and services has not been material.

OUR MARKETS

We offer telecommunications services in 29 markets, comprising 38 basic trading
areas. We are currently operating in the following markets:

<TABLE>
<S>                         <C>                                <C>
Akron, OH (1)               Green Bay, WI (3)                  Portland, ME (7)
Albany, NY (2)              Harrisburg, PA (4)                 Providence, RI
Allentown, PA               Hartford, CT                       Rochester, NY
Buffalo, NY                 Indianapolis, IN                   Rockford, IL
Columbus, OH                Kalamazoo, MI (5)                  Scranton, PA
Dayton, OH                  Madison, WI                        South Bend, IN (8)
Erie, PA                    Manchester, NH                     Springfield, MA
Evansville, IN              Milwaukee, WI                      Syracuse, NY (9)
Fort Wayne, IN              New Haven, CT (6)                  Worcester, MA
Grand Rapids, MI            Pittsburgh, PA
</TABLE>

(1)   Also includes the basic trading area for Youngstown, OH.

(2)   Also includes the basic trading area for Schenectady, NY and Kingston, NY.

(3)   Also includes the basic trading area for Appleton, WI and Oshkosh, WI.

(4)   Also includes the basic trading area for Lancaster, PA.

(5)   Also includes the basic trading area for Battlecreek, MI.

(6)   Also includes the basic trading area for Bridgeport, CT and Stamford, CT.

(7)   Also includes the basic trading area for Bangor, ME.

(8)   Also includes the basic trading area for Elkhart, IN.

(9)   Also includes the basic trading area for Binghamton, NY and Ithaca, NY.

NETWORK INFRASTRUCTURE

Our flexible network has allowed us to enter markets quickly, achieve cost
efficiencies, add incremental network capacity as needed, and integrate and
benefit from new telecommunications technologies.

We have a Class 5 digital switch in each of the markets we serve, other than
Worcester, MA, New Haven, CT, Erie, PA and Portland, ME. We have installed a
packet-based switch network in each market in order to establish a widespread
coverage area for the offering of high bandwidth digital connections utilizing
DSL technology. We have installed our network equipment, including both voice
and data components, in established telephone company central offices in a
manner that enables us to address 70% to 80% of the business lines in each
market. An additional benefit of this broad coverage is the ability to reach
approximately 70% of the residential lines in the markets we serve. We lease
unbundled loops or T-1 facilities from the established telephone company or
competitive network provider to connect our equipment in the telephone company
central office to the client locations. Using these leased facilities we service
our clients with an integrated access device installed at the client location
for providing packetized voice and data services. If the client's service
requirements do not warrant the deployment of an integrated access device, the
traditional telephone technology is used to provide the service.

As of December 31, 2003, we had 25 Class 5 switches in service and 63 data
switches in service. Our switches are connected to established telephone
companies' networks and long distance and Internet service provider
points-of-presence.

We lease local network facilities from the established telephone company and/or
one or more competitive network providers to connect our switch to established
telephone company central offices. Initially, leasing these facilities allowed
us to begin operations more quickly and at a lower up front cost than if we had
acquired or built them. However, we have chosen to acquire local fiber network
capacity when and where traffic volume and other conditions have made this
alternative more cost effective. We have 20-year agreements for indefeasible
rights to use fiber (IRU) that will provide us, when completed, with intra-city
fiber capacity across our footprint in 22 of our markets, and inter-city fiber
capacity in and between markets in five states in which we operate. As of
December 31, 2003, we had 1,429 route miles of operational intra-city fiber and
1,076 route miles of operational inter-city fiber.

During 2003, our fiber provider in our eastern markets completed construction of
fiber in one of our markets, bringing the total number of our markets with fiber
to 19. Our agreement includes preferred pricing for the first five years of the
agreement. We are in the fourth year of the agreement. The benefits of IRUs
include network


                                      -7-
<PAGE>
redundancy, reduced provisioning intervals (provisioning onto our own network,
versus relying on the established telephone company for provisioning) and
reduced per unit costs with additional product offerings.

We operate a network operations control center, or NOCC, facility in Grand
Rapids, Michigan, which provides monitoring of the switching and fiber
facilities across our entire network 24 hours per day, seven days per week. We
also have locally based switch engineers and technicians to manage each switch
and other network equipment.

Rapid and significant changes in technology are expected to continue in the
telecommunications industry. We believe that our network design positions us to
rapidly implement future voice and data switching technology. Our continued
success will depend, in part, on our ability to anticipate and adapt to
technological changes. For instance, we have partnered with Lucent Technologies
to trial test their new technology to offer voice over Internet protocol (VoIP).

INFORMATION SYSTEMS

We have designed, developed and implemented integrated operations support
systems and other back office systems. We believe these integrated systems give
us significant competitive advantages by enhancing our efficiency, providing us
capacity to process large order volumes, allowing us to support rapid and
sustained growth and enabling us to provide exceptional client care. We have
automated most of our back office systems into a seamless end-to-end system that
synchronizes multiple activities, including installation, billing and client
care. We integrated our order management and billing systems in a manner that
enables us to transmit client information directly from the order management and
service fulfillment systems into the billing system. This allows us to eliminate
redundant keying, reducing the potential for errors, and to share information
between the various components of our systems.

The individual components of our system are as follows:

    ORDER ENTRY, PROCESS FLOW, NETWORK INVENTORY, BILLING AND ADMINISTRATION,
                               NETWORK ACTIVATION

We have an agreement with MetaSolv Software Inc. to license its Telecom Business
Solution, or TBS, software to manage our back office operations support system.
MetaSolv's software manages our order entry, service installation, network
element inventory, gateway interconnects and workflow business functions and
allows our sales team to monitor the status of an order from initiation through
service implementation.

We have an agreement with ADC Communications to utilize its Convergent Billing
Platform AS/400 software which enables us to combine and bill current and future
service offerings and present the information on a single statement for our
clients. This system supports client care functions, including billing inquiries
and collection processes. Call detail records, such as the billing records
generated by our voice or data switches, are automatically processed by the
billing platform in order to calculate and produce bills in a variety of
formats. We also utilize a billing system developed and maintained by PCR, Inc.
This is a legacy billing system from our acquisition of US Xchange Inc. in
August 2000. We are evaluating a plan to migrate the clients billed on the PCR,
Inc. billing platform to the ADC Communications billing platform, but no
timeline for such a migration has been established. All new clients are billed
from the ADC Communications billing platform.

Our MetaSolv system has been integrated with our ADC Communications billing and
administration system to ensure data integrity and eliminate redundant data
entry. This integrated software solution allows us to efficiently bill for
multiple products on a single statement and provides a central point of contact
for handling orders and activities.

We have licensed software from Harris Corp. that enables network activation of
client orders. This software enables the automated processing of line
activations in all of our Class 5 switches and distinctive remote modules. This
software also enables the automated processing of line activations on our
voicemail platforms within New York, Pennsylvania, Massachusetts, Rhode Island,
New Hampshire, Connecticut, Maine and Ohio.

      ELECTRONIC BONDING

Through software that we have licensed from DSET Corporation and have integrated
with our MetaSolv software, we have established electronic bonding with Verizon
and SBC/Ameritech. We have implemented an electronic interface linking our
operations support systems directly to the established telephone company system
so that we can process orders on an automated basis for our clients which are
switching service from an established telephone company. Additionally, we can
confirm receipt and installation of service on-line and in real-time.

      TROUBLE TICKETING

We have created a system that logs information related to and monitors the
resolution of network problems. This system acts as a central repository for
logging client trouble calls, assigning responsibility for addressing the
problem


                                      -8-
<PAGE>
to the appropriate party, and tracking the status of the response to the calls,
including automatically escalating the response process, as appropriate.

      SALES FORCE AUTOMATION AND CONTACT MANAGEMENT

We utilize internally developed software to assist us in the management of
potential customer contacts, the management of the sales process with particular
client prospects and the preparation of proposals, correspondence and order
forms.

REGULATION

The following summary of regulatory and legislative developments describes
current and proposed federal, state, and local regulations and legislation that
are related to the telecommunications and Internet service industries that could
have a material effect on our business. Existing federal and state regulations
are currently subject to judicial proceedings, legislative hearings and
administrative proposals that could change, in varying degrees, the manner in
which our industries operate. We cannot predict the outcome of these proceedings
or their impact upon the telecommunications and Internet service industries, or
Choice One.

      OVERVIEW

Our telecommunications services are subject to federal, state, and, at times,
local regulation. The Federal Communications Commission ("FCC") exercises
jurisdiction over all facilities and services of telecommunications carriers to
the extent those facilities are used to provide, originate, or terminate
state-to-state or international communications (e.g. interstate). Generally,
state regulatory commissions exercise jurisdiction over facilities and services
to the extent those facilities are used to provide, originate or terminate
in-state communications. In addition, as a result of the passage of the
Telecommunications Act of 1996, state and federal regulators share
responsibility for implementing and enforcing the pro-competitive policies of
the Telecommunications Act. In particular, state regulatory commissions have
substantial oversight over the provision of interconnection and
non-discriminatory network access to established telephone companies. Local
governments often regulate public rights-of-way necessary to install
telecommunications facilities.

      FEDERAL REGULATION

We are regulated at the federal level as a nondominant common carrier subject to
minimal regulation under Title II of the Communications Act of 1934 and the
Telecommunications Act of 1996. The Telecommunications Act of 1996 was a
comprehensive reform of the nation's telecommunications laws and was designed to
enhance competition in the local telecommunications marketplace by requiring
established telephone companies to provide competitors like Choice One with
access and interconnection to their facilities and to open their local markets
to competition. Under the Telecommunications Act, regional Bell operating
companies have the opportunity to provide long distance services in any state in
which they offer local service if they comply with 14 market-opening conditions
under Section 271 of the Telecommunications Act. Established telephone companies
are no longer prohibited from providing specified cable TV services. In
addition, the Telecommunications Act eliminates particular restrictions on
utility holding companies, thus clearing the way for companies to diversify into
telecommunications services.

The regional Bell operating companies have demonstrated to the FCC's
satisfaction that they have satisfied the 14-point "checklist" of competitive
requirements, and thus have been granted authority to provide long distance
services in every state. The provision of in-region long distance services by
Verizon and SBC Communications ("SBC") in the states that overlap with Choice
One's service territory has permitted them to offer "one-stop shopping" of
bundled local and long distance services, thereby eliminating this aspect of our
marketing advantage.

      FCC RULES IMPLEMENTING THE LOCAL COMPETITION PROVISIONS OF THE
      TELECOMMUNICATIONS ACT

Over the last eight years, the FCC has established a framework of national rules
enabling local competition. Some of those rules have important bearing on our
business, particularly:

Interconnection. Established telephone companies are required to provide
interconnection for telephone exchange or exchange access service, or both, to
any requesting telecommunications carrier at any technically feasible point. The
interconnection must be at least equal in quality to that provided by the
company to itself or subsidiaries, affiliates or any other party to which it
provides interconnection, and must be provided on rates, terms and conditions
that are just, reasonable and nondiscriminatory.


                                      -9-
<PAGE>
We have obtained agreements with the established telephone companies in our
service areas. These agreements are subject to state approval and must be
renegotiated periodically, and we are working to renew these documents on a
continual basis. Renewal terms may be more or less favorable and could affect
our overall costs.

Access to and Pricing of Unbundled Elements. Established telephone companies are
required to lease portions of their networks to requesting telecommunications
carriers by providing them with nondiscriminatory access to network elements on
an unbundled basis at any technically feasible point, on rates, terms, and
conditions that are just, reasonable, and nondiscriminatory and TELRIC-based
(FCC cost mechanism Total Element Long Run Incremental Cost). This is important,
because it minimizes our need to make major investments in building our network.
At a minimum, established telephone companies must provide competitors with
access to various network elements used to originate and terminate telephone
calls, call routing database facilities, and computerized operations support
systems. The prices for these unbundled elements are set by the states under
guidelines established by the FCC. In 2003, the FCC instituted a comprehensive
review of the methodologies that states use to set the wholesale rates that
established telephone companies may charge for access to their networks. This
proceeding is designed to revise the TELRIC methodology to reflect real-world
costs, as opposed to costs based on hypothetically efficient carriers. We cannot
predict the outcome of that proceeding or any state proceeding that may
implement new federal pricing rules.

On February 20, 2003, the FCC revised the established telephone company
obligations to make elements of their networks available on an unbundled basis
to competitors and new entrants. This action, known as the Triennial Review
decision, addresses various local phone competition and broadband competition
issues. Following is a brief summary of the key issues resolved in the FCC's
decision:

      Impairment Standard - The FCC defined "impairment" as when lack of access
      to an established telephone company network element poses barriers to
      entry, including operational and economic barriers. Such barriers include
      scale economies, sunk costs, first-mover advantages and barriers within
      the control of the established telephone company. The FCC's unbundling
      analysis specifically considers market specific variations, such as
      customer class, geography and service.

      Broadband Issues - The FCC provides substantial unbundling relief for
      loops utilizing fiber facilities: no unbundling of fiber-to-the-home
      loops, no unbundling of bandwidth for the provision of broadband services
      for loops where the established telephone company deploys fiber further
      into the neighborhood but short of the customer's home (hybrid loops) and
      no line-sharing as an unbundled element. For the hybrid loops, the
      requesting carriers that provide broadband services over high capacity
      facilities will continue to obtain that same access. The FCC also provides
      clarification on its unbundled network element pricing rules.

      Unbundled Network Element Platform (UNE-P) Issue - The FCC will no longer
      require the unbundling of switching for business customers served by
      high-capacity loops such as DS-1, based on a presumptive finding of no
      impairment. States have 90 days from the effective date of the Triennial
      Review decision to rebut the FCC finding. For mass-market customers, the
      FCC sets out specific criteria that states shall apply to determine, on a
      granular basis, whether economic and operational impairment exists in a
      particular market. State commissions must complete such proceedings within
      nine months. Upon a state finding of no impairment, the FCC sets forth a
      three year period for carriers to transition from UNE-P.

      Roles of States - The states have a substantial role in applying the FCC's
      impairment standard according to specific guidelines tailored to
      individual elements.

      Dedicated Transport - The FCC found that requesting carriers are not
      impaired without access to Optical Carrier level transport circuits.
      However, the FCC found that requesting carriers are impaired without
      access to dark fiber, DS-3 and DS-1 capacity transport, each independently
      subject to a route-specific review by states to identify available
      wholesale facilities. Dark fiber and DS-3 transport are also each subject
      to a route-specific review by the states to identify where competing
      carriers are able to provide their own facilities.

On March 2, 2004, the US Court of Appeals for the District of Columbia vacated
large portions of the Triennial Review decision, including sections concerning
impairment standards and the delegation of authority to the states. The Court's
decision is largely viewed as unfavorable to the competitive industry, since it
vacated those portions of the Triennial Review decision that afforded
competitive carriers more liberal rights to access certain network elements. The
Court temporarily stayed its action pending an appeal of its decision. We cannot
predict the outcome of any appeal of the Court's decision.

Collocation. Established telephone companies are required to provide space in
their switching offices so that requesting telecommunications carriers can
physically "collocate" equipment necessary for interconnection or access


                                      -10-
<PAGE>
to unbundled network elements at the company's premises, except that the
established telephone company may provide off-site "virtual" collocation, if it
demonstrates to the state regulatory commission that physical collocation is not
practical for technical reasons, or because of space limitations.

      OTHER REGULATIONS

In general, the FCC has historically had a policy of encouraging newer
competitors, such as us, in the telecommunications industry and preventing
anti-competitive practices. Therefore, the FCC has established different levels
of regulation for dominant carriers, such as the established telephone
companies, and nondominant carriers, such as integrated communications providers
and competitive local exchange carriers.

Interstate and International Services. As a nondominant carrier, we may install
and operate facilities for the transmission of domestic interstate
communications without the time and expense of obtaining prior FCC
authorization.

Nondominant carriers are required to obtain FCC authorization pursuant to
Section 214 of the Communications Act before providing international
communications services. We have obtained such authority. Under recent FCC
decisions, the rates, terms, and conditions of domestic interstate and
international services are no longer filed with or regulated by the FCC,
although we remain subject to the FCC's jurisdiction over complaints regarding
these services. We also must comply with various FCC rules regarding disclosure
of our rates, the contents and format of our bills, payment of various
regulatory fees and contributions.

The FCC has adopted rules for a multi-year transition to lower international
settlement payments by U.S. common carriers. We believe that these rules are
likely to lead to lower rates for some international services and increased
demand for these services, including capacity on the U.S. facilities, like ours,
that provide these services.

Established Telephone Company Pricing Regulation Reform. The FCC has adopted a
number of changes to its rules that significantly reduce its regulation of
established telephone company pricing. These changes may greatly enhance the
ability of established telephone companies to compete against us, particularly
by targeting price cuts to particular clients, which could have a material
adverse effect on our ability to compete based on price. We expect that the FCC
will consider further initiatives along these lines in the future, but we cannot
predict the specific effects of future FCC reforms.

Access Charges. The FCC has also made various changes to the existing rate
structure for charges assessed on long distance carriers for allowing them to
connect to local networks. These changes will reduce some access charges and
will shift other charges, which had historically been based on minutes-of-use,
to flat rate monthly charges. Still other access charges will be shifted to
end-user clients rather than long distance carriers. As a result, the aggregate
amount of access charges paid by long distance carriers to access providers like
us may decrease. Under the FCC rules, the rates charged by the largest
established telephone companies for network access are targeted to be reduced
over time, and some of the larger companies have already reduced their rates.

In 2001, the FCC adopted new rules to limit the access charges of nondominant
local carriers like us. Under these rules, competitive carriers, such as us, are
required to reduce their interstate access charges to rates no higher than 2.5
cents per minute. After one year, this rate ceiling was to be reduced to 1.8
cents and after two years to 1.2 cents per minute. After three years, all
competitive carriers will be required to charge rates no higher than the
established telephone company.

Inter-carrier Compensation. In April 2001, the FCC initiated a rulemaking
proceeding to investigate whether comprehensive reform is warranted of the rules
governing the manner in which telecommunications carriers compensate each other
for the use of each other's networks, including through the payment of access
charges and reciprocal compensation. Industry groups have been formed to develop
a consensus on intercarrier compensation issues. We cannot predict what effect,
if any, the outcome of this proceeding will have on our access charge and
reciprocal compensation revenues.

Voice over Internet Protocol. In October 2003, a federal court in Minnesota
declared that VOIP is an information service under the Telecommunications Act of
1996, and is not subject to state regulation or the rules and regulations
applicable to traditional telephone service. In addition, a number of telephone
companies have also petitioned the FCC to declare that VoIP services are exempt
from access charges and other regulations under federal law. While we cannot
predict the outcome of such petitions, if the FCC were to rule in their favor,
it would create regulatory and financial incentives to deploy VoIP technology.
Such a ruling could also result in a reduction in access revenues paid to local
exchange carriers like us.

Universal Service Reform. Universal telephone service is a long-standing policy
initiative designed to assure that as many people as possible have access to
quality telephone service at affordable rates, particularly in rural and
high-cost areas, as well as providing advanced telecommunications services for
schools, health care providers and libraries. All telecommunications carriers
providing interstate telecommunications services must contribute to the
universal service support fund.

Various states are in the process of implementing their own universal service
programs, which also may increase our overall costs.


                                      -11-
<PAGE>
Slamming. The FCC has adopted rules to govern the process by which end-users
choose their carriers. Under their rules, a user may change service providers at
any time, but specific client authentication procedures must be followed. When
they are not, particularly if the change is unauthorized or fraudulent, the
change in service providers is referred to as "slamming". Slamming is such a
significant problem that it was addressed in detail in the Telecommunications
Act and by the FCC in recent orders. The FCC has levied significant fines for
slamming. The risk of financial damage and harm to business reputation from
slamming is significant. The FCC applies its slamming rules to both local and
long distance services.

Communications Assistance for Law Enforcement Act. Congress passed this act,
known as CALEA, in 1994 to maintain law enforcement agencies' ability to conduct
lawfully approved electronic surveillance despite changing telecommunications
technologies. CALEA defines all telecommunications carriers' obligations to
accommodate lawful electronic surveillance, and requires the industry to ensure
that their technology and equipment are CALEA compliant. The FCC is charged with
several responsibilities for CALEA implementation. In the face of changing
technology, law enforcement agencies have expressed concern over the
implementation of CALEA, and has asked the FCC to institute a rulemaking
proceeding to investigate these issues. We cannot predict what, if any,
additional costs we will incur as a result of any changing CALEA requirements.

State Regulation. All states we operate in require a registration, certification
or other authorization, and continued regulatory compliance, to offer intrastate
services. Many of the states in which we operate are addressing issues relating
to the regulation of competitive local exchange carriers. In most states, we are
required to file tariffs setting forth the terms, conditions and prices for
services that are classified as intrastate. States may also set the rates for
the access charges that local exchange carriers like us may assess long distance
companies for access to our networks for intrastate calls.

We have received, through our operating subsidiaries, certificates of authority
to provide local exchange and interexchange telecommunications services in each
state in which we are operating and in Virginia.

In addition to tariff filing requirements, some states also impose reporting,
client service and quality requirements, as well as unbundling and universal
service requirements. In addition, we are subject to the outcome of generic
proceedings held by state utility commissions to determine new state regulatory
policies. Some states have adopted or have pending proceedings to adopt specific
universal service funding obligations. These state proceedings may result in
obligations that are equal to or more burdensome than the federal universal
service obligations.

We believe that, as the degree of intrastate competition increases, the states
may allow the established telephone companies increasing pricing flexibility.
This flexibility may present the established telephone companies with an
opportunity to subsidize services that compete with our services with revenue
generated from non-competitive services, thereby allowing established telephone
companies to offer competitive services at lower prices. This could have a
material adverse effect on our ability to attract and retain clients at
profitable margins.

We are also subject to requirements in some states to obtain prior approval for,
or notify the state commission of, specified events such as transfers of
control, sales of assets, corporate reorganizations, issuances of stock or debt
instruments and related transactions.

As noted above, the states set most of the prices for the unbundled network
elements we purchase from the established telephone companies to connect our
network to customers. Several states have instituted proceedings to reexamine
whether unbundled network elements rates should be adjusted either upwards or
downwards. While we cannot predict the final outcome of these cases and their
effect on our business, changes in unbundled element prices directly affect and
are a large portion of our network costs.

Internet. Our Internet operations are not currently subject to direct regulation
by the FCC or any other telecommunications regulatory agency, although they are
subject to regulations applicable to businesses generally. However, the future
regulatory status of Internet service providers continues to be uncertain.
Congress and other federal entities have adopted or are considering proposals
that would further regulate the Internet. Various states have adopted and are
considering Internet-related legislation. Increased regulation of the Internet
may slow its growth or reduce potential revenue which may increase the cost of
doing business over the Internet.


                                      -12-
<PAGE>
Under the Telecommunications Act, competitive local exchange carriers are
entitled to receive compensation from established telephone companies for
delivering traffic to their customers. A dispute has existed for several years
over whether this compensation applies to calls bound for Internet service
provider customers of the competitive local exchange carriers. Most states have
required established telephone companies to pay this compensation to competitive
local exchange carriers. However in April 2001, the FCC adopted rules limiting
the right of competitive local exchange carriers to collect compensation on
calls that terminate to Internet service providers, and preempting inconsistent
state rules. Under the rules which became effective in June 2001, the amount of
compensation payable on calls to Internet service providers is limited to 0.15
cents per minute for the first six months after the rules became effective, 0.10
cents per minute for the next eighteen months, and 0.07 cents per minute
thereafter. In addition, the overall amount of compensation payable in each
state is limited by a formula based upon the number of minutes of Internet
traffic terminated in the first quarter of 2001. The FCC rules permit carriers
to continue collecting the existing higher rates on calls that terminate to
customers who are not Internet service providers. Any traffic exchanged between
carriers that exceeds a three-to-one ratio of terminating to originating minutes
is presumed to be Internet calls, although either carrier may attempt to rebut
this presumption and show a different level of Internet traffic. However, this
ratio and the per minute rate may be modified by agreements between the
established telephone company and the competitive local exchange carrier. In May
2002, a federal court of appeals rejected part of the FCC's rationale for its
April 2001 order but declined to vacate the order while its on remand. As a
result, pending further action from the FCC, the underlying rules remain in
effect.

      STATE AND FEDERAL LEGISLATION

State and federal legislatures periodically consider or pass legislation that
can affect our business. Several states have legislation pending to afford the
regional Bell operating companies regulatory flexibility that will make it
easier for them to compete with us. It is also expected that federal legislation
will soon be introduced to codify the deregulation of VOIP. We cannot predict
whether any new legislation will be introduced, whether it will be enacted into
law, or what effect such legislation would have on our business.

COMPETITION

We operate in a competitive environment. Some of our actual and potential
competitors have substantially greater financial, technical, marketing and other
resources, including brand name recognition, than we do. The increasingly
reduced regulatory and technological barriers to entry in the data and Internet
services markets could give rise to significant new competition. During 2003,
the number of competitors across our operating territories remained stable with
no significant new entrants or exits. The existing competitors, particularly the
regional Bell operating companies, increased their marketing activities in order
to attract former customers and expanded their service offerings to become
single-source providers for wireline and wireless telecommunications services.

We believe that the principal competitive factors affecting our business are
pricing, client service, accurate billing and, to a lesser extent, variety of
services. Our ability to compete effectively depends upon our ability to provide
high quality services at prices generally equal to or below those charged by
established telephone companies. To maintain our competitive posture, we believe
that we must be in a position to reduce our prices in order to meet reductions
in rates, if any, by others.

      ESTABLISHED TELEPHONE COMPANIES

In each of our markets, we compete principally with the established telephone
company serving that area, such as Verizon, SBC (including Southern New England
Telephone) and Frontier Telephone of Rochester. Established telephone companies
are the established providers of dedicated and local telephone services to the
majority of telephone subscribers within their respective service areas. In
addition, established telephone companies generally have long-standing
relationships with their clients and with federal and state regulatory
authorities and have financial, technical and marketing resources substantially
greater than we do, and the potential to subsidize competitive services from a
variety of businesses.

While recent regulatory initiatives provide increased competitive opportunities
to voice, data, and Internet-service providers such as us, they also provide the
established telephone companies with increased pricing flexibility for their
private line, special access, and switched access services. The FCC has
increased established telephone company pricing flexibility, under certain
circumstances, for the fees to connect to established telephone companies'
facilities known as competitive access services. As the established telephone
companies are allowed additional flexibility to offer discounts to large
clients, engage in aggressive volume and term discount pricing practices, and/or
charge competitors with additional fees for interconnection to their local
networks, the future revenue of integrated communications providers and
competitive local exchange carriers could be adversely affected.


                                      -13-
<PAGE>
In addition, the previously noted regulatory initiatives benefit the regional
Bell operating companies' offering of in-region long distance services, and
Verizon and SBC have begun to offer such services in all of the states where we
offer services. Many of the regional Bell operating companies also own or have
significant investments in wireless telephone companies. Recently, the regional
Bell operating companies have begun to bundle wireless services with their
wireline offerings to offer customers a fully integrated service offering for
their wireline and wireless telecommunications needs. These actions could create
increased competition for companies such as us.

      COMPETITIVE TELECOMMUNICATIONS PROVIDERS

We face competition from other current and potential market entrants, including
long distance carriers seeking to enter, reenter or expand entry into the local
exchange market such as AT&T, MCI, and Sprint, and from resellers of local
exchange services and competitive access providers. We also face competition
from other competitive local exchange carriers with operations in our markets,
such as TDS Metrocom, McLeod USA, Time Warner Telecom, Conversent, XO
Communications and LDMI (Long Distance of Michigan). Some of the established
telephone companies have created independent competitive local exchange carrier
subsidiaries to compete in these markets. Some of these competitors have
significantly greater financial resources than we do.

      OTHER SERVICES AND COMPETITORS

The established telephone companies represent the dominant competition for DSL
services in all of our markets. These companies have an established brand name,
possess sufficient capital to deploy DSL equipment rapidly, have their own
telephone wires and can bundle digital data services with their existing analog
voice services to achieve economies of scale in serving clients. Cable modem
service providers have deployed high-speed Internet services over cable
networks. Where deployed, these networks provide similar and, in some cases,
higher speed Internet access than we provide.

Many competitive telecommunications companies providing similar Internet service
that competes with our Internet services have deployed large-scale Internet
access networks, and have brand recognition. Companies that are solely Internet
service providers also provide Internet access to residential and business
customers, although generally at lower speeds than we offer. Cable television
companies also now offer competitive Internet access services to residential and
business customers, and are subject to relatively little regulatory oversight.

More recently, competitive pressures have increased as other competitors have
launched VoIP telephony to complement their other services. VoIP is a method of
transmitting voice communications by breaking the information into data packets
and transporting them over the Internet. Technological improvements have enabled
cable television companies, national telephone companies and several new
entrants to substantially increase their offerings of VoIP service to business
and residential customers where broadband connections to the Internet are
available. VoIP providers send calls over the Internet and can bypass local
telephone companies circuit switches, and in certain cases, avoid the
established telephone companies network entirely. The extent to which VoIP
services will be subject to federal and/or state regulation is unsettled. In
March 2004, the FCC initiated a rulemaking proceeding to address the effect of
VoIP service on intercarrier compensation, universal service subsidies, and
public safety. We cannot predict the outcome of such proceeding.

Other companies that currently offer, or are capable of offering, local switched
services include: cable television companies, electric utilities, microwave
carriers, and large business clients who build private networks. These entities,
upon entering into appropriate interconnection agreements or resale agreements
with established telephone companies, could offer single source local and long
distance services similar to those offered by us. We also expect to face
increasing competition from cellular carriers and companies offering long
distance data and voice services. We face competition from equipment companies
that enter into third party agent agreements to sell services. Some of these
companies could enjoy a significant cost advantage because they do not currently
pay carrier access charges or universal service fees.

INTELLECTUAL PROPERTY

We regard our products, services and technology as proprietary and attempt to
protect them with copyrights, trademarks, trade secret laws, restrictions on
disclosure and other methods. We also generally enter into confidentiality or
license agreements with our employees and consultants, and generally control
access to and distribution of our documentation and other proprietary
information. Currently we have 17 servicemark applications or registrations.
Despite our precautions, we may not be able to prevent misappropriation or
infringement of our products, services and technology.


                                      -14-
<PAGE>
Our logo and some titles and logos of our services mentioned in this Form 10-K
are either our service marks or service marks that have been licensed to us.
Each trademark, trade name or service mark of any other company appearing in
this Form 10-K belongs to its holder.

SIGNIFICANT CUSTOMERS

We do not have any customers from whom revenue equals 10 percent or more of our
net revenue.

EMPLOYEES

As of December 31, 2003, we had 1,412 employees compared to 1,539 employees at
December 31, 2002. We believe that our future success will depend on our
continued ability to attract and retain highly skilled and qualified employees.
None of our employees are currently represented by collective bargaining
agreements nor have we experienced any work stoppage due to labor disputes. We
believe that we enjoy good relationships with our employees.

                                  RISK FACTORS

RISKS RELATED TO OUR BUSINESS

WE WILL NEED A SIGNIFICANT AMOUNT OF CASH TO OPERATE OUR BUSINESS, WHICH WE MAY
BE UNABLE TO OBTAIN

Our viability is dependent upon our ability to continue to generate and grow
positive cash flows from operating activities during 2004. The success of our
business strategy necessitates obtaining and retaining a significant number of
customers, and generating significant and sustained growth in our cash flows
from operating activities to be able to fully satisfy our operating expenses,
meet our debt service obligations, including the repayment of principal
beginning on June 30, 2004, continue to comply with our credit facility and
subordinated debt covenants, and fund our capital expenditures. At December 31,
2003 we had $16.2 million in cash and cash equivalents. There is no additional
funding available under our credit facility at December 31, 2003.

Our revenue and costs are dependent upon some factors that are not entirely
within our control, including regulatory changes, changes in technology, and
increased competition. Due to the uncertainty of these factors, actual revenue
and costs may vary from expected amounts, possibly to a material degree, and
such variations could affect our future funding requirements and our ability to
continue operating our business. If we are unable to maintain minimum cash and
committed financing greater than $10.0 million through June 30, 2004, to
continue to comply with the credit facility covenants, and to commence the
repayment of principal beginning on June 30, 2004 as required under our senior
credit facility, we may need to raise additional capital or obtain a covenant
modification from our lenders. As of December 31, 2003, we were in compliance
with all applicable covenants. We can make no assurances that we will remain in
compliance with the applicable covenants during 2004. We can make no assurances
that we would be successful in raising additional capital or obtaining a
covenant modification from our lenders, if needed, on favorable terms or at all.
Failure to raise sufficient funds or modify our covenants under these
circumstances may affect our ability to continue to operate our business.

We may also require additional financing in order to develop new services or to
otherwise respond to changing business conditions or unanticipated competitive
pressures. Sources of additional financing may include commercial bank
borrowings, capital leasing, vendor financing, or the private or public sale of
equity or debt securities. We can make no assurances that we will be successful
in raising sufficient additional capital on favorable terms or at all. Failure
to raise sufficient funds as and when needed or advisable may require us to
engage in asset sales or pursue other alternatives designed to enhance our
liquidity or obtain relief from our obligations. Any or all of these scenarios
could have a material adverse effect on our business, financial condition and
results of operations and in such case, there is no assurance we could continue
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations --Liquidity and Capital Resources."

OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND
COULD PREVENT US FROM FULFILLING OBLIGATIONS

We are highly leveraged and have significant debt service and related
obligations. As of December 31, 2003, our aggregate outstanding financial
institution indebtedness was $632.0 million (net of unamortized discount of $5.8
million), our capital lease obligations were $33.0 million and our redeemable
preferred stock was $296.0 million.


                                      -15-
<PAGE>
We have $398.9 million committed and outstanding under our senior credit
facility at December 31, 2003. We also have $230.4 million outstanding in senior
unsecured notes that are subordinated to our senior credit facility. Any
incremental borrowings are subject to the approval from a majority of our senior
credit facility lenders. Our subordinated debt permits us to incur up to $425.0
million of indebtedness without approval from the subordinated debt lenders.

Our debt is subject to covenants customary to these types of arrangements. Our
ability to comply with these covenants will depend on our future financial and
operating performance, which, in turn, will be subject to prevailing economic
and competitive conditions and to certain financial, business, regulatory and
other factors, many of which are beyond our control. These factors could include
operating difficulties, increased operating costs, significant customer churn,
pricing pressures, the response of competitors, regulatory developments and
delays in implementing strategic projects. We can make no assurances that we
will continue to maintain compliance with our debt covenants should the factors
above occur and adversely affect our business, financial condition and results
of operations. These covenants require us to maintain an aggregate minimum
amount of cash and committed financing of $10.0 million at all times through
June 30, 2004, the covenant measurement period, impose limits on our capital
expenditures that vary annually, and require us to maintain certain leverage,
fixed charges and interest coverage ratios as described in the Credit Agreement.
As of December 31, 2003, we were in compliance with all applicable covenants. We
can make no assurances that we will remain in compliance with the applicable
covenants during 2004. If new indebtedness is added to our current levels, the
related risks that we face could intensify.

Our substantial leverage could have important consequences to us. For example,
it could:

      -     make it more difficult for us to obtain additional financing for
            working capital, capital expenditures, acquisitions or general
            corporate purposes;

      -     require us to dedicate a substantial portion of our cash flows from
            operating activities to the payment of principal and interest on our
            indebtedness, thereby reducing the funds available to us for our
            operations and other purposes, including investments in service
            development, capital spending and acquisitions;

      -     place us at a competitive disadvantage to our competitors that are
            not as highly leveraged as we are;

      -     impair our ability to adjust to changing market conditions; and

      -     make us more vulnerable in the event of a downturn in general
            economic conditions or in our business or of changing market
            conditions and regulations.

SERVICING OUR INDEBTEDNESS WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH AND OUR
ABILITY TO GENERATE CASH PARTIALLY DEPENDS ON SOME FACTORS BEYOND OUR CONTROL

We can make no assurances that we will be able to meet our debt service
obligations. If we are unable to generate sufficient cash flow or otherwise
obtain funds necessary to make required payments, or if we otherwise fail to
comply with the various covenants in our debt obligations, we would be in
default under such agreements, which would permit our lenders to declare all
amounts owed them immediately due and payable and could cause defaults under
other debt related agreements. Our ability to repay or to refinance our
obligations with respect to our indebtedness will depend on our future financial
and operating performance, which, in turn, will be subject to prevailing
economic and competitive conditions and to certain financial, business,
regulatory and other factors, many of which are beyond our control. These
factors could include operating difficulties, increased operating costs,
significant customer churn, pricing pressures, the response of competitors,
regulatory developments and delays in implementing strategic initiatives.

The successful execution of our business strategy, including obtaining and
retaining a significant number of clients, and sustained growth in our cash
flows from operating activities are necessary for us to be able to meet our debt
service obligations, including the repayment of principal beginning on June 30,
2004, and working capital requirements. We can make no assurances that the
anticipated results of our strategy will be realized, or that we will be able to
generate sufficient cash flows from operating activities to meet our debt
service obligations and working capital requirements. If our cash flow and
capital resources are insufficient to fund our debt service obligations and
working capital requirements, we could be forced to sell assets, seek to obtain
additional equity capital, or refinance or restructure our debt. A disposition
of assets in order to make up for any shortfall in the payments due on our
indebtedness could take place under circumstances that might not be favorable to
realizing the highest price for such assets. We can make no assurance that such
efforts would succeed, and if unsuccessful our business, financial condition,
results of operations and cash flows could be materially adversely affected,
with no assurance in such case that we could continue operations.


                                      -16-
<PAGE>
WE ANTICIPATE HAVING FUTURE OPERATING AND NET LOSSES

For the year ended December 31, 2003, we had operating losses of $29.2 million,
net losses applicable to common stockholders of $148.3 million and adjusted
earnings before income taxes, depreciation, amortization and other non-cash
charges ("EBITDA") of $36.2 million. Our net cash used in operating activities
for the year ended December 31, 2003 was $3.7 million as compared with net cash
used in operating activities for the year ended December 31, 2002 of $55.1
million. Although not necessarily indicative of future performance, the year
ended December 31, 2003 was the first year that we have generated positive
adjusted EBITDA. Adjusted EBITDA represents earnings before interest, income
taxes, depreciation and amortization, and other non-cash charges. Adjusted
EBITDA is used by management and certain investors as an indicator of a
company's liquidity and should not be substituted for cash flows from/used by
operating activities determined in accordance with accounting principles
generally accepted in the United States of America ("GAAP"), the most directly
comparable financial measure under GAAP. A reconciliation of our net cash used
in operating activities to adjusted EBITDA can be found in Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A").

We have suffered recurring losses from operations and have a net capital
deficiency that raises doubt about our ability to continue as a going concern.
Our continuation as a going concern is dependent on:

-     Sustained growth through increased penetration for data and voice
      offerings and the introduction of new products;

-     Continued improvement in operational efficiencies that may translate into
      lower network costs and lower selling, general and administrative expenses
      as a percentage of revenue.

We can make no assurances that we will generate sufficient adjusted EBITDA or
cash flows from operating activities to meet our working capital and debt
service requirements, including the repayment of principal beginning on June 30,
2004, or satisfy our credit facility covenants which could have a material
adverse effect on our business, financial condition and results of operations.
Our revenue and costs are dependent upon some factors that are not entirely
within our control, including regulatory changes, changes in technology, and
increased competition. Due to the uncertainty of these factors, actual revenue
and costs may vary from expected amounts, possibly to a material degree, and
such variations could affect our future funding requirements.

WE MAY FAIL TO ACHIEVE ACCEPTABLE PROFITS DUE TO PRICING

Prices in the long distance business have declined substantially in recent
years. We rely on other carriers to provide us with a major portion of our long
distance transmission network. Such agreements typically provide for the resale
of long distance services on a per-minute basis and may contain minimum volume
commitments. The negotiation of these agreements involves estimates of future
supply and demand for transmission capacity as well as estimates of the calling
patterns and traffic levels of our future clients. In the event that we fail to
meet such minimum volume commitments, we may be obligated to pay
underutilization charges, and, in the event we underestimate our need for
transmission capacity, we may be required to obtain capacity through more
expensive means.

Prices for data communication services have fallen historically, a trend which
may continue. Accordingly, we cannot predict to what extent we may need to
reduce our prices to remain competitive or whether we will be able to sustain
future pricing levels as our competitors introduce competing services or similar
services at lower prices. Our ability to meet price competition may depend on
our ability to operate at costs equal to or lower than our competitors or
potential competitors. There is a risk competitors, perceiving us to lack
capital resources, may undercut our rates or increase their services or take
other actions in an effort to force us out of business.

Local and long distance services have recently been shifting from usage based
pricing to flat rate pricing with unlimited usage. In addition, data service is
increasingly being bundled with voice services and priced as part of a bundle.
It is becoming increasingly difficult to separate services that form part of a
bundle.

Our failure to achieve acceptable profits on our local exchange, long distance
and data services due to pricing declines could have a material adverse effect
on our business, financial condition and results of operation.

WE MAY NOT BE SUCCESSFUL IN MAINTAINING OUR HIGH CUSTOMER RETENTION RATE

We maximize customer retention by offering a simplified, comprehensive package
of services and providing a high level of customer care. Our churn rate for
facilities-based business clients for the year ended December 31, 2003


                                      -17-
<PAGE>
was approximately 1.5% per month. If our churn rate increases or is higher than
expected, it could have a material adverse effect on our business and prospects.

Our ability to retain our customers is dependent upon a number of factors,
including our ability to provide quality service, customer care, accurate and
timely billing, our ability to provide competitive pricing and overcome
"win-back" programs offered by our competitors, the economic viability of our
customers, and our customers' perception of our economic viability. We can make
no assurances that we will be able to retain clients at the level we have in the
past.

We provide services to small and medium-sized businesses as well as network
service providers. A number of these businesses have experienced financial
difficulties in recent years, in some cases leading to bankruptcies and
liquidations. The financial difficulties of these companies could have a
material adverse effect on our financial results if we are unable to collect
revenues owed to us by these customers. In addition, we believe companies in
financial difficulty may be less likely to expand their operations and their
related demand for communications services or to migrate from dial-up Internet
connections to more advanced dedicated connections such as those that we offer.

WE EXPECT TO GROW OUR BUSINESS AND CANNOT GUARANTEE THAT WE WILL BE ABLE TO
EFFECTIVELY MANAGE OUR FUTURE GROWTH

The growth of our business and the provision of bundled telecommunications
services on a widespread basis could place a significant strain on our
management, operations, financial and other resources and increase demands on
our systems and controls. Failure to manage our future growth effectively could
adversely affect the expansion of our client base and service offerings. We can
make no assurances that we will be able to successfully maintain efficient
operations and financial systems, procedures and controls or successfully
obtain, integrate and utilize the employees and management, operations,
financial and other resources necessary to manage an expanding business in our
evolving, highly regulated and increasingly competitive industry. Failure to
expand in these areas and to improve such systems, procedures and controls in an
efficient manner at a pace consistent with the growth of our business could have
a material adverse effect on our business, financial condition and results of
operations.

If we are unable to hire sufficient qualified personnel or successfully maintain
our operations and financial systems, procedures and controls, our clients could
experience delays in connection of service and/or lower levels of client
service, our resources may be strained and we may be subjected to additional
expenses. Our failure to meet client demands and to manage the expansion of our
business and operations could have a material adverse effect on our business,
financial condition and results of operations.

The success of our business is dependent upon, among other things, the
effectiveness of our sales personnel in the promotion and sale of our services,
the acceptance of such services by potential clients, and our ability to hire
and train qualified personnel and further enhance our services in response to
future technological changes. We can make no assurances that we will be
successful with respect to these matters. If we are not successful with respect
to these matters, it could have a material adverse effect on our business,
financial condition and results of operations.

WE RELY ON THE EFFECTIVE OPERATION OF OUR INFORMATION AND PROCESSING SYSTEMS

Sophisticated back office information and processing systems are vital to our
business and our ability to monitor costs, bill clients, provision client
orders, and achieve operating efficiencies. Our maintenance of these systems
relies, for the most part, on choosing products and services offered by third
party vendors and integrating such products and services in-house to produce
efficient operational solutions. We can make no assurances that the system
maintenance and upgrades will be successfully implemented on a timely basis,
that they will be implemented at all or that, once implemented, they will
perform as expected. Risks to our business associated with our systems include:

      -     failure by our vendors to deliver their products and services in a
            timely and effective manner and at acceptable costs;

      -     failure by us to adequately identify all of our information and
            processing needs;

      -     failure of our related processing or information systems; and

      -     failure by us to effectively integrate new products or services.

Furthermore, as our suppliers revise and upgrade their hardware, software and
equipment technology, we could encounter difficulties in integrating the new
technology into our business or the new systems may not be appropriate


                                      -18-
<PAGE>
for our business. In addition, our right to use these systems is dependent upon
license agreements with third party vendors. Some of these agreements may be
cancelled by the vendor, and the cancellation or nonrenewal of these agreements
may have an adverse effect on us.

WE RELY ON THE ESTABLISHED LOCAL TELEPHONE COMPANIES TO IMPLEMENT SUCCESSFULLY
OUR SWITCHED AND ENHANCED SERVICES, WHOSE FAILURE TO COOPERATE WITH US COULD
AFFECT THE SERVICES WE OFFER

As a participant in the competitive local telecommunications services industry,
we may encounter numerous operating complexities associated with providing local
exchange services. The competition we face has required us to develop new
products, services and systems and to develop new marketing initiatives to sell
these services. We can make no assurances that we will be able to continue to
develop such products and services.

We have deployed high capacity voice and data switches in the cities in which we
operate networks. We rely on the networks of established telephone companies or
those of other competitive local exchange carriers for some aspects of
transmission. Federal law requires most of the established telephone companies
to lease or "unbundle" elements of their networks and permit us to purchase the
call origination and call termination services we need, thereby decreasing our
operating expenses. We can make no assurances that such unbundling will continue
to occur in a timely manner or that the prices for such elements will be
favorable to us. In addition, our ability to successfully provide our switched
and enhanced services has and will continue to require the negotiation of
interconnection and collocation agreements with established telephone companies
and other competitive local exchange carriers, which can take considerable time,
effort and expense and are subject to federal, state and local regulation.

We may experience difficulties in working with the established telephone
companies with respect to ordering, interconnecting, and leasing premises or
services. We can make no assurances that these established telephone companies
will continue to cooperate with us. If we are unable to obtain the cooperation
of an established telephone company in a region, our ability to continue to
offer local services in such region on a timely and cost-effective basis may be
adversely affected.

We depend significantly on the quality and maintenance of the copper telephone
lines we lease from the established telephone companies that are providing
services in our markets to provide DSL services. We can make no assurances that
we will be able to continue to lease the copper telephone lines and the services
we require from these established telephone companies on a timely basis or at
quality levels, prices, terms and conditions satisfactory to us or that such
established telephone companies will maintain the lines in a satisfactory
manner.

WE DEPEND ON CERTAIN KEY PERSONNEL AND COULD BE AFFECTED BY THE LOSS OF THEIR
SERVICES

We are managed by a number of key executive officers. We believe that our
success will depend in large part on our ability to continue to attract and
retain qualified management, technical, marketing and sales personnel and the
continued contributions of such management and personnel. Competition for
qualified employees and personnel in the telecommunications industry remains
strong and there are a limited number of persons with the requisite knowledge of
and expertise to operate and manage companies of our size in the industry. We do
not maintain key person life insurance for any of our executive officers. We do
have employment agreements with key executive officers. Although we have been
successful in attracting and retaining qualified personnel, we can make no
assurances that we will be able to hire or retain necessary personnel in the
future. The loss of services of one or more of our key executives, or the
inability to attract and retain additional qualified personnel, could materially
and adversely affect us.

WE MAY NOT HAVE THE ABILITY TO DEVELOP STRATEGIC ALLIANCES, MAKE INVESTMENTS OR
ACQUIRE ASSETS NECESSARY TO COMPLEMENT OUR EXISTING BUSINESS

We may seek, as part of our business strategy, to continue to develop strategic
alliances or to make investments or acquire assets or other businesses that will
relate to and complement our existing business. We are unable to predict whether
or when any prospective strategic alliances or acquisitions will occur or the
likelihood of a material transaction being completed on favorable terms and
conditions. Our ability to finance strategic alliances and acquisitions may be
constrained by our degree of leverage at the time of such strategic alliance or
acquisition. In addition, our credit facility may significantly limit our
ability to enter into strategic alliances or make acquisitions and to incur
indebtedness in connection with strategic alliances and acquisitions.

We can make no assurances that any acquisition will be made or that we will be
able to obtain financing needed to fund such acquisition. We currently have no
definitive agreements with respect to any material acquisition, although from
time to time we may have discussions with other companies and assess
opportunities on an ongoing basis. We


                                      -19-
<PAGE>
do not have any current plans relating to a material acquisition.

The financial impact of strategic alliances, acquisitions and investments could
have a material adverse effect on our business, financial condition and results
of operations and could cause substantial fluctuations in our quarterly and
yearly operating results. Furthermore, if we use our common stock as
consideration for acquisitions our shareholders could experience dilution of
their existing shares.

OUR 2001 FINANCIAL STATEMENTS HAVE BEEN AUDITED BY ARTHUR ANDERSEN LLP

Our consolidated financial statements for the year ended December 31, 2001 were
audited by Arthur Andersen LLP, independent public accountants. On August 31,
2002, Arthur Andersen ceased practicing before the SEC and has ceased
operations. Therefore, Arthur Andersen did not participate in the preparation of
this Form 10-K, did not reissue its audit report with respect to the financial
statements for the year ended December 31, 2001 included in this Form 10-K, and
did not consent to the inclusion of its audit report in this Form 10-K. As a
result, holders of our securities may have no effective remedy against Arthur
Andersen in connection with a material misstatement or omission in the financial
statements to which Arthur Andersen's audit report relates.

OUR STOCK PRICE HAS BEEN VOLATILE

Our stock price has experienced significant price and volume fluctuations and
may be thinly traded. Therefore, sales by even a single large shareholder can
materially decrease our stock's market price. The market price for our common
stock may continue to be subject to wide fluctuations in response to a variety
of factors, including but not limited to the following, some of which are beyond
our control:

      -     revenues and operating results failing to meet or exceed the
            expectations of securities analysts or investors in any period;

      -     failure to successfully implement our business strategy;

      -     announcements of operating results and business conditions by our
            clients and competitors;

      -     technological innovations by competitors or in competing
            technologies;

      -     announcements by us or our competitors of significant contracts,
            acquisitions, strategic partnerships, joint ventures or capital
            commitments;

      -     announcements by third parties of significant claims or proceedings
            against us;

      -     investor perception of our industry or our prospects;

      -     economic developments in the telecommunications industry and general
            market conditions; or

      -     regulatory changes.

Our common stock is quoted on the National Association of Security Dealers
("NASD") OTC Bulletin Board (OTCBB) under the symbol "CWON". As a result, it is
expected that our stockholders will find it more difficult to buy or sell shares
of, or obtain accurate quotations as to the market value of, our common stock
than it would be if our stock were listed on a national securities exchange or
the Nasdaq National Market System. In addition, our common stock may be
substantially less attractive as collateral for margin borrowings and loan
purposes, for investment by financial institutions under their internal policies
or state legal investment laws, or as consideration in future capital raising
transactions.

OUR NEED TO COMPLY WITH EXTENSIVE GOVERNMENT REGULATION CAN INCREASE OUR COSTS
AND SLOW OUR GROWTH.

Our networks and the provision of telecommunications services are subject to
significant regulation at the federal, state and local levels. The enactment of
new adverse regulation or regulatory requirements may affect our growth and have
a material adverse effect upon us.

The FCC exercises jurisdiction over us with respect to interstate and
international services. We must obtain, and have obtained prior FCC
authorization for installation and operation of international facilities and the
provision, including by resale, of international long distance services.

State regulatory commissions exercise jurisdiction over us because we provide
intrastate services. We are required to obtain regulatory authorization and/or
file tariffs at state agencies in most of the states in which we operate. If and
when we seek to build our own network segments, local authorities regulate our
access to municipal rights-of-way. Constructing a network and selling telephone
equipment is also subject to numerous local regulations such as building codes
and licensing. Such regulations often vary on a city by city and county by
county basis. In some states, we are required to obtain state contractor
licenses. If we do not obtain such required licenses, we may be subject to fines
and other penalties.


                                      -20-
<PAGE>
Regulators at both the federal and state level require us to pay various fees
and assessments, file periodic reports, and comply with various rules regarding
the contents of our bills, protection of subscriber privacy, service quality and
similar matters on an ongoing basis.

We cannot assure you that the FCC or state commissions will grant required
authority or refrain from taking action against us if we are found to have
provided services without obtaining the necessary authorizations, or to have
violated other requirements of their rules and orders. Regulators or others
could challenge our compliance with applicable rules and orders. Such challenges
could cause us to incur substantial legal and administrative expenses and cause
material adverse effects.

RISKS RELATED TO OUR INDUSTRY

WE FACE A HIGH LEVEL OF COMPETITION IN THE TELECOMMUNICATIONS INDUSTRY

The telecommunications industry is highly competitive, and one of the primary
purposes of the Telecommunications Act of 1996 is to foster further competition.
In each of our markets, we compete principally with the established telephone
company serving such market. The established telephone companies have
long-standing relationships with their clients, financial, technical and
marketing resources substantially greater than ours and the potential to fund
competitive services with cash flows from a variety of businesses. Established
telephone companies also benefit from existing regulations that, in some
respects, favor them over integrated communications providers and competitive
local exchange carriers. Furthermore, one large group of established telephone
companies, the regional Bell operating companies, have pricing flexibility under
particular conditions from federal regulators with regard to some services with
which we compete. This presents established telephone companies with an
opportunity to subsidize services that compete with our services and offer such
competitive services at lower prices.

It is likely that we will also face competition from other integrated
communications providers, facilities-based competitive local exchange carriers
and other competitors in some of our markets. We believe that second and third
tier markets will support only a limited number of competitors and that
operations in such markets with multiple competitive providers are likely to be
unprofitable for one or more of such providers.

We can make no assurances that we will be able to achieve or maintain adequate
market share or margins, or compete effectively, in any of our markets.
Moreover, many of our current and potential competitors have financial,
technical, marketing, personnel and other resources, including brand name
recognition, substantially greater than ours as well as other competitive
advantages over us. Any of the foregoing factors could have a material adverse
effect on our business, financial condition or results of operations. See
"Description of Business - Competition."

WIRELINE PROVIDERS FACE INCREASED COMPETITION FROM WIRELESS SERVICES

Wireless services constitute another significant source of competition to our
wireline telecommunications services. Wireless carriers such as Verizon Wireless
and Cingular Wireless (which has recently announced the purchase of AT&T
Wireless), have expanded and improved their network coverage, started to provide
bundled wireless products and lowered their prices to end-users. As a result,
customers are beginning to substitute wireless services for basic wireline
service. Wireless telephone services can also be used for data transmission.
These factors could also have a material adverse effect on our business,
financial condition or results of operations.

FINANCIAL DIFFICULTIES OF OUR COMPETITORS COULD ADVERSELY AFFECT OUR BUSINESS

Many of our competitors have experienced substantial and highly publicized
financial difficulties over the past several years. The financial difficulties
of these companies could reflect poorly on the overall telecommunications
industry. As a result, this could diminish our ability to obtain additional
capital and adversely affect the number of customers willing to purchase their
telecommunications services from us. Additionally, some of these competitors
have emerged from bankruptcy and have been able to reduce their debt or
otherwise recapitalize. These companies may be able to reduce their prices to a
point lower than our prices and yet still be able to make a profit because of
their reduced debt or more favorable capital structure. We may lose business as
a result of this price competition. Any of the foregoing factors could have a
material adverse effect on our business, financial condition or results of
operations.


                                      -21-
<PAGE>
FCC AND STATE REGULATIONS MAY LIMIT THE SERVICES WE CAN OFFER

Our networks and the provision of telecommunications services are subject to
significant regulation at the federal, state and local levels. The costs of
complying with these regulations and the delays in receiving required regulatory
approvals or the enactment of new adverse regulation or regulatory requirements
may have a material adverse effect upon our business, financial condition and
results of operations.

We can make no assurances that the FCC or state commissions will grant required
authority or refrain from taking action against us if we are found to have
provided services without obtaining the necessary authorizations. If we do not
fully comply with the rules of the FCC or state regulatory agencies, third
parties or regulators could challenge our authority to do business. Such
challenges could cause us to incur substantial legal and administrative
expenses.

Our Internet operations are not currently subject to direct regulation by the
FCC or any other governmental agency, other than regulations applicable to
businesses generally. However, the FCC continues to examine the regulatory
status of some services offered over the Internet. New laws or regulations
relating to Internet services, or existing laws found to apply to them, may have
a material adverse effect on our business, financial condition or results of
operations.

The Telecommunications Act of 1996 remains subject to judicial review and
additional FCC rulemaking, and thus it is difficult to predict what effect the
legislation will have on us and our operations. There are currently many
regulatory actions underway and being contemplated by federal and state
authorities regarding interconnection pricing and other issues that could result
in significant changes to the business conditions in the telecommunications
industry. We can make no assurances that these changes will not have a material
adverse effect on our business, financial condition or results of operations.

OBTAINING INTERCONNECTION AGREEMENTS WITH ESTABLISHED TELEPHONE COMPANIES
INVOLVES UNCERTAINTIES, AND THE RESOLUTION OF THESE UNCERTAINTIES COULD
ADVERSELY AFFECT OUR BUSINESS

Although the established telephone companies are required under the
Telecommunications Act of 1996 to unbundle and make available elements of their
network and permit us to purchase only the origination and termination services
that we need, thereby decreasing our operating expenses, such unbundling may not
be done as quickly as we require and may be priced higher than we expect. This
is important because we rely on the facilities of these other carriers to
connect network elements to our switches so that we can provide services to our
customers. Our ability to obtain these interconnection agreements on favorable
terms, and the time and expense involved in negotiating them, can be adversely
affected by legal developments.

We have interconnection agreements with a number of established telephone
companies through negotiations or, in some cases, adoption of another
competitive local carrier's approved agreement. In some cases one or both
parties may be entitled to demand renegotiation of particular provisions based
on intervening changes in the law, if any. We are in the process of negotiating
some successor interconnection agreements. However, it is uncertain whether we
will be able to obtain renewal of these agreements on as favorable terms.

In May 2002, the Supreme Court upheld the FCC's revised rules regarding which
network elements the established telephone companies must provide to competitors
on an unbundled basis such as local loops, the connection from a customer's
location to the established telephone company, and dedicated transport, used by
us. In the same case, the Supreme Court also upheld the FCC's total element
long-run incremental (TELRIC) pricing rules. Notwithstanding this decision
affirming the FCC's existing TELRIC methodology, the FCC has instituted a
proceeding to revise its TELRIC methodology, which may adversely affect us in
the form of higher rates. Favorable resolution of these cases will not
necessarily affect future uncertainties inherent in the regulation of
interconnection with established telephone companies.

In its Triennial Review decision, the FCC revised the established telephone
company obligations to make elements of their networks available on an unbundled
basis to competitors and new entrants. The Triennial Review decision has
eliminated certain unbundling provisions. However, the US Court of Appeals for
the District of Columbia circuit has vacated some of the FCC determinations and
appeals of the decision are likely. We cannot predict the outcome of these
appeals.

IF WE ARE UNABLE TO ADAPT TO TECHNOLOGICAL CHANGES IN THE TELECOMMUNICATIONS
INDUSTRY OUR BUSINESS COULD BE ADVERSELY AFFECTED

The telecommunications industry is subject to rapid and significant changes in
technology, including continuing developments in DSL technology and Internet
enabled telecommunication services, which do not presently have


                                      -22-
<PAGE>
widely accepted standards, and alternative technologies for providing high-speed
data transport and networking. The absence of widely accepted standards may
delay or increase the cost of our market entry due to changes in equipment
specifications and customer needs and expectations. If we fail to adapt
successfully to technological changes or obsolescence, fail to adopt technology
that becomes an industry standard or fail to obtain access to important
technologies, our business, financial condition or results of operations could
be materially adversely affected. We may also be dependent on third parties for
access to new technologies. Also, if we acquire new technologies, we may not be
able to implement them as effectively as other companies with more experience
with those technologies and in their markets. If this occurs, we may lose
customers to competitors with these technologies and our ability to attract new
customers would be affected.

ADDITIONAL INFORMATION

You may read and copy this Form 10-K, including the attached exhibits, and any
reports, statements or other information that we may file, at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549-1004. You can request copies of these documents, upon payment of the
duplicating fee, by writing to the SEC at its principal office at 450 Fifth
Street, N.W., Washington, D.C. 20549-1004. Please call the SEC at 1-800-SEC-0330
for further information on the operation of the Public Reference Room. Our SEC
filings are also available to the public, free of charge, on the SEC's Internet
site (www.sec.gov) or our Internet site (www.choiceonecom.com). None of the
materials posted on our Internet site are incorporated in this Form 10-K.

ITEM 2. PROPERTIES

We are headquartered in Rochester, New York. We occupy office space in Rochester
under a market-rate lease that expires in 2009. As of December 31, 2003, this
lease covered 105,680 square feet. We also have administrative offices under a
lease for 65,000 square feet of space in Grand Rapids, Michigan. The lease for
this space expires in 2009. In addition, we lease space in a number of
locations, primarily for sales offices and network equipment installations. We
believe that our leased facilities are adequate to meet our current needs and
that additional facilities are available to meet our development and expansion
needs in existing markets.

ITEM 3. LEGAL PROCEEDINGS

On November 20, 2001, the Company and three of its officers were named in a
complaint filed in the United States District Court of the Southern District of
New York on behalf of a class of persons consisting of certain purchasers of the
Company's common stock in its initial public offering which was completed on
February 23, 2000. The complaint seeks damages based on allegations that the
Company's Registration Statement and Prospectus relating to the offering
contained material misstatements and/or omissions regarding the compensation
received by the underwriters of the offering and certain transactions engaged in
by the underwriters. This case, which has been consolidated with more than 300
other cases against other companies involving similar allegations, also names
six underwriters of the Company's offering and the offerings of other issuers,
and alleges that the underwriters engaged in a pattern of conduct to extract
inflated commissions in excess of the amounts disclosed in offering materials
and manipulated the post-offering markets in connection with hundreds of
offerings by engaging in stabilizing transactions and issuing misleading and
fraudulent analyst and research reports. The complaint alleges that the Company
is strictly liable under Section 11 of the Securities Act of 1933 because Item
508 of Regulation S-K allegedly required the disclosure of commissions to be
paid to underwriters and of stabilizing transactions, and that the Company and
its officers acted with scienter, or recklessness, in failing to disclose these
facts, in violation of Section 10(b) of the Securities Exchange Act and Rule
10b-5 promulgated thereunder. The claims against the individual defendants were
dismissed without prejudice, by an agreement with the plaintiffs. After the
court denied motions to dismiss the cases, the parties entered into a mediation
which has resulted in the execution of a Memorandum of Understanding by the
Company and approximately 300 other issuers who are the subject of similar
litigation. The settlement contemplated by the Memorandum of Understanding will
not involve any payments by the Company and would terminate only the claims by
the plaintiffs against issuers. The claims against the underwriters will
continue, and the Company will be required to participate in limited discovery
related to those claims. It is expected that a Settlement Agreement formalizing
the terms of the settlement will be signed within the next 90 days and the
processes to finalize the settlement, including the certification of a class and
obtaining court approval of the settlement, will continue through at least the
end of the year. There are a number of conditions to the finalization of the
settlement and it is not presently possible to predict whether all of those
conditions will be satisfied.


                                      -23-
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth information concerning our executive officers and
other key personnel, including their ages, as of December 31, 2003.

<TABLE>
<CAPTION>
   NAME                                     AGE                                  TITLE
   ----                                     ---                                  ------
<S>                                         <C>    <C>
   Steve M. Dubnik.......................    41    Chairman of the Board and Director, President and Chief
                                                        Executive Officer
   Kevin S. Dickens......................    40    Chief Operating Officer
   Ajay Sabherwal........................    37    Executive Vice President, Finance and Chief Financial Officer
   Mae H. Squier-Dow.....................    42    Chief Client Officer
   Philip H. Yawman......................    38    Executive Vice President, Corporate Development
   Robert O. Bailey......................    57    Senior Vice President, Technology
   Linda S. Chapman......................    40    Senior Vice President, Human Resources
   Scott D. Deverell.....................    38    Vice President, Accounting, Treasurer and Controller
   Elizabeth A. Ellis....................    45    Senior Vice President, Information Technology
   Elizabeth J. McDonald.................    50    Vice President, Legal and Regulatory Affairs, and General Counsel
   Terry Nulty...........................    48    Senior Vice President, Sales
   Kevin Stephens........................    41    Senior Vice President, Marketing
</TABLE>

      Steve M. Dubnik, our Chairman of the Board, President, Chief Executive
Officer and Co-Founder, has worked in the telecommunications industry for 20
years. Prior to founding Choice One in June 1998, Mr. Dubnik served in various
capacities with ACC Corp., including as the President and Chief Operating
Officer of North American Operations of ACC from November 1996 to April 1998 and
as Chairman of the Board of Directors of ACC TelEnterprises Ltd. from July 1994
to April 1998. From December 1997 to April 1998, he also jointly performed the
functions of Chief Executive Officer of ACC. Mr. Dubnik currently serves on the
Board of Managers of Fibertech Networks, LLC.

      Kevin S. Dickens, our Chief Operating Officer since February 2003, and
prior to that Co-Chief Operating Officer from August 2000 to January 2003,
Senior Vice President, Operations and Engineering, and Co-Founder since July
1998, has worked in the telecommunications industry for 15 years. Prior to
joining us, Mr. Dickens was President and Chief Executive Officer of ACC Corp.'s
Canadian subsidiary, ACC TelEnterprises Ltd., from May 1997 to June 1998. Prior
thereto, Mr. Dickens was Vice President of Network Planning and Optimization at
Frontier Corporation, from September 1996 to May 1997, with responsibility for
Frontier's long distance network.

      Ajay Sabherwal, our Executive Vice President, Finance and Chief Financial
Officer since September 1999, has worked both directly in the telecommunications
industry and as an equity analyst covering the telecommunications industry for
over 14 years. Mr. Sabherwal was most recently executive director of
institutional equity research for Toronto-based CIBC World Markets from June
1996 to September 1999. Prior to joining CIBC World Markets as a senior research
analyst in June of 1996, Mr. Sabherwal was the telecommunications analyst for
BZW (Barclays de Zoete Wedd) Canada and its successor company from November 1993
until June 1996.

      Mae H. Squier-Dow, our Chief Client Officer since February 2003, and prior
to that Co-Chief Operating Officer from August 2000 to January 2003, Senior Vice
President, Sales, Marketing and Service, and Co-Founder since June 1998, has
worked in the telecommunications industry for 19 years. Ms. Squier-Dow served as
President of ACC Telecom, a U.S. subsidiary of ACC Corp., from June 1996 to May
1998, and in several positions at ACC Long Distance U.K. Ltd., including as
Commercial Director from April 1995 to June 1996, and as Director of Client
Relations and Marketing, Vice President of International Planning and Operations
Director from October 1993 to April 1995.

      Philip H. Yawman, our Executive Vice President, Corporate Development and
Co-Founder since July 1998, has worked in the telecommunications industry for 16
years. Prior to joining us, Mr. Yawman was Vice President of Investor Relations
and Corporate Communications at ACC Corp. from April 1997 to January 1998. Mr.
Yawman also served in various positions at Frontier Corporation from July 1989
to April 1997, including as head of investor relations' activities and in
several product management positions.


                                      -24-
<PAGE>
      Robert O. Bailey, our Senior Vice President, Technology since September
1999, is responsible for the engineering, cost of operating, and service
delivery design of the Choice One network. In addition, he is responsible for
evaluating and selecting the technology to be deployed by Choice One in the next
generation of switching systems architecture, including the evolution from
circuit switching systems to packet and ATM-based infrastructure. Most recently,
he was Vice President and Chief Technology Officer for the Upstate Cellular
Network (Frontier Cellular), a joint venture of Verizon Mobile and Frontier
Corporation, from January 1985 until April 1999, where he was responsible for
engineering and operations of a cellular network that covered 5.5 million
population units in upstate New York.

      Linda S. Chapman, our Senior Vice President, Human Resources since May
2001 and prior to that Vice President, Human Resources since August 1998, was
the Director of Human Resources of ACC Corp.'s U.S. subsidiary, ACC Telecom,
from June 1997 to July 1998. Prior thereto, Ms. Chapman held various management
positions with MCI from March 1994 to May 1997.

      Scott D. Deverell, our Vice President, Accounting, Treasurer and
Controller since September 2002, and prior to that our Vice President,
Accounting, and Controller since March 2000 and Director of Accounting since
December 1998, is a certified public accountant. Prior to joining us, Mr.
Deverell was employed by PSC Inc. as Assistant Treasurer from September 1997 to
December 1998 and as Controller from 1990 until September 1997.

      Elizabeth A. Ellis, our Senior Vice President, Information Technology
since August 2000 and prior to that Vice President, Information Technology since
July 1998, has worked in the information technology field for over 23 years,
including the past seven years in the telecommunications industry. Prior to
joining us in July 1998, Ms. Ellis was Commercial Director for ACC Telecom's
subsidiaries in the United Kingdom and Germany from August 1994 to June 1998
where she was responsible for all aspects of network, operations, client
service, telemarketing and information technology.

      Elizabeth J. McDonald, our Vice President, Legal and Regulatory Affairs
and General Counsel since December 2002, served as Associate General Counsel
from November 2001 to November 2002. Prior to joining us in November 2001, Ms.
McDonald was the Vice President and General Counsel of PSC Inc. from December
1996 to October 2001.

      Terry Nulty, Senior Vice President, Sales has been with the Company since
December 2002. Prior to joining the Company, Mr. Nulty was President of Element
K, a provider of e-Learning solutions to businesses, governments, and non-profit
organizations from March 1999 to August 2000, and as General Manager from 1996
to February 1999. Prior to joining Element K as General Manager in 1996, he
spent 15 years with Eastman Kodak in a variety of sales, marketing and staff
positions, both domestic and international, the last as Regional Manager for
business technology products.

      Kevin Stephens, our Senior Vice President, Marketing since March 2001 has
over 16 years of marketing and sales experience. Prior to joining us, Mr.
Stephens was Vice President of Marketing at Xerox Corporation from June 1984 to
February 2001. During his tenure at Xerox, he held various positions within
sales, marketing and general management.

Each of our officers serves at the pleasure of the board of directors.

PART II

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

MARKET INFORMATION

Our common stock has been quoted on the OTC Bulletin Board (OTCBB) under the
symbol "CWON" since December 10, 2002. Previously, from the time of our initial
public offering on February 16, 2000, our common stock was traded on the Nasdaq
Stock Market's National Market. There are approximately 8,500 holders of record
of our common stock. The following table sets forth the high and low bid prices
for our common stock as reported on the OTCBB and the high and low sale prices
as reported on the Nasdaq National Market, for the periods indicated. Quotations
on the OTCBB reflect the inter-dealer prices without retail mark-up, mark-down,
or commissions, and may not necessarily represent actual transactions.


                                      -25-
<PAGE>
<TABLE>
<CAPTION>
                                         Common Stock Price
                               --------------------------------------
                                    2003                   2002
                               ----------------      ----------------
                               High        Low       High        Low
                               -----      -----      -----      -----
<S>                            <C>        <C>        <C>        <C>
           First Quarter       $0.41      $0.16      $3.95      $1.24

           Second Quarter      $0.43      $0.25      $1.95      $0.33

           Third Quarter       $0.35      $0.25      $0.88      $0.12

           Fourth Quarter      $1.49      $0.27      $0.45      $0.10
</TABLE>

DIVIDEND POLICY

We have never paid or declared any cash dividends on our common stock and do not
anticipate paying cash dividends in the foreseeable future. We currently intend
to retain all future earnings, if any, for use in the operation of our business
and to fund future growth. Our future dividend policy will depend on our
earnings, capital requirements, requirements of financing agreements to which we
are a party, our financial condition and other factors considered relevant by
our board of directors. The agreements and terms of our Series A senior
cumulative preferred stock prohibit us from paying dividends on our common stock
so long as the Series A senior cumulative preferred stock is outstanding unless,
for any period, all cumulative dividends on all outstanding Series A senior
cumulative preferred stock have been paid or set apart for payment. The
agreements and terms of our subordinate notes prohibit us from paying dividends
on our common stock in cash. The agreements and terms of our senior credit
facility prohibit us from paying dividends on our Series A senior cumulative
preferred stock in cash.


                                      -26-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data presented below as of and for the years
ended December 31, 2003, 2002, 2001, 2000 and 1999, have been derived from our
consolidated financial statements. The results of our operations for the periods
indicated are not necessarily indicative of what our results of operations may
be in the future.

You should read the selected consolidated financial data set forth below in
conjunction with the Consolidated Financial Statements and notes thereto and our
MD&A - Results of Operations included elsewhere in this Form 10-K. Our
consolidated financial statements for the year ended December 31, 2003 were
audited by Deloitte & Touche LLP. Our consolidated financial statements for the
year ended December 31, 2002 were audited by PricewaterhouseCoopers LLP. Our
consolidated financial statements for the years ended December 31, 2001, 2000
and 1999 were audited by Arthur Andersen LLP, and the reports for those years
have not been reissued by Arthur Andersen LLP.

<TABLE>
<CAPTION>
                                                                                 YEAR ENDED DECEMBER 31,
                                                          2003            2002 (1)         2001           2000           1999
                                                          ----            --------         ----           ----           ----
                                                                             (IN THOUSANDS, EXCEPT PER SHARE)
<S>                                                   <C>               <C>            <C>            <C>            <C>
STATEMENT OF OPERATIONS DATA:
Revenue ............................................  $    322,891      $    290,780   $    181,598   $     68,082   $      4,518
Operating expenses:
   Network costs (2) ...............................       157,738           163,887        120,923         56,182          6,979
   Selling, general and administrative (3)(4) ......       129,938           173,595        168,295        173,197         22,978
   Restructuring (credits)/costs ...................          (535)            5,282             --             --             --
   Impairment loss on long-lived assets ............            --           294,524             --             --             --
   Loss on disposition of  assets ..................           230               733            801             --             --
   Depreciation and amortization ...................        64,691            71,046         89,144         41,003          5,153
                                                      ------------      ------------   ------------   ------------   ------------
   Total operating expenses ........................       352,062           709,607        379,163        270,382         35,110
                                                      ------------      ------------   ------------   ------------   ------------
Loss from operations ...............................       (29,171)         (418,287)      (197,565)      (202,300)       (30,592)
Interest income/(expense):
   Interest income .................................           165               412          4,871          2,111             76
   Interest expense ................................       (66,824)          (61,584)       (56,077)       (16,663)        (1,959)
   Accretion of preferred stock (5) ................        (5,974)               --             --             --             --
   Accrued dividends on preferred stock (5) ........       (21,283)               --             --             --             --
                                                      ------------      ------------   ------------   ------------   ------------
     Total interest expense, net ...................       (93,916)          (61,172)       (51,206)       (14,552)        (1,883)
   Other income ....................................            36                --             --             --             --
                                                      ------------      ------------   ------------   ------------   ------------
Net loss ...........................................      (123,051)         (479,459)      (248,771)      (216,852)       (32,475)
   Accretion of preferred stock (5) ................         5,334             8,802          7,007          2,393             --
   Accrued dividends on preferred stock (5) ........        19,867            35,860         31,250         11,830             --
                                                      ------------      ------------   ------------   ------------   ------------
Net loss applicable to common stockholders .........  $   (148,252)     $   (524,121)  $   (287,028)  $   (231,075)  $    (32,475)
                                                      ============      ============   ============   ============   ============

Net loss per share, basic and diluted ..............  $      (2.75)     $     (11.50)  $      (7.23)  $      (7.11)  $      (1.47)
                                                      ============      ============   ============   ============   ============
Weighted average number of shares outstanding, basic
and diluted ........................................    53,892,999        45,582,855     39,676,218     32,481,307     22,022,256
                                                      ============      ============   ============   ============   ============

Reconciliation of reported net income to reflect the
adoption of SFAS No. 142, "Goodwill and Other
Intangible Assets" on January 1, 2002

Net loss applicable to common stockholders .........  $   (148,252)     $   (524,121)  $   (287,028)  $   (231,075)  $    (32,475)
Goodwill amortization ..............................            --                --         33,010         15,275            306
                                                      ------------      ------------   ------------   ------------   ------------
Adjusted net loss applicable to common stockholders   $   (148,252)     $   (524,121)  $   (254,018)  $   (215,800)  $    (32,169)
                                                      ============      ============   ============   ============   ============

Net loss per share, basic and diluted as reported ..  $      (2.75)     $     (11.50)  $      (7.23)  $      (7.11)  $      (1.47)
Goodwill amortization per share ....................            --                --           0.83           0.47           0.01
                                                      ------------      ------------   ------------   ------------   ------------
Adjusted net loss per share, basic and diluted .....  $      (2.75)     $     (11.50)  $      (6.40)  $      (6.64)  $      (1.46)
                                                      ============      ============   ============   ============   ============
</TABLE>


                                      -27-
<PAGE>
<TABLE>
<CAPTION>
                                                                                AS OF DECEMBER 31,
                                                            2003          2002          2001          2000          1999
                                                            ----          ----          ----          ----          ----
<S>                                                     <C>           <C>           <C>           <C>           <C>
BALANCE SHEET DATA:
Cash and cash equivalents ............................  $    16,238   $    29,434   $    14,415   $   173,573   $     3,615
Accounts receivable, net .............................       30,859        43,215        40,239        20,655         2,929
Working (deficit)/ capital ...........................      (13,223)        1,388        (6,337)      185,800        (9,035)
Property and equipment, net ..........................      295,423       336,711       361,768       302,833        72,427
Total assets .........................................      383,468       463,950       764,378       923,830        94,512
Long-term debt, including current portion ............      631,976       595,941       473,432       447,000        51,500
Long-term capital leases, including current portion ..       32,999        32,429        12,860         1,667            --
Redeemable preferred stock (5) .......................      295,990       243,532       200,780       162,523            --
Accumulated deficit ..................................   (1,105,682)     (982,631)     (503,172)     (254,401)      (37,549)
Stockholders' (deficit)/equity .......................     (644,995)     (503,939)        1,231       259,530        26,724
</TABLE>

<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                            2003          2002          2001          2000          1999
                                                            ----          ----          ----          ----          ----
<S>                                                     <C>           <C>           <C>           <C>           <C>
OTHER FINANCIAL DATA:
Net cash used in by operating activities .............  $    (3,678)  $   (55,110)  $  (126,635)  $   (69,604)  $   (24,319)
Net cash used in investing activities ................      (12,223)      (27,514)      (50,967)     (489,280)      (56,077)
Net cash provided by financing activities ............        2,705        97,643        18,444       728,842        82,520
Capital expenditures .................................       12,358        28,526        85,051       119,400        56,077
</TABLE>

<TABLE>
<CAPTION>
                                                                                AS OF DECEMBER 31,
                                                            2003          2002          2001          2000          1999
                                                            ----          ----          ----          ----          ----
<S>                                                         <C>           <C>           <C>           <C>            <C>
OPERATING DATA:
Lines in service (6) .................................      515,715       500,923       383,975       177,614        20,096
Central office collocations ..........................          505           530           517           410           141
Markets in operation .................................           29            29            30            26             9
Number of voice switches .............................           25            25            26            24             8
Number of data switches ..............................           63            63            63            45            10
</TABLE>

<TABLE>
<CAPTION>
THE FOLLOWING TABLE SHOWS THE DIFFERENCES BETWEEN OUR
NET CASH USED IN OPERATING ACTIVITIES AS DETERMINED IN
ACCORDANCE WITH GAAP AND OUR ADJUSTED EBITDA:                                 YEAR ENDED DECEMBER 31,
                                                           2003          2002          2001          2000          1999
                                                           ----          ----          ----          ----          ----
<S>                                                     <C>           <C>           <C>           <C>           <C>
Net cash used in operating activities ................  $    (3,678)  $   (55,110)  $  (126,635)  $   (69,604)  $   (24,319)
Adjustments to reconcile:
   Changes in assets and liabilities .................       10,207       (10,954)        7,340       (13,858)         (661)

   Net interest expense (net of other income) ........       93,880        61,172        51,206        14,552         1,883
   Amortization of deferred financing costs ..........       (4,381)       (4,500)       (3,615)       (1,860)         (294)
   Amortization of discount on long-term debt ........       (1,119)         (683)          (80)           --            --
   Interest payable in-kind on long-term debt ........      (31,486)      (25,944)       (3,413)           --            --
   Accretion of preferred stock ......................       (5,974)           --            --            --            --
   Dividends on preferred stock ......................      (21,283)           --            --            --            --
                                                        -----------   -----------   -----------   -----------   -----------
Net interest expense currently payable ...............       29,637        30,045        44,098        12,692         1,589

   Specific bad debt reserves ........................           --        15,416            --            --            --
   Other non-cash charges ............................           --           571            --            --            --
   Restructuring charge ..............................           --         5,282            --            --            --
                                                        -----------   -----------   -----------   -----------   -----------
Adjusted EBITDA (7) ..................................  $    36,166   $   (14,750)  $   (75,197)  $   (70,770)  $   (23,391)
                                                        ===========   ===========   ===========   ===========   ===========
</TABLE>


                                      -28-
<PAGE>
(1) Our results for the year ended December 31, 2002 included an impairment
charge for goodwill of $283.0 million, a restructuring charge of $5.3 million,
and an impairment charge of $11.3 million for long-lived assets in connection
with our restructuring activities.

(2) Excludes depreciation expense of $36.4 million, $40.2 million, $27.4
million, $13.0 million and $2.4 million in 2003, 2002, 2001, 2000 and 1999,
respectively.

(3) Excludes depreciation and amortization expense of $28.3 million, $30.9
million, $61.7 million, $28.0 million and $2.8 million in 2003, 2002, 2001, 2000
and 1999, respectively, and includes non-cash deferred compensation and non-cash
management ownership allocation charge of $1.0 million, $16.0 million, $32.4
million, $90.5 million and $2.1 million in 2003, 2002, 2001, 2000, and 1999,
respectively.

(4) On January 1, 2003, we adopted the financial statement measurement and
recognition provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation" in accordance with SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure."
Under SFAS No. 123, on a prospective basis, the Company recognizes compensation
expense for the fair value of all stock options granted after December 31, 2002,
over the vesting period of the options. For stock options granted prior to
December 31, 2002, the Company accounts for stock based compensation issued to
its employees in accordance with APB Opinion No. 25, "Accounting for Stock
Issued to Employees." The Company's stock option plans are more fully described
in Note 13 to the consolidated financial statements.

(5) On July 1, 2003, we adopted SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." Upon adoption,
we reclassified our mandatorily redeemable preferred stock to long-term
liabilities. We now recognize dividends declared and accretion related to this
preferred stock as a component of interest expense. Restatement of prior period
classifications is not permitted upon adoption of SFAS No. 150.

(6) We evaluate the growth of our business by focusing on various operational
data in addition to financial data. Lines in service represent the lines sold
that are now being used by our clients subscribing to our services. Although the
number of lines we service for each client may vary, our primary focus is on the
small to medium-sized business customer. On average, our clients have 5 lines.
We plan to continue to focus primarily on small to medium-sized business
clients; however, we began offering residential voice telecommunication services
in selected markets in January 2004.

(7) Regulation G, "Conditions for Use of Non-GAAP Financial Measures," and other
provisions of the Exchange Act define and prescribe the conditions for use of
certain non-GAAP financial information in SEC filings. In this filing, we
include references to and analyses of adjusted EBITDA amounts that are not
calculated and presented in accordance with GAAP. Adjusted EBITDA represents
earnings before interest, income taxes, depreciation and amortization, and other
non-cash charges. In calculating adjusted EBITDA, we exclude from cash used in
operating activities the financial items that we believe have less significance
to the day-to-day liquidity and operation of our business. Adjusted EBITDA
highlights trends that may not otherwise be apparent when relying solely on GAAP
financial measures, because this non-GAAP financial measure eliminates from cash
used in operating activities financial items that have less bearing on our
liquidity. Adjusted EBITDA is used by management and certain investors as an
indicator of a company's liquidity and should not be substituted for cash flows
from/used by operating activities determined in accordance with GAAP, the most
directly comparable financial measure under GAAP. Management believes that the
presentation of adjusted EBITDA is meaningful because it is an indicator of our
ability to service existing debt, to sustain potential increases in debt, and to
satisfy capital requirements. Adjusted EBITDA is also used in the calculation of
management's variable compensation. Adjusted EBITDA as presented may not be
comparable to other similarly titled measures used by other companies. Investors
or potential investors are urged to read our consolidated financial statements
and notes thereto in conjunction with our adjusted EBITDA. They should not rely
solely on a single financial measure to evaluate our business. Management
compensates for the limitation of our non-GAAP financial measure by using
non-GAAP financial measures only to supplement our GAAP results to provide a
more complete understanding of the factors and trends affecting our business.


                                      -29-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

We are an integrated communications provider offering facilities-based voice and
data telecommunications services primarily to small and medium-sized businesses
in 29 second and third tier markets in 12 states in the northeastern and
midwestern United States. In January 2004, we began offering residential voice
and data telecommunication services in selected markets in our footprint. Our
services include:

      -     local exchange and long distance service; and

      -     high-speed data and Internet services.

Our principal competitors are established telephone companies, such as the
regional Bell operating companies, as well as other integrated communications
providers.

We seek to become the leading integrated communications provider in each of our
markets by offering a single source for competitively priced, high quality,
customized telecommunications services. A key element of our strategy has been
to be one of the first integrated communications providers to provide
comprehensive network coverage in each of the markets we serve. We have achieved
this market coverage by installing both voice and data equipment in multiple
established telephone company central offices. As of December 31, 2003, we have
connected approximately 94% of our clients directly to our own switches, which
allows us to more efficiently route traffic, ensure a high quality of service
and control costs.

Our financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. Our auditors' opinion notes that we have suffered
recurring losses from operations and have a net capital deficiency that raises
substantial doubt about our ability to continue as a going concern.

At December 31, 2003, we had $16.2 million in cash and cash equivalents and all
available commitments under our senior credit facility were outstanding. We
generated positive cash flows from operating activities during the final two
fiscal quarters of 2003 and positive adjusted EBITDA during each of the fiscal
quarters in 2003. Although not necessarily indicative of future results, the
final two fiscal quarters of 2003 was the first time in our history that we
generated positive cash flows from operating activities during reporting
periods. Our viability is dependent upon our ability to continue to generate and
grow positive cash flows from operating activities. The success of our business
strategy necessitates obtaining and retaining a significant number of customers,
generating significant and sustained growth in our cash flows from operating
activities, and managing our costs and capital expenditures to be able to meet
our debt service obligations, including the repayment of principal beginning on
June 30, 2004.

Our senior credit facility contains certain covenants that are customary for
credit facilities of this nature. These covenants require us to maintain an
aggregate minimum amount of cash and committed financing of $10.0 million
through June 30, 2004 and, commencing on September 30, 2004, require us to
maintain certain leverage, fixed charges and interest coverage ratios as
described in the senior credit facility. Our ability to comply with these
covenants will primarily depend on our operating results, which are subject to
the uncertainties described above. A breach in observance of any of these
covenants, if unremedied in three business days, would cause an event of default
under the senior credit facilities and an event of default under our
subordinated debt. An event of default would permit our obligations under our
senior credit facility and our subordinated debt to be declared to be
immediately payable. If the lenders so accelerate our obligations, then we can
make no assurances that we would be able to obtain additional or substitute
financing. An acceleration of our obligations would have a material adverse
effect on our business, financial condition and results of operations.

As of December 31, 2003, and from then through the date of filing of this
report, we were and are in compliance with all covenants under our senior credit
facility. However, it is reasonably likely, without covenant relief or
modification or other action, that we will be in breach of one or more
applicable covenants at some point during 2004. With respect to this situation,
we intend to pursue a variety of matters including changes to our operating
plans to enable us to remain in compliance, discussions with lenders to gain
certain waivers or modifications regarding our covenants which will enable us to
remain in compliance, and other possible actions and strategic alternatives. To
help guide and facilitate this effort, we have engaged consultants to provide us
with a broad range of financial advisory services. We can make no assurances
that we will be successful in any or all of these efforts.


                                      -30-
<PAGE>
The year ended December 31, 2003 was marked by several significant highlights
that are discussed in further detail in our discussion and analysis of financial
condition and results of operations. The year ended December 31, 2003 was also
marked by our implementation of measures to become more efficient in providing
our products and services, strengthen our cash position and become adjusted
EBITDA positive. Our discussion and analysis should be read in conjunction with
our audited financial statements for the three years ended December 31, 2003.

During 2003, we:

      -     Celebrated our 5th year of providing services in the competitive
            telecommunications industry;

      -     Were recognized by the New York State Public Service Commission
            (NYSPSC) for providing excellent telephone service to our customers
            during 2002;

      -     Continued with operational initiatives to optimize our network and
            lower our cost structure;

      -     Implemented initiatives to improve our credit and collections
            processes;

      -     Took steps to reduce selling, general and administrative expenses
            through cost reduction initiatives; and

      -     Reduced capital expenditures as we completed our network build out.

FACTORS AFFECTING RESULTS OF OPERATIONS

REVENUE

We generate revenue from the following categories of service:

-     local calling services, which consist of monthly recurring charges for
      basic service, usage charges for local calls and service charges for
      features such as call waiting and call forwarding;

-     long distance services, which include a full range of retail long distance
      services, including traditional switched and dedicated long distance,
      800/888 calling, international, calling card and operator services;

-     DSL and other data services, which consist primarily of monthly recurring
      charges for connections from the end-user to our facilities;

-     access charges, which we earn by connecting our clients to their selected
      long distance carrier for outbound calls or by delivering inbound long
      distance traffic to our local service clients;

-     reciprocal compensation, which entitles us to bill the established
      telephone companies and competitive local exchange carriers for calls in
      the same local calling area placed by their clients to our clients; and

-     web design and hosting.

The market for local and long distance services is well established. The
principal ways to increase revenues from these services is to capture market
share from other service providers and to increase the amount and range of
services sold to existing clients. We expect revenue from access charges that
are based on other established telephone companies' long distance calls made by
and to our clients to increase in the aggregate as revenue increases, but on a
declining per unit basis, as the FCC's benchmark for established interstate
access rates declines. The FCC mandates that we reduce the rates we charge
interexchange carriers for interstate switched access services to a level equal
to the rate charged for similar services by competing established telephone
companies. Such mandated rate reduction have occurred in prior years with the
last step in the transition phase-down of access charges established by the FCC
set to occur on June 21, 2004. As in prior years, we expect that growth in our
non-access revenue will fully offset negative revenue impacts from this access
rate decrease. Reciprocal compensation rates are also expected to decline on a
per unit basis. However reciprocal compensation revenue is expected to increase
as minutes of use volume increases.

The market for high-speed data communications services and Internet access is
intensely competitive. We offer data services in all of our markets. We generate
revenue from the sale of these services to end user clients in the small and
medium-sized business market segments. We price our services competitively in
relation to those of the


                                      -31-
<PAGE>
established telephone companies and offer bundled and individual services to
give clients incentives to buy a portfolio of services. See "Description of
Business--Our Telecommunications Services."

During the past several years, market prices for many telecommunications
services on a unit basis have been declining, which is a trend that we believe
will likely continue. This decline may have a negative effect on our revenue.
Although pricing is an important part of our strategy, we believe that direct
relationships with our clients and consistent, high quality service and client
support is essential to generating client loyalty. See "Description of Business
--Competition."

Our churn rate for the year ended December 31, 2003 of our facilities-based
business clients was approximately 1.5% per month, as compared to 1.6% per month
for the year ended December 31, 2002. We seek to minimize churn by providing
superior client care, by offering a competitively priced portfolio of local,
long distance and Internet services, by signing a significant number of clients
to multi-year service agreements, and by focusing on offering our own
facilities-based services.

There is uncertainty surrounding the payment of reciprocal compensation by the
established telephone companies for calls delivered to Internet service
providers due to their regulatory interpretations and disputes therein. However,
the amount of reciprocal compensation revenue that we receive related to
Internet service providers is not material. See "Description of Business
--Regulation --Federal Regulation."

NETWORK COSTS

Our network costs include the following:

-     The cost of leasing high-capacity digital lines that interconnect our
      network with established telephone company networks. These facilities are
      also used to connect our switching equipment to our transmission equipment
      located in established telephone company central offices, as well as to
      connect our transmission equipment between these offices. These network
      expenses include non-recurring installation costs and monthly recurring
      fixed costs. As our markets mature, these costs will remain a significant
      part of our ongoing cost of services, but are expected to represent a
      declining percentage of total costs.

-     The cost of leasing our inter-city network. Our inter-city network
      facilities are used to carry data traffic between our markets and for
      delivery to Internet access points. The costs of these lines will increase
      as we increase capacity to address client demand. As we deploy fiber,
      however, these costs associated with the leased facilities will decrease
      and an increase in depreciation expense will occur due to the deployment
      of fiber.

-     The cost of leasing local loop lines which connect our clients to our
      network. The costs to lease local loop lines from established telephone
      companies vary by company and are regulated by state authorities under the
      Telecommunications Act. These client loop costs are for voice and data
      lines as well as client T-1 links. These expenses include non-recurring
      installation costs and monthly recurring fixed costs. As our clients and
      related lines continue to increase, total local loop line costs will
      continue to increase and will remain a significant component of our
      ongoing network costs.

-     The cost of leasing space in established telephone company central offices
      for collocating our transmission equipment. When we constructed switching
      and transmission equipment, we capitalized, as a component of property and
      equipment, non-recurring charges for items such as construction. We also
      capitalized the monthly recurring leasing costs of the collocations during
      the construction period, typically one to two months. These capitalized
      non-recurring costs are depreciated over the life of the lease and are not
      included in our network costs. After traffic is being carried on the
      facilities, recurring lease costs are expensed as incurred and are
      included in our network costs. As a market matures, these costs are
      expected to remain relatively constant, decreasing as a total component of
      total network costs.

-     The cost of completing local calls originated by our clients. These local
      call costs are referred to as "reciprocal compensation" costs and are
      incurred primarily in connection with voice services. We have entered into
      interconnection agreements with the established telephone companies in our
      markets to make widespread calling available to our clients. These
      agreements typically set the cost per minute to be charged by each party
      to the other for the calls that are exchanged between the two carriers'
      networks and provide that a carrier must compensate the other carrier when
      a local call by the first carrier's client terminates on the other
      carrier's network. These reciprocal compensation costs will grow as our
      clients' outbound calling volume grows and will continue to be a
      significant component of total network costs. As clients and related lines
      installed increase, our


                                      -32-
<PAGE>
      costs will continue to increase proportionately. Changes in regulatory
      requirements for reciprocal compensation costs may result in an
      arrangement of bill and keep which may dramatically reduce these costs to
      us.

-     The cost of completing, originating (1+ calling) and terminating (inbound
      800 calling) long distance calls by our clients. The cost of securing long
      distance service capacity is a variable cost that increases in direct
      relationship to increases in our client base and our clients' long
      distance calling volumes. These minute of usage charges will continue to
      be a significant component of total network costs. As clients and calling
      volumes increase, these costs will continue to increase proportionately.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Our selling, general and administrative expenses include costs associated with
sales and marketing, client care, billing, corporate administration, personnel,
and network maintenance. We incur other costs and expenses, including network
maintenance costs, administrative overhead, office lease expense and bad debt
expense.

NON-CASH DEFERRED COMPENSATION

As the estimated fair market value of our common stock exceeded the exercise
price of certain options that we granted, we recognized non-cash deferred
compensation that was amortized over the vesting period of the options.

As our estimated fair market value has exceeded the price at which shares of our
stock have been sold to management employees since our formation, we recognized
a non-cash deferred compensation charge of $4.4 million which was amortized over
a four year period from the date the shares were issued. The charge was fully
amortized at December 31, 2002. In addition, we have similarly recognized a
non-cash deferred compensation charge of $7.5 million in connection with the
issuance of options to various employees, which was amortized over a four-year
period from the date the options were issued. The non-cash compensation charge
was fully amortized at December 31, 2003.

MANAGEMENT OWNERSHIP ALLOCATION CHARGE

Upon consummation of our initial public offering, we were required by GAAP to
record the $119.9 million increase in the assets of Choice One Communications
L.L.C. allocated to management as an increase in additional paid-in capital,
with a corresponding increase in deferred compensation. We were required to
record $62.4 million of the deferred compensation as a non-cash, non-recurring
charge to operating expense during the period in which the initial public
offering was consummated, and the remaining $57.5 million was recorded as
deferred management ownership allocation charge. The allocation charge was fully
amortized at December 31, 2002.

RESTRUCTURING (CREDITS)/COSTS

During September 2002, we identified opportunities to optimize the use of
capital and company assets and committed to a plan of workforce reductions,
closing operations in our Ann Arbor and Lansing, Michigan market and reducing
reliance on certain collocation sites. On September 5, 2002, we announced that
we had reduced our workforce by 102 operational and administrative positions. In
addition, approximately 100 positions were eliminated through normal attrition.

On October 9, 2002, we notified our customers in the communities of Ann Arbor
and Lansing, Michigan that we would be ceasing operations in that market. We
stopped selling services to new clients in this market and notified existing
customers of the decision and the approximate time remaining until services were
terminated. We also redeployed certain equipment from this market to other
markets to optimize our network assets and to minimize future capital
expenditures. Revenue and operating results of the Ann Arbor and Lansing,
Michigan market were not significant to our consolidated results of operations.
This market was closed in December 2002 and had an immaterial impact on revenue
for the year ended December 31, 2002.

We recorded restructuring costs of $5.3 million in September 2002, comprised of
employee termination benefits of $0.6 million, contractual lease obligations of
$3.4 million and network facility costs of $1.3 million. During February 2003,
we modified a portion of our restructuring plan related to reduced reliance on
certain collocation sites. As we engaged in our restructuring actions in the
first quarter of 2003, we were informed that additional costs would be charged
to us by the established telephone companies in connection with the
restructuring. Based on this new information, we reduced the number of
collocation sites that would be affected.


                                      -33-
<PAGE>
DEPRECIATION AND AMORTIZATION

Our depreciation and amortization expense includes depreciation of switch
related equipment, non-recurring charges and equipment collocated in established
telephone company central offices, network infrastructure equipment, information
systems, furniture and fixtures, and indefeasible rights to use fiber. It also
includes amortization of goodwill (prior to January 1, 2002) and client
relationships. We performed an assessment of our goodwill impairment during June
2002 in accordance with SFAS No. 142 "Goodwill and Other Intangible Assets" and
determined that the goodwill was fully impaired.

Our acquisitions of US Xchange, Atlantic Connections and EdgeNet were accounted
for using the purchase method of accounting. The value of the client
relationships acquired from US Xchange, Atlantic Connections and EdgeNet was
$48.5 million, $3.3 million and $0.5 million, respectively, and is being
amortized over five year periods. The value of the indefeasible right to use
fiber acquired from US Xchange was $34.3 million and is being amortized over 20
years. The amount of the purchase price in excess of the fair value of the net
assets acquired (goodwill) for US Xchange, Atlantic Connections and EdgeNet was
$319.3 million, $7.3 million and $3.5 million, respectively. The goodwill had
been amortized over the estimated useful life of 10 years. Amortization of the
goodwill ceased as of January 1, 2002, in accordance with SFAS No. 142.

INTEREST INCOME (EXPENSE)

Our interest income results from the investment of our cash and other short-term
investments. Our interest expense includes interest payments on borrowings under
our senior credit facility, non-cash interest expense on the subordinated notes,
amortization of deferred financing costs related to these facilities,
amortization of the discount on the subordinated notes and Term C loan under the
senior credit facility, interest expense related to IRUs, and commitment fees on
the unused senior credit facility. As of July 1, 2003, dividends and accretion
related to our Series A preferred stock were also classified as interest
expense. Dividends on preferred stock may be paid in-kind or in cash, at our
option. Interest expense on the subordinated notes is payable in-kind (PIK)
through November 2006. Interest expense, currently payable in cash, as discussed
below, is the interest expense that must be settled periodically in cash as
compared to the interest expense which accretes to principal.

INCOME TAXES

We have not generated any taxable income to date and do not expect to generate
taxable income in the next few years. The use of our net operating loss
carryforwards, which begin to expire in 2021, may be subject to limitations
under Section 382 of the Internal Revenue Code of 1986, as amended. We have
recorded a full valuation allowance on the deferred tax asset, consisting
primarily of net operating loss carryforwards, due to the uncertainty of its
realizability.

CRITICAL ACCOUNTING POLICIES

The preparation of our consolidated financial statements requires management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses and disclosure of contingent assets and
liabilities. On an on-going basis, management evaluates these estimates.

Our significant accounting policies are described in Note 2 to the consolidated
financial statements included in Item 8 of this Form 10-K. We believe our most
critical accounting policies, judgments and estimates include those relating to
revenue recognition, the allowance for doubtful accounts, network costs and
long-lived assets.

Management bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for judgments about the carrying values of
assets and liabilities. Actual results could differ from those estimates.

Revenue recognition. Revenue from monthly recurring charges, enhanced features
and usage is recognized in the period in which service is provided in accordance
with GAAP and SEC Staff Accounting Bulletin No. 104, "Revenue Recognition in
Financial Statements" (SAB 104). Deferred revenue represents advance billings
for services not yet provided. Such revenue is deferred and recognized in the
period in which service is provided. Nonrefundable activation fees are also
deferred and recognized as revenue over the expected term of the customer
relationship. The Company recognizes revenue from switched access and reciprocal
compensation based on actual usage and applicable rates per minute of usage,
adjusted for management's assessment of reasonable collectibility. As part of
the revenue recognition process for switched access, we evaluate whether
receivables are reasonably assured of collection based on certain factors,
including past credit history, financial condition of the customer,


                                      -34-
<PAGE>
industry norms, past payment history of the customer and the likelihood of
billings being disputed by customers. In situations where a dispute is likely,
we generally defer recognition until cash is collected. Certain judgments in
measuring revenue and assessing the reasonable assurance of collectibility,
including regulatory interpretations and legal challenges, may affect our
results. Revenue results may be difficult to predict, and any shortfall in
revenue or delay in recognizing revenue could cause our operating results to
vary significantly and could result in future operating losses.

Allowance for doubtful accounts. We maintain an allowance for doubtful accounts
for estimated losses resulting from the inability of our customers to make the
required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required resulting in additional expense to us and
affecting our results of operations. In addition, collectibility may be affected
by regulatory and contractual challenges.

Network costs. The liability for network costs is incurred to provide
telecommunication services to our clients and is recognized in the period when
the service is utilized. There is considerable judgment and estimation of these
costs based on line and circuit counts, estimated usage, active collocation
sites, contractual interpretations and anticipated challenges, and regulatory
interpretations and anticipated changes. In addition, we accrue for charges
invoiced by carriers which are probable for payment but have not been paid due
to rate or volume disputes. As of December 31, 2003 and 2002, our accrued
network costs were $19.4 million and $33.9 million, respectively. Changes in
these estimates could have a significant effect on our financial condition and
results of operations.

Long-Lived assets. Our business acquisitions resulted in goodwill and other
intangible assets that affect the amount of future period amortization expense
and possible impairment expense that we may incur. During 2002, we determined
that our goodwill was fully impaired. We also have a significant investment in
property and equipment. The determination of the value and any subsequent
impairment of our remaining long-lived assets requires management to make
estimates and assumptions that may affect our consolidated financial statements.
Long-lived assets, including property, plant and equipment and intangible assets
with finite lives, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. The carrying amount of a long-lived asset is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset. The impairment loss, if determined to be
necessary, would be measured as the amount by which the carrying amount of the
asset exceeds the fair value of the asset. Factors that may affect the
recoverability of our long-lived assets include shifts or reductions in our
client base, adverse changes in our expected future cash flows and changes in
our borrowing amounts and market interest rates.

RESULTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2002

REVENUE

We generated $322.9 million in revenue for the year ended December 31, 2003, an
increase of 11.0% as compared to $290.8 million in revenue for the year ended
December 31, 2002. Of our total revenue increase, approximately $32.4 million
was attributable to increases in voice and data revenue, offset by a $0.3
million decrease in access revenues. The favorable changes in voice and data
revenue were primarily due to increases in the average number lines in service
during 2003. The average number of lines in service increased by approximately
60,700 lines. Our lines in service at December 31, 2003 increased approximately
3.0% from our lines in service at December 31, 2002.

Average revenue per line in 2003 as compared to 2002 declined by approximately
2.0% as compared to 2.8% a year ago. Our access revenue was negatively impacted
by reduced interstate rates that we charged other carriers as FCC mandated rate
reductions took effect in both June 2002 and June 2003. At December 31, 2003 and
2002, we provided service in 29 markets, and had a total of 515,715 and 500,923
lines in service, respectively. Revenue is expected to increase from the level
realized during the year ended December 31, 2003 due to the full year impact of
515,715 lines in service, additional penetration in our existing markets, the
introduction and sales of additional value added services to our existing
clients and the introduction of residential services in selected markets in
2004.

NETWORK COSTS

Network costs for the year ended December 31, 2003 were $157.7 million, a
decrease of $6.1 million, or 3.8%, as compared to the year ended December 31,
2002. This decrease is partly due to a reduction in the number of collocation
sites operated during 2003. The number of operational collocation sites as of
December 31, 2003 was


                                      -35-
<PAGE>
505, as compared to 530 operational collocation sites as of December 31, 2002.
The reduction in collocation sites was a direct result of our restructuring
activities previously described above.

Additionally, initiatives to further optimize our existing network implemented
during 2002 continued during 2003. These initiatives included least cost
routing, replacing leased capacity with alternative technologies and grooming
and capacity sizing of our network facilities. As a result, for 2003 our average
cost per line declined approximately 15% as compared to 2002, highlighting the
effectiveness of our network optimization initiatives, economies of scale, and
the benefits of leasing fiber. During the year ended December 31, 2003, we took
possession of fiber in one additional market in our footprint from Fibertech,
LLC, under our master facilities agreement, bringing to 19 the number of markets
where we have intra-city fiber capacity connecting our collocations. We plan to
activate fiber in an additional 3 markets across our footprint in 2004.
Amortization of the cost of the capital leases for fiber is included in
depreciation and amortization expense. As a result of the factors noted above,
we expect that network costs as a percentage of revenue will decline in 2004.

Our revenues exceeded our network costs by $165.2 million, or 51.1% of revenue,
for the year ended December 31, 2003, compared to $126.9 million, or 43.6% of
revenue, for the year ended December 31, 2002. We continue to evaluate network
optimization initiatives. We expect that our revenue in excess of network costs,
as a percentage of revenue will improve as our revenue increases and as we are
able to capitalize on network optimization initiatives and economies of scale.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the year ended December 31,
2003 were $129.9 million, compared to $173.6 million for the year ended December
31, 2002. Excluding the non-cash deferred compensation and management ownership
allocation charges, the selling, general and administrative expenses decreased
$28.6 million, or 18.2%, from $157.6 million for the year ended December 31,
2002 to $129.0 million for the year ended December 31, 2003. Selling, general
and administrative expenses are expected to grow as we serve our increasing
client base and introduce new services to our clients, but are expected to be at
a consistent percentage of our revenue.

Selling, general and administrative expenses, excluding non-cash deferred
compensation and management ownership allocation charges, as a percentage of
revenue was 39.9% for 2003 as compared to 54.2% for 2002. The changes in
selling, general and administrative expenses resulted primarily from reductions
in the number of sales employees, and a decrease in bad debt expense. During
this period, salary, commissions and benefits decreased approximately $13.1
million related to a decrease in the average annual headcount of approximately
373 employees, mainly in the sales force. The reduction of personnel in the
sales force was generally through attrition of non-productive employees, and is
not expected to have an adverse effect on revenue. At December 31, 2003, we
employed 1,412 individuals, of whom 567 were involved in sales, sales management
and sales support. As of December 31, 2002, there were 1,529 employees, of whom
656 were involved in sales, sales management and sales support.

Bad debt expense decreased by $15.4 million for the year ended December 31, 2003
from the year ended December 31, 2002. We increased our bad debt reserves during
the year ended December 31, 2002 for accounts receivable affected by the
economic conditions present at that time. This included accounts related to
telecommunications carrier accounts, including Global Crossing and WorldCom, now
known as MCI.

Also included in selling, general and administrative expenses for the year ended
December 31, 2003, is non-cash compensation expense of $1.0 million. This
compares to non-cash charges of $16.0 million for the year ended December 31,
2002, which includes management ownership allocation amortization of $10.9
million. The management ownership allocation was fully amortized at December 31,
2002. Compensation expense for the year ended December 31, 2003 includes the
expense associated with our adoption of SFAS No. 148 under which we adopted the
financial statement measurement and recognition provisions of SFAS No. 123.
Under SFAS No. 123, on a prospective basis, we recognize compensation expense
for the fair value of all stock options granted after December 31, 2002, over
the vesting period of the options.

RESTRUCTURING (CREDITS)/COSTS

During February 2003, we modified a portion of our restructuring plan related to
reduced reliance on certain collocation sites. As we engaged in our
restructuring actions in the first quarter of 2003, we were informed that
additional costs would be charged to us by the established telephone companies
in connection with the restructuring. Based on this new information, we reduced
the number of collocation sites that would be affected. As a result, we


                                      -36-
<PAGE>
reversed approximately $0.7 million in restructuring costs related to the
collocation sites. At the same time, we increased the restructuring accrual for
$0.1 million in termination benefits and other network costs that became known
to us during the three months ended March 31, 2003.

For the year ended December 31, 2003, approximately $0.8 million of the
restructuring costs were paid and it is anticipated that the remaining liability
will be settled in 2004, except for contractual lease obligations of $2.6
million that extend beyond one year and are included in other long-term
liabilities.

The following table highlights the cumulative restructuring activities through
December 31, 2003:

<TABLE>
<CAPTION>
                                             TERMINATION         LEASE           NETWORK
                                               BENEFITS       OBLIGATIONS     FACILITY COSTS       TOTAL
                                               --------       -----------     --------------       -----
<S>                                          <C>              <C>              <C>              <C>
Initial restructuring charge ............    $        559     $      3,440     $      1,283     $      5,282
Payment of benefits and other obligations            (537)             (24)              --             (561)
                                             ------------     ------------     ------------     ------------
Balance at December 31, 2002 ............              22            3,416            1,283            4,721
Payment of benefits and other obligations             (72)            (384)            (332)            (788)
Adjustments due to plan modifications ...              50               --             (585)            (535)
                                             ------------     ------------     ------------     ------------

Balance at December 31, 2003 ............    $         --     $      3,032     $        366     $      3,398
                                             ============     ============     ============     ============
</TABLE>

IMPAIRMENT LOSS ON LONG-LIVED ASSETS

There were no impairment losses on long-lived assets recognized for the year
ended December 31, 2003. During June 2002, we noted a significant adverse change
in the business climate of our company and the telecommunications industry in
general. These circumstances required us to perform an interim goodwill
impairment test. As a result, we recorded an impairment charge of $283.0 million
in accordance with SFAS No. 142. In addition, we recorded a $0.3 million charge
to write-down the value of acquired customer relationships related to our web
hosting and design services in accordance with the provisions of SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets."

In conjunction with restructuring initiatives in 2002, we also evaluated the
related long-lived assets for impairment. We recorded an impairment charge of
approximately $7.3 million for the value of unrecoverable leasehold improvements
and other general equipment that was abandoned, which is reported in impairment
loss on long-lived assets in the Consolidated Statement of Operations for the
year ended December 31, 2002. The restructuring plan and related asset
impairment required us to evaluate for impairment our equipment held for use. We
recorded an impairment charge of $4.0 million related to equipment held for use
that was determined would not be used, which is reported in impairment loss on
long-lived assets on the Consolidated Statement of Operations for the year ended
December 31, 2002.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization for the year ended December 31, 2003 was $64.7
million as compared to $71.0 million for the year ended December 31, 2002. This
represents a decrease of $6.4 million, or 8.9%. The decrease in depreciation
expense as compared to the year ended December 31, 2002 was primarily related to
certain switch software assets acquired in the acquisition of US Xchange
becoming fully depreciated during the three months ended September 30, 2003. We
expect that our depreciation and amortization expense will remain stable in
2004.

INTEREST EXPENSE AND INCOME

Interest expense, net, for the years ended December 31, 2003 and 2002 was
approximately $93.9 million and $61.2 million, respectively. The increase in
interest expense, net, was attributable to an increase of $27.3 million of
accretion and dividends on our preferred stock being characterized as interest
expense in accordance with SFAS No. 150 where corresponding amounts in prior
years were not included in interest expense, net, and an increase in interest
expense of $5.2 million as described below.

Interest expense increased from $61.6 million in 2002 to $66.8 million in 2003
due to increases in the amount of borrowings and increases in the amount of
accreted PIK interest, offset by favorable declines in LIBOR rates that impacted
our borrowing rates. We expect interest expense to increase slightly over the
next year due to anticipated increases in LIBOR rates that will impact our
borrowing rates, offset by scheduled decrease in borrowings under our


                                      -37-
<PAGE>
credit facility which begin on June 30, 2004. Interest expense, currently
payable in cash, was $29.6 million for the year ended December 31, 2003 as
compared to $30.0 million for the year ended December 31, 2002. The decrease in
interest expense currently payable in cash was the result of lower interest
rates on our credit facility borrowings.

Interest income for the years ended December 31, 2003 and 2002 was approximately
$0.2 and $0.4 million, respectively. Interest income results from the investment
of cash and cash equivalents, mainly from the cash proceeds generated from the
borrowings under our senior credit and subordinated debt facilities. Cash and
cash equivalents, on which interest income is earned, were lower during the year
ended December 31, 2003 as compared to the year ended December 31, 2002. We
expect interest income to remain stable in 2004.

The non-cash accretion and dividends on our preferred stock increased in total
by $7.8 million from the year ended December 31, 2002 to December 31, 2003. This
change was primarily driven by the increase in dividends on preferred stock,
which results from the compounding effect of dividends that have accreted. As of
July 1, 2003, the accretion and dividends on preferred stock is classified as a
component of interest expense, net, and included in the calculation of net loss
in accordance with the adoption of SFAS No.150. Restatement of prior period
classifications is not permitted upon the adoption of SFAS No. 150. The
accretion and dividends on preferred stock component of interest expense will
double in 2004 due to the full year impact as compared to 2003 which included
only six months of activity.

INCOME TAXES

We did not generate taxable income in either 2003 or 2002, and did not incur any
income tax liability as a result.

NET LOSS

Our net loss was $123.1 million and $479.5 million for the years ended December
31, 2003 and 2002, respectively. The net loss applicable to common stockholders
was $148.3 million and $524.1 million for the years ended December 31, 2003 and
2002, respectively. The improvement in net loss and net loss applicable to
common stockholders was attributable to the factors previously discussed, due to
the absence in 2003 of the goodwill impairment charge of $283.0 million in June
2002.

FOR THE YEARS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001

REVENUE

We generated $290.8 million in revenue for the year ended December 31, 2002, an
increase of 60.1% as compared to $181.6 million in revenue for the year ended
December 31, 2001. Of our total revenue increase, approximately $96.7 million
was attributable to increases in voice and data revenue and $12.5 million in
access revenues. The favorable changes in revenue were primarily due to
increases in the average number of lines in service during 2002. The average
number of lines increased by approximately 167,000. Our lines in service at
December 31, 2002 increased 30.5% from our lines in service at December 31,
2001.

Average revenue per line in 2002 as compared to 2001 declined by 2.8%. Access
revenue increases were driven by increased customer volume, and slightly offset
by reduced interstate rates that we charged other carriers as FCC mandated rate
reductions took effect in the second half of 2002. At December 31, 2002 and
2001, we provided service in 29 and 30 markets, and had a total of 500,923 and
383,975 lines in service, respectively.

During the fourth quarter of 2002, we determined that a portion of the revenue
related to billings for monthly recurring line charges and calling features
("MRCs") should have been deferred at the end of previous quarterly and annual
reporting periods. However, we also determined that the effect of not previously
deferring a portion of theses revenues was not material to any previous annual
results of operations or financial position, and therefore previously issued
financial statements were not restated. The impact was not material to results
of operations for fiscal 2002. Consequently, we recorded an adjustment of $4.6
million in the fourth quarter of 2002 to establish deferred revenue for the
cumulative amount of MRC billings that were recognized for periods preceding the
fourth quarter of 2002 that related to services rendered in the fourth quarter
of 2002. The effect of this adjustment was to reduce reported revenues for the
fourth quarter and full fiscal year of 2002 by $4.6 million, and increase
operating loss and net loss by the same amount and for the same periods.


                                      -38-
<PAGE>
NETWORK COSTS

Network costs for the year ended December 31, 2002 were $163.9 million, an
increase of $43.0 million, or 35.5%, as compared to the year ended December 31,
2001. This increase is due to the completion of the deployment of our network
and growth of our services in 29 markets with 530 collocation sites as compared
to 30 markets with 517 collocation sites as of December 31, 2001. Network costs
continued to increase at a slower rate than revenue, which reflects the benefits
of our fiber network implementation and other network efficiencies realized from
the increased number of installed lines.

Additionally, in 2002, we began initiatives to further optimize our existing
network. For 2002, our average cost per line declined approximately 18% as
compared to 2001, which highlights the effectiveness of our network optimization
initiatives, economies of scale, and the benefits of leasing fiber. The cost of
leasing fiber is included in depreciation and amortization expense.

Our revenues exceeded our network costs by $126.9 million, or 43.6% of revenue,
for the year ended December 31, 2002, compared to $60.7 million, or 33.4% of
revenue, for the year ended December 31, 2001.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the year ended December 31,
2002 were $173.6 million, compared to $168.3 million for the year ended December
31, 2001. Excluding the non-cash deferred compensation and management ownership
allocation charges, the selling, general and administrative expenses increased
$21.8 million, or 16.0%, from $135.9 million for the year ended December 31,
2001 to $157.6 million for the year ended December 31, 2002.

Selling, general and administrative expenses, excluding non-cash deferred
compensation and management ownership allocation charges, as a percentage of
revenue was 54% for 2002 as compared to 75% for 2001. The changes in selling,
general and administrative expenses resulted primarily from the growth of our
operations, ongoing back office infrastructure enhancements and related changes
in the number of employees. During this period, salary, commissions and benefits
increased approximately $6.6 million, directly related to headcount increases
prior to our reduction of 102 positions in September 2002.

We also increased the bad debt reserves for the year ended December 31, 2002,
for specific accounts receivable negatively affected by economic conditions, by
$15.4 million. This includes accounts related to telecommunications carriers
including Global Crossing, WorldCom now known as MCI, and other distressed
carriers. It also includes accounts related to retail customers negatively
affected by economic conditions.

The number of individuals we employed increased to approximately 1,825 during
2002 before decreasing in the last quarter of 2002 as a result of restructuring
initiatives. At December 31, 2002, we employed 1,539 individuals, of whom 656
were sales employees, including direct sales. As of December 31, 2001, there
were 1,758 employees, of whom 786 were sales employees, including direct sales.

For the year ended December 31, 2002, we recognized non-cash charges for
management ownership allocation of $10.9 million and deferred compensation
amortization of $5.1 million. This compares to the same non-cash charges of
$24.0 million and $8.4 million, respectively, for the year ended December 31,
2001. Deferred compensation was recorded in connection with membership units of
Choice One Communications L.L.C. sold to certain management employees, grants to
employees under our 1998 Stock Option Plan, and the issuance of restricted
shares to the former employees of US Xchange, which we acquired in 2000. The
management ownership allocation charge was fully amortized at December 31, 2002.

RESTRUCTURING COSTS

In connection with our restructuring activities in 2002, we recorded
restructuring costs of $5.3 million in September 2002, comprised of employee
termination benefits of $0.6 million, contractual lease obligations of $3.4
million and network facility costs of $1.3 million. At December 31, 2002,
approximately $0.6 million of the restructuring costs had been paid.


                                      -39-
<PAGE>
IMPAIRMENT LOSS ON LONG-LIVED ASSETS

In conjunction with restructuring initiatives in 2002, we evaluated long-lived
assets related to our Ann Arbor and Lansing, Michigan operations and equipment
held for use for impairment. As a result of our evaluation, we recorded
impairment charges of approximately $7.3 million for the value of unrecoverable
leasehold improvements and other general equipment that was abandoned and $4.0
million related to equipment held for use. These charges are reported in
impairment loss on long-lived assets on the Consolidated Statement of
Operations.

During June 2002, we noted a significant adverse change in the business climate
of the company and the telecommunications industry in general. These
circumstances required us to perform an interim goodwill impairment test. As a
result, we recorded an impairment charge of $283.0 million. The amount of the
impairment charge was determined utilizing a combination of market-based methods
to estimate the fair value of our goodwill in accordance with SFAS No. 142. In
addition, we recorded a $0.3 million charge to write-down the value of acquired
customer relationships related to our web hosting and design services in
accordance with the provisions of SFAS No. 144.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization for the year ended December 31, 2002 was $71.0
million as compared to $89.1 million for the year ended December 31, 2001. This
represents a decrease of $18.1 million, or 20.3%. The decrease from the same
period in the previous year results from the adoption of SFAS No. 142 which
required us to discontinue the systematic amortization of goodwill and
intangible assets with indefinite lives. Amortization from goodwill was
approximately $33.0 million for the year ended December 31, 2001. This decrease
was partially offset by an increase in depreciation expense of $13.9 million, or
31.9%, related to the deployment of our networks and initiation of service in
our markets as well as other asset acquisitions being placed in service in late
2001 and 2002.

INTEREST EXPENSE AND INCOME

Interest expense, net, for the years ended December 31, 2002 and 2001 was
approximately $61.2 million and $51.2 million, respectively. The increase in
interest expense, net, was attributable to an increase in interest expense of
$5.5 million and a decrease in interest income of $4.5 million.

Interest expense increased from 2001 to 2002 due to increases in the amount of
borrowings, offset by favorable declines in LIBOR rates that impacted our
borrowing rates. Interest expense, currently payable in cash, was $30.0 million
for the year ended December 31, 2002 as compared to $44.1 million for the year
ended December 31, 2001. Interest expense, currently payable in cash, decreased
from the same period a year ago as a result of the rollover of the subordinated
notes in November 2001, when the interest on these obligations became PIK.

Interest income for the years ended December 31, 2002 and 2001 was approximately
$0.4 and $4.9 million, respectively. Cash and cash equivalents, on which
interest income is earned, were significantly lower during the year ended
December 31, 2002 as compared to the year ended December 31, 2001.

INCOME TAXES

We did not generate taxable income in either 2002 or 2001, and did not incur any
income tax liability as a result.

NET LOSS

Our net loss was $479.5 million and $248.8 million for the years ended December
31, 2002 and 2001, respectively. The increase in net loss was attributable to
the factors previously discussed, primarily the goodwill impairment charge of
$283.0 million in June 2002.

Our net loss applicable to common stockholders was $524.1 million and $287.0
million for the years ended December 31, 2002 and 2001, respectively. The
increase in net loss applicable to common stockholders was attributable to the
factors previously discussed, primarily the goodwill impairment charge of $283.0
million in June 2002. Non-cash accretion and dividends on preferred stock
increased $6.4 million, or 16.7%, for the year ended December 31, 2002 to $44.7
million as compared to the year ended December 31, 2001


                                      -40-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

Our financial statements included in this Form 10-K have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Our auditors'
opinion notes that we have suffered recurring losses from operations and have a
net capital deficiency that raise substantial doubt about the Company's ability
to continue as a going concern.

We have experienced net losses applicable to common stockholders of $148.3
million, $524.1 million and $287.0 million, during the years ended December 31,
2003, 2002 and 2001, respectively. At December 31, 2003, we had $16.2 million in
cash and cash equivalents and all available commitments under our senior credit
facility were outstanding. We generated positive cash flows from operating
activities during the final two fiscal quarters of 2003 and positive adjusted
EBITDA during each of the fiscal quarters in 2003. Although not necessarily
indicative of future results, the final two fiscal quarters of 2003 was the
first time in our history that we generated positive cash flows from operating
activities during reporting periods. Our viability is dependent upon our ability
to continue to generate and grow positive cash flows from operating activities.
The success of our business strategy necessitates obtaining and retaining a
significant number of customers, generating significant and sustained growth in
our cash flows from operating activities, and managing our costs and capital
expenditures to be able to meet our debt service obligations, including the
repayment of principal beginning on June 30, 3004.

Our revenue and costs are dependent upon some factors that are not entirely
within our control, including regulatory changes, changes in technology, and
increased competition. Due to the uncertainty of these factors, actual revenue
and costs may vary from expected amounts, possibly to a material degree, and
such variations could affect our future funding requirements and our ability to
continue operating our business. If we are unable to maintain minimum cash and
committed financing greater than $10.0 million through June 30, 2004, to
continue to comply with the credit facility covenants, and to commence the
repayment of principal beginning on June 30, 2004 as required under our senior
credit facility, we may need to raise additional capital or obtain a covenant
modification from our lenders. Additional financing may also be required in
response to changing conditions within the industry or unanticipated competitive
pressures. We can make no assurances that we would be successful in raising
additional capital or obtaining a covenant modification from our lenders, if
needed, on favorable terms or at all. Failure to raise sufficient funds or
modify our covenants under these circumstances may affect our ability to
continue to operate our business.

Our senior credit facility contains certain covenants that are customary for
credit facilities of this nature. These covenants require us to maintain an
aggregate minimum amount of cash and committed financing of $10.0 million
through June 30, 2004 and, commencing on September 30, 2004, require us to
maintain certain leverage, fixed charges and interest coverage ratios as
described in the senior credit facility. Our ability to comply with these
covenants will primarily depend on our operating results, which are subject to
the uncertainties described above. A breach in observance of any of these
covenants, if unremedied in three business days, would cause an event of default
under the senior credit facilities and an event of default under our
subordinated debt. An event of default would permit our obligations under our
senior credit facility and our subordinated debt to be declared to be
immediately payable. If the lenders so accelerate our obligations, then we can
make no assurances that we would be able to obtain additional or substitute
financing. An acceleration of our obligations would have a material adverse
effect on our business, financial condition and results of operations.

As of December 31, 2003, and from then through the date of filing of this
report, we were and are in compliance with all covenants under our senior credit
facility. However, it is reasonably likely, without covenant relief or
modification or other action, that we will be in breach of one or more
applicable covenants at some point during 2004. With respect to this situation,
we intend to pursue a variety of matters including changes to our operating
plans to enable us to remain in compliance, discussions with lenders to gain
certain waivers or modifications regarding our covenants which will enable us to
remain in compliance, and other possible actions and strategic alternatives. To
help guide and facilitate this effort, we have engaged consultants to provide us
with a broad range of financial advisory services. We can make no assurances
that we will be successful in any or all of these efforts.


                                      -41-
<PAGE>
Our positive cash flows from operating activities may be adversely affected due
to a variety of factors including:

      -     delays in the timely collection of amounts owed to us;

      -     shorter payment terms given to us by our vendors;

      -     changes in number of customers and penetration of new services;

      -     changes in cost of our networks in each of our markets;

      -     regulatory changes;

      -     changes in technology;

      -     changing conditions within the industry and the general economy; and

      -     increased competition.

Due to the uncertainty of all of these factors, actual funding available from
operations and other sources may vary from expected amounts, possibly to a
material degree, and such variations could affect our funding needs and could
result in a default under our credit facilities.

Credit Facility. We have $398.9 million that has been committed under our senior
credit facility, subject to various conditions, covenants and restrictions,
including those described in Note 9 to the financial statements. Any incremental
borrowings are subject to the approval from a majority of our senior credit
facility lenders. Our subordinated debt permits us to incur up to $425.0 million
of indebtedness, without approval from the subordinated debt lenders. At
December 31, 2003, there was $125.0 million outstanding under the term B loan,
$125.0 million outstanding under the term A loan, $100.0 million outstanding
under the revolving credit facility, $44.5 million outstanding under the term C
loan, and $4.4 million outstanding under the term D loan. The maximum available
funding under the senior credit facility was outstanding at December 31, 2003.
We are required to make periodic payments on our credit facility to reduce
outstanding balances in 2004 of $12.2 million. The senior credit facility, which
is secured by liens on substantially all of our and our subsidiaries' assets and
a pledge of our subsidiaries' common stock, contains covenants and events of
default that are customary for credit facilities of this nature.

We also have $230.4 million of subordinated notes outstanding, excluding the
discount of $2.2 million and accrued PIK interest of $4.2 million, which are
subordinate to the senior credit facility. The interest expense on the
subordinated notes is PIK at a fixed rate of 13.0%, accreting to principal
semi-annually, until November 2006. Thereafter, until maturity on November 9,
2010, interest will be payable in cash quarterly. During the year ended December
31, 2003, $27.6 million in PIK interest accreted to principal. The subordinated
notes contain covenants related to capital expenditures and events of default
that are similar to those within our senior credit facility.

Cash Flows. We have incurred significant operating and net losses since our
inception. However, we generated positive cash flows from operating activities
during the final two fiscal quarters of 2003 and positive adjusted EBITDA during
each of the fiscal quarters in 2003. Although not necessarily indicative of
future cash flow results, the final two fiscal quarters of 2003 was the first
time in our history that we generated positive cash flows from operating
activities during reporting periods. While we expect to continue to generate
positive adjusted EBITDA, we also expect to continue to have operating losses as
we further penetrate our markets. As of December 31, 2003, we had an accumulated
deficit of $1.1 billion. Net cash used in operating activities was approximately
$3.7 million, $55.1 million and $126.6 million for the years ended December 31,
2003, 2002 and 2001, respectively.

Net cash used in operating activities for the year ended December 31, 2003 was
primarily due to the net loss from operations, negative net working capital
changes of $10.7 million, of which $0.8 million was related to payments of
restructuring obligations, and interest expense payable in cash of $29.8
million. Net cash used in operating activities for the year ended December 31,
2002 was due to the net loss from operations, net interest paid in cash of $32.4
million, and negative working capital changes (net of restructuring charges and
specific bad debt reserves) of $8.1 million. The decline in working capital
changes from 2001 was the result of a decline in current liabilities as cost
saving initiatives implemented during 2002 were realized, and an increase in
gross accounts receivable created by strong business growth and slowed
collections from distressed carriers.

Net cash provided by financing activities was $2.7 million, $97.6 million and
$18.4 million for the years ended December 31, 2003, 2002 and 2001. Net cash
provided by financing activities for the years ended December 31,


                                      -42-
<PAGE>
2003 was related to net borrowings under our senior credit facility. This
funding was used to support operating losses incurred while we executed our
business strategy, and to support our business growth in 2003 as we focused on
client retention and new market opportunities. Net cash provided by financing
activities for the years ended December 31, 2002 and 2001 was related to net
borrowings under our senior credit facility and payments of related financing
costs. This funding was used to support operating losses incurred during the
completion of the build-out phase of our business strategy in 2001, and to
support our business growth in 2002 as we focused on client retention and cost
saving initiatives. We do not expect to receive additional cash flows from
financing activities as a result of borrowings under our credit facility as all
of the existing financing commitments have been used.

Net cash used for investing activities for the year ended December 31, 2003 was
$12.2 million, which was primarily related to capital expenditures in support of
the growth in our existing markets. We realized proceeds from the sale of
various corporate assets of approximately $0.1 million. Net cash used for
investing activities for the year ended December 31, 2002 was $27.5 million
which was also due to growth in of our existing markets. For the year ended
December 31, 2002, we realized proceeds from the sale of various corporate
assets of approximately $1.0 million. Net cash used for investing activities for
the year ended December 31, 2001 was $51.0 million, which was due to expansion
of our existing markets, expansion into new markets, addition of capacity to
support incremental growth in several of our early markets and collocation sites
acquired from FairPoint Communications Solutions Corp. in December 2001.

Capital Requirements. Capital expenditures were $12.4 million, $28.5 million and
$85.1 million for the years ended December 31, 2003, 2002 and 2001,
respectively. We expect that our capital expenditures will be between $15.0
million and $30.0 million for 2004 as we continue to penetrate our existing
markets. The actual amount and timing of our future capital requirements may
differ materially from our estimates as a result of the demand for our services
and regulatory, technological and competitive developments, including new
opportunities in the industry and other factors. We may require additional
financing, or require financing sooner than anticipated, if our business plans
or projections change or prove to be inaccurate. We may also require additional
financing in order to take advantage of unanticipated opportunities, to effect
acquisitions of businesses, to develop new services or to otherwise respond to
changing business conditions or unanticipated competitive pressures.

DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS, LONG-TERM MATURITIES, AND CERTAIN
EQUITY SECURITIES

The following table summarizes anticipated debt maturities, contractual lease
obligation payments and preferred stock redemptions for the years shown as of
December 31, 2003:

<TABLE>
<CAPTION>
                                                                                           THERE-
                                2004        2005        2006        2007        2008       AFTER         TOTAL
                                ----        ----        ----        ----        ----       -----         -----
<S>                           <C>         <C>         <C>         <C>         <C>         <C>         <C>
Operating leases .........    $  7,926    $  7,183    $  6,832    $  6,709    $  6,227    $  5,823    $   40,700
Network commitments ......       2,544         744         124          --          --          --         3,412
Marketing sponsorship
commitments ..............       1,215         878         421         335         170          --         3,019
Long-term debt ...........      12,220      32,231      60,356      68,794     118,674     345,482       637,757
Capital leases ...........       3,307       3,240       3,242       3,244       3,247      43,836        60,116
Restructuring costs ......         761         464         415         424         434         900         3,398
Redeemable preferred stock          --          --          --          --          --     295,990       295,990
                              --------    --------    --------    --------    --------    --------    ----------
Total obligations ........    $ 27,973    $ 44,740    $ 71,390    $ 79,506    $128,752    $692,031    $1,044,392
                              ========    ========    ========    ========    ========    ========    ==========
</TABLE>

We maintain a master facilities agreement with Fibertech, LLC ("Fibertech"), a
company that designs, constructs and leases high performance fiber networks in
second and third tier markets in the Northeast and Mid-Atlantic regions of the
United States. The agreement provides us with a 20-year IRU for fiber, without
electronics, in 13 of our market cities. Our commitment under this agreement
could be up to $74.4 million over the 20-year term of the agreement, subject to
certain performance criteria and price reductions in accordance with the
agreement. For the year ended December 31, 2003, we paid Fibertech $0.7 million
and amounts owed to Fibertech at December 31, 2003, were $31.4 million. The
amounts owed to Fibertech, as stated, are the total future minimum lease
payments, including interest. The lease payments are included in capital leases
in the above table.

We have no material off-balance sheet debt or other unrecorded obligations other
than the items noted in the above table.


                                      -43-
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This standard addresses the financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard is effective for fiscal years
beginning after June 15, 2002. We adopted this standard on January 1, 2003. The
adoption did not have a material impact on our consolidated financial
statements.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This standard amends Emerging Issue Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." This statement
requires that a liability for costs associated with an exit or disposal activity
be recognized when the liability is incurred, rather than when an entity commits
to an exit plan. The standard also established the use of fair value for the
measurement of exit liabilities. The standard is effective for exit or disposal
activities initiated after December 31, 2002, with early application encouraged.
We adopted this standard on January 1, 2003. The adoption of this standard did
not have a material impact on our consolidated financial statements as it will
only impact our future exit or disposal activities, if any.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement clarifies the accounting guidance on derivative instruments, including
certain derivative instruments embedded in other contracts, and hedging
activities. The standard is effective for contracts entered into or modified
after June 30, 2003. We adopted this standard on June 30, 2003. The adoption of
this standard has not had a material impact on our consolidated financial
statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within the scope of SFAS No. 150 as a liability (or an asset
in some circumstances) because that financial instrument embodies an obligation
of the issuer. This statement is effective for financial instruments entered
into or modified after May 31, 2003 and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003, except for
mandatorily redeemable financial instruments of nonpublic entities. We adopted
this standard on July 1, 2003. Upon adoption, we reclassified our mandatorily
redeemable preferred stock to long-term liabilities. We now recognize dividends
declared and accretion related to this preferred stock as a component of
interest expense. Restatement of prior period classifications is not permitted
upon adoption of SFAS No. 150.

In November 2002, the FASB issued Financial Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 elaborates on the
existing disclosure requirements for most guarantees, and clarifies that at the
time a company issues a guarantee, the company must recognize an initial
liability for the fair value of the obligation it assumes under that guarantee
and must disclose that information in its interim and annual financial
statements. The initial recognition and measurement provisions apply on a
prospective basis to guarantees issued or modified after December 31, 2002. Our
adoption of FIN No. 45 did not have a material impact on our consolidated
financial statements.

In January 2003 the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities." The objective of FIN No. 46 is to improve financial reporting by
companies involved with variable interest entities. FIN No. 46 changes certain
consolidation requirements by requiring a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. The consolidation
requirements apply to entities created before February 1, 2003, no later than
the beginning of the first fiscal year or interim period beginning after
December 15, 2003, as amended by FASB Staff Position FIN 46R. Our adoption of
FIN No. 46 did not have a material impact on our consolidated financial
statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At December 31, 2003 and 2002, the carrying value of our debt obligations,
excluding obligations under capital leases for indefeasible rights to use fiber,
was $632.0 million and $595.9 million, respectively. At December 31, 2003,
$278.2 million was variable rate debt. The fair value of those obligations at
December 31, 2003 and 2002 was $643.3 million and $602.4 million, respectively.
The changes in value are due to net borrowings of $3.5 million,


                                      -44-
<PAGE>
non-cash amortization of debt discount of $1.1 million, interest payable in-kind
which accreted to principal of $31.4 million, and changes in related interest
rates. The weighted average interest rate of our credit facility debt
obligations at December 31, 2003 and 2002 was 7.41% and 8.21%, respectively. A
hypothetical decrease of approximately 100 basis points from prevailing interest
rates at December 31, 2003 would result in an increase in the fair value of our
fixed rate debt by approximately $10.9 million.

A hypothetical increase of approximately 100 basis points from prevailing
interest rates at December 31, 2003, would result in an approximate increase in
cash required for interest on our variable rate debt during the next fiscal year
of $2.7 million, declining to $2.5 million, $2.1 million, $1.5 million and $0.8
million in the second, third, fourth and fifth years, respectively.

As a result of our operating and financing activities, we are exposed to changes
in interest rates that may adversely affect our results of operations and
financial position. In seeking to minimize the risks and/or costs associated
with such activities, we may enter into derivative contracts. However, we do not
use derivative financial instruments for speculative purposes. Interest rate
swaps were employed as a requirement under our Second Amended and Restated
Credit Agreement. The Third Amended and Restated Credit Agreement does not have
such a requirement. This agreement does prohibit us from entering into any new
interest rate swap, collar, cap, floor or forward rate agreements without the
prior written consent of the lenders. Interest rate swap agreements are used to
reduce our exposure to risks associated with interest rate fluctuations. By
their nature, these instruments would involve risk, including the risk of
nonperformance by counterparties, and our maximum potential loss may exceed the
amount recognized in our balance sheet. We attempt to mitigate our exposure to
counterparty credit risk by using major financial institutions with high credit
ratings.

At December 31, 2003, we had an interest rate swap agreement for an aggregate
notional amount of $125.0 million that expires in February 2006. At December 31,
2003, the weighted average pay rate for the interest rate swap agreement was
6.94% and the average receive rate was 1.17%. Based on the fair value of the
interest rate swap agreement at December 31, 2003, it would have cost us $13.5
million to terminate the agreement. A hypothetical 100 basis point decrease in
the floating spot rate would increase the cost to terminate the interest rate
swap agreement by approximately $2.7 million.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial statements with supplementary data are included under Item 15(a).

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

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Based on their evaluation at December 31, 2003, our principal executive officer
and principal financial officer, with the participation and assistance of our
management, concluded that our disclosure controls and procedures as defined in
Rules 13a-15(e) promulgated under the Securities Exchange Act of 1934, were
effective in design and operation. There have been no changes in our internal
controls over financial reporting that occurred during the quarter ended
December 31, 2003 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item 10 regarding our executive officers and
other key personnel is included under Item 4A of this Form 10-K under the
heading "Executive Officers of the Registrant." The other information required
by this Item 10 is incorporated in this report by reference from certain
sections of our definitive proxy statement for our 2004 annual meeting of
stockholders, which will be filed with the SEC no later then April 29, 2004. You
will find our responses to this Item 10 in the sections titled "Elections of
Directors".


                                      -45-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item 11 is incorporated in this report by
reference from the sections titled "Compensation of Executive Officers" and
"Executive Agreements" of our proxy statement.

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

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

We maintain two equity compensation plans for the benefit of our employees,
officers and directors. The following schedule details information concerning
those plans as of December 31, 2003:

<TABLE>
<CAPTION>
                            Number of securities to be   Weighted-average         Number of securities remaining
                            issued upon exercise of      exercise price of        available for future issuance
      Plan Category         all outstanding options      outstanding options      under equity compensation plans
    ----------------------  --------------------------   --------------------     --------------------------------
<S>                         <C>                          <C>                      <C>
    Equity compensation
    plans approved by
    security holders        5,939,480                    $    1.50                4,592,416

    Equity compensation
    plans not approved by
    security holders               --                           --                       --
                            ---------                                             ---------
    Total                   5,939,480                    $    1.50                4,592,416
                            =========                                             =========
</TABLE>

The other information required by this Item 12 is incorporated in this report by
reference from the section titled "Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters" of our proxy statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item 13 is incorporated in this report by
reference from the section titled "Certain Relationships and Related
Transactions" of our proxy statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item 14 is incorporated in this report by
reference from the section titled "Independent Accountant Compensation" of our
proxy statement.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

      a.    Documents filed as a part of this report.

            1.    Financial Statements

                       See Index to Financial Statements on page 48.

            2.    Financial Statement Schedules

                       See Index to Financial Statements on page 48.

            3.    Exhibits

                       See Index to Exhibits on page 80.

      b.    Reports on Form 8-K.

            On October 15, 2003, the Company filed a report on Form 8-K to
            announce that its Audit Committee had dismissed
            PricewaterhouseCoopers LLP as the independent accountants for the
            Company.


                                      -46-
<PAGE>
            On October 15, 2003, the Company filed a report on Form 8-K to
            announce that its Audit Committee had engaged Deloitte & Touche LLP
            as the new independent auditors for the Company, effective on
            October 15, 2003.

            On October 21, 2003, the Company filed a report on Form 8-K
            announcing its achievement of positive cash flow for the three
            months ended September 30, 2003.

            On November 12, 2003, the Company filed a report on Form 8-K
            announcing its third quarter results for the three months and nine
            months ended September 30, 2003.


                                      -47-
<PAGE>
                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                                       PAGE
<S>                                                                                                                    <C>
CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES

Independent Auditors' Report - December 31, 2003..................................................................      49

Report of Independent Accountants - December 31, 2002.............................................................      50

Report of Independent Public Accountants - December 31, 2001......................................................      51

Consolidated Balance Sheets as of December 31, 2003 and 2002......................................................      52

Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001........................      53

Consolidated Statements of Redeemable Preferred Stock and Stockholders' Equity
(Deficit) for the years ended December 31, 2003, 2002 and 2001 ...................................................      54

Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001........................      56

Notes to Consolidated Financial Statements........................................................................      57

Schedule II-Valuation and Qualifying Accounts.....................................................................      78
</TABLE>


                                     - 48 -
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Choice One Communications Inc.
Rochester, New York

We have audited the accompanying consolidated balance sheet of Choice One
Communications Inc. and subsidiaries (the "Company") as of December 31, 2003,
and the related consolidated statements of operations, redeemable preferred
stock and stockholders' equity (deficit) and cash flows for the year then ended.
Our audit also included the financial statement schedule listed in the Index at
Item 15. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit. The consolidated financial statements of the Company for the year
ended December 31, 2001 were audited by other auditors who have ceased
operations. Those auditors expressed an unqualified opinion on those financial
statements in their report dated March 19, 2002 (except with respect to the
matter discussed in Note 19 of the financial statements as of December 31, 2001,
as to which the report was dated March 31, 2002), which report included an
explanatory paragraph related to the Company's change in its method of
accounting for derivative instruments in accordance with Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" described in Note 3 to the financial statements. The consolidated
financial statements of the Company as of and for the year ended December 31,
2002 were audited by other auditors whose report, dated March 27, 2003,
expressed an unqualified opinion on those statements, and included explanatory
paragraphs related to a going concern uncertainty and a change in the Company's
accounting method for goodwill and other intangible assets to conform with the
provisions of Statement of Financial Accounting Standards No. 142.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2003
and the results of their operations and their cash flows for the year then ended
in conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects the information set forth
therein.

As discussed in Note 6 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill and other intangible
assets to conform to statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets." As discussed in Note 11 to the
consolidated financial statements, in 2003 the Company changed its method of
accounting for redeemable preferred stock to conform to statement of Financial
Accounting Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity."

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 4 to the
financial statements, the Company's recurring losses from operations and net
stockholders' capital deficiency raise substantial doubt about its ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 4. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.


/s/ DELOITTE & TOUCHE LLP
Rochester, New York
March 25, 2004


                                     - 49 -
<PAGE>
                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
of Choice One Communications Inc.:

In our opinion, the accompanying consolidated balance sheet as of December 31,
2002 and the related consolidated statements of operations, redeemable preferred
stock and stockholders' equity and cash flows for the year then ended present
fairly, in all material respects, the financial position of Choice One
Communications Inc. and its subsidiaries at December 31, 2002, and the results
of their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule for the year ended
December 31, 2002 presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. These financial statements and this financial statement schedule are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements and this financial statement schedule
based on our audit. We conducted our audit of these statements in accordance
with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. The consolidated financial statements of
Choice One Communications Inc. as of December 31, 2001 and for each of the two
years in the period ended December 31, 2001, prior to the revisions discussed in
Note 6, were audited by other independent accountants who have ceased
operations. Those independent accountants expressed an unqualified opinion on
those financial statements in their report dated March 19, 2002 (except with
respect to the matter discussed in Note 19 of the financial statements as of
December 31, 2001, as to which the report was dated March 31, 2002).

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 4 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 4. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

As discussed in Note 6 to the consolidated financial statements, as of January
1, 2002, the Company ceased amortization of goodwill to conform with the
provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets."

As discussed above, the consolidated financial statements of Choice One
Communications Inc. as of December 31, 2001, and for each of the two years in
the period ended December 31, 2001, were audited by other independent
accountants who have ceased operations. As described in Note 6, these
consolidated financial statements have been revised to include the transitional
disclosures required by Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets", which was adopted by the Company as of
January 1, 2002. We audited the transitional disclosures described in Note 6. In
our opinion, the transitional disclosures for 2001 and 2000 in Note 6 are
appropriate. However, we were not engaged to audit, review, or apply any
procedures to the 2001 or 2000 consolidated financial statements of the Company
other than with respect to such disclosures and, accordingly, we do not express
an opinion or any other form of assurance on the 2001 or 2000 consolidated
financial statements taken as a whole.


/s/ PricewaterhouseCoopers LLP
Rochester, New York
March 27, 2003


                                     - 50 -
<PAGE>
THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP IN
CONNECTION WITH THE YEAR ENDED DECEMBER 31, 2001. THIS AUDIT REPORT HAS NOT BEEN
REISSUED BY ARTHUR ANDERSEN LLP. THE REFERENCES TO NOTE 3 AND 19 IN THE
FOLLOWING REPORT REFER TO THE CONSOLIDATED FINANCIAL STATEMENTS IN THE COMPANY'S
FORM 10-K DATED DECEMBER 31,2001.

AS DISCUSSED IN NOTE 6, CHOICE ONE COMMUNICATIONS INC. HAS REVISED ITS FINANCIAL
STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2001 TO INCLUDE THE TRANSITIONAL
DISCLOSURES REQUIRED BY STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 142,
"GOODWILL AND OTHER INTANGIBLE ASSETS." THE REVISIONS TO THE 2001 FINANCIAL
STATEMENTS RELATED TO THESE TRANSITIONAL DISCLOSURES WERE REPORTED ON BY
PRICEWATERHOUSECOOPERS LLP, AS STATED IN THEIR REPORT APPEARING HEREIN.

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO CHOICE ONE COMMUNICATIONS INC.:

We have audited the accompanying consolidated balance sheets of Choice One
Communications Inc. (a Delaware corporation) and subsidiaries as of December 31,
2001 and 2000 and the related consolidated statements of operations, redeemable
preferred stock and stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Choice One Communications Inc.
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

As explained in Note 3 to the financial statements, effective January 1, 2001,
the Company changed its method of accounting for derivative instruments in
accordance with Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities."

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.


                                              /s/ ARTHUR ANDERSEN LLP

Rochester, New York
March 19, 2002 (except with respect to the
matter discussed in Note 19, as to
which the date is March 31, 2002)


                                     - 51 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                        AS OF DECEMBER 31, 2003 AND 2002
             (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                             2003              2002
                                                                                             ----              ----
                                         ASSETS
<S>                                                                                      <C>               <C>
Current Assets:
     Cash and cash equivalents ....................................................      $    16,238       $    29,434
     Accounts receivable (net of allowance for doubtful accounts of
       $3,041 and $13,583 at December 31, 2003 and 2002) ..........................           30,859            43,215
     Prepaid expenses and other current assets ....................................            3,251             2,298
                                                                                         -----------       -----------
         Total current assets .....................................................           50,348            74,947

Property and equipment, net of accumulated depreciation ...........................          295,423           336,711
Intangible assets, net of accumulated amortization ................................           32,601            47,479
Other assets, net .................................................................            5,096             4,813
                                                                                         -----------       -----------
Total assets ......................................................................      $   383,468       $   463,950
                                                                                         ===========       ===========

                          LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
     Current portion of capital leases for indefeasible rights to use fiber .......      $       962       $       461
     Current portion of long-term debt ............................................           12,220                --
     Accounts payable .............................................................            7,762            14,717
     Accrued expenses .............................................................           42,627            58,381
                                                                                         -----------       -----------
         Total current liabilities ................................................           63,571            73,559

Long-term debt (net of unamortized discount of $5,781and $6,900 at December 31,
     2003 and 2002) ...............................................................          619,756           595,941
Redeemable Preferred Stock:
     Series A Preferred stock, $0.01 par value, 340,000 shares authorized;
     251,588 shares issued and outstanding, at December 31, 2003, ($337,701
     liquidation value at December 31, 2003, inclusive of accrued dividends of
     $68,502) .....................................................................          295,990                --
Interest rate swaps ...............................................................           13,500            19,308
Long-term portion of capital leases for indefeasible rights to use fiber ..........           32,037            31,968
Other long-term liabilities .......................................................            3,609             3,581
                                                                                         -----------       -----------
Total long-term debt and other long-term liabilities ..............................          964,892           650,798

Commitments and Contingencies (Note 18)

Redeemable Preferred Stock:
     Series A Preferred stock, $0.01 par value, 340,000 shares authorized; 251,588
     shares issued and outstanding, at December 31, 2002 ..........................               --           243,532

Stockholders' Deficit:
     Undesignated preferred stock, $0.01 par value, 4,600,000 shares
       authorized, no shares issued and outstanding ...............................               --                --
     Common stock, $0.01 par value, 150,000,000 authorized; 44,261,052 and
       42,478,396 shares issued as of December 31, 2003 and 2002, respectively ....              443               425
     Treasury stock, 135,415 shares, at cost, at December 31, 2003 and December 31,
       2002, respectively .........................................................             (473)             (473)
     Additional paid-in capital ...................................................          475,179           498,439
     Deferred compensation ........................................................             (962)             (391)
     Accumulated other comprehensive loss .........................................          (13,500)          (19,308)
     Accumulated deficit ..........................................................       (1,105,682)         (982,631)
                                                                                         -----------       -----------
     Total stockholders' deficit ..................................................         (644,995)         (503,939)
                                                                                         -----------       -----------
     Total liabilities and stockholders' deficit ..................................      $   383,468       $   463,950
                                                                                         ===========       ===========
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
                         of these financial statements.


                                     - 52 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                FOR YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001

             (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                      2003            2002            2001
                                                                                      ----            ----            ----
<S>                                                                               <C>             <C>             <C>
Revenue .......................................................................   $    322,891    $    290,780    $    181,598
Operating expenses:
     Network costs, excluding depreciation expense of $36,375, $40,188
     and $27,433 in 2003, 2002 and 2001, respectively .........................        157,738         163,887         120,923

     Selling, general and administrative, excluding depreciation and
       amortization expense of $28,316, $30,858 and $61,711 in 2003, 2002 and
       2001, respectively, and including non-cash compensation of $951, $5,050
       and $8,406 in 2003, 2002 and 2001, respectively, and non-cash management
       ownership allocation charge of $-0-, $10,915 and $24,017 in 2003, 2002
       and 2001, respectively .................................................        129,938         173,595         168,295
     Loss on disposition of assets ............................................            230             733             801
     Restructuring (credits)/costs ............................................           (535)          5,282              --
     Impairment loss on long-lived assets .....................................             --         294,524              --
     Depreciation and amortization ............................................         64,691          71,046          89,144
                                                                                  ------------    ------------    ------------
         Total operating expenses .............................................        352,062         709,067         379,163
                                                                                  ------------    ------------    ------------
Loss from operations ..........................................................        (29,171)       (418,287)       (197,565)

Interest income/(expense):
     Interest income ..........................................................            165             412           4,871
     Interest expense .........................................................        (66,824)        (61,584)        (56,077)
     Accretion of preferred stock .............................................         (5,974)             --              --
     Accrued dividends on preferred stock .....................................        (21,283)             --              --
                                                                                  ------------    ------------    ------------
         Total interest expense, net ..........................................        (93,916)        (61,172)        (51,206)
     Other income .............................................................             36              --              --
                                                                                  ------------    ------------    ------------
Net loss ......................................................................       (123,051)       (479,459)       (248,771)

     Accretion of preferred stock .............................................          5,334           8,802           7,007
     Accrued dividends on preferred stock .....................................         19,867          35,860          31,250
                                                                                  ------------    ------------    ------------
Net loss applicable to common stockholders ....................................   $   (148,252)   $   (524,121)   $   (287,028)
                                                                                  ============    ============    ============

Net loss per share, basic and diluted .........................................   $      (2.75)   $     (11.50)   $      (7.23)
                                                                                  ============    ============    ============

Weighted average number of shares outstanding, basic and diluted ..............     53,892,999      45,582,855      39,676,218
                                                                                  ============    ============    ============
</TABLE>

           The accompanying notes to consolidated financial statements
               are an integral part of these financial statements.


                                     - 53 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
              CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
                       AND STOCKHOLDERS' EQUITY (DEFICIT)

              FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

                    (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                   REDEEMABLE PREFERRED
                                           STOCK                 COMMON STOCK
                                           -----                 ------------            TREASURY     ADDITIONAL
                                                              SHARES                      STOCK        PAID-IN        DEFERRED
                                  SHARES        AMOUNT      OUTSTANDING     AMOUNT        AMOUNT       CAPITAL      COMPENSATION
                                  ------        ------      -----------     ------        ------       -------      ------------
<S>                             <C>           <C>           <C>           <C>           <C>           <C>           <C>
Balance, January 1, 2001 .....      200,000       162,523    37,843,654           379          (216)      566,975       (53,207)
     Exercise of stock options           --            --        20,056            --            --           107            --
     Management ownership
      allocation charge ......           --            --            --            --            --            --        24,017
     Amortization of deferred
      compensation ...........           --            --            --            --            --            --         8,406
     Issuance of detachable
      warrants ...............           --            --            --            --            --         3,366            --
     Issuance of common stock
      for asset acquisition ..           --            --     2,500,000            25            --         8,750            --
     Accretion of preferred
     stock ...................           --         7,007            --            --            --        (7,007)           --
     Accrued dividends on
      preferred stock ........           --        31,250            --            --            --       (31,250)           --
     Acquisition of treasury
      shares .................           --            --       (64,455)           --          (264)       (3,882)        3,888
     Issuance of executive
      loans ..................           --            --            --            --            --        (2,200)           --
     Net loss ................           --            --            --            --            --            --            --
     Change in fair value of
      interest rate swaps ....           --            --            --            --            --            --            --

     Comprehensive loss ......           --            --            --            --            --            --            --
                                -----------   -----------   -----------   -----------   -----------   -----------   -----------
Balance at  December 31, 2001       200,000       200,780    40,299,255           404          (480)      534,859       (16,896)
     Issuance of dividends
      and warrants related
      to Series A preferred
      stock ..................       51,588        (1,910)           --            --            --         1,910            --
     Management ownership
      allocation charge ......           --            --            --            --            --            --         5,050
     Amortization of deferred
      compensation ...........           --            --            --            --            --            --        10,915
     Forfeiture of stock
      options ................           --            --            --            --            --          (455)          572
     Issuance of Term C loan
      detachable warrants ....           --            --            --            --            --         4,297            --
     Issuance of common stock
      for asset acquisition ..           --            --     1,040,000            11            --         1,897            --
     Issuance of common stock
      for employer 401(k)
      contributions ..........           --            --     1,006,813            10            --           667            --
     Accretion of preferred
       stock .................           --         8,802            --            --            --        (8,802)           --
     Accrued dividends on
      preferred stock ........           --        35,860            --            --            --       (35,860)           --
     Acquisition of treasury
      shares .................           --            --        (3,087)           --             7           (92)          (32)
     Refund of excess equity
      filing fees ............           --            --            --            --            --            18            --
     Net loss ................           --            --            --            --            --            --            --
     Change in fair value of
      interest rate swaps ....           --            --            --            --            --            --            --
     Comprehensive loss ......           --            --            --            --            --            --            --
                                -----------   -----------   -----------   -----------   -----------   -----------   -----------
Balance, December 31, 2002 ...      251,588   $   243,532    42,342,981   $       425   $      (473)  $   498,439   $      (391)
</TABLE>

<TABLE>
<CAPTION>
                                  ACCUMULATED
                                     OTHER
                                 COMPREHENSIVE            ACCUMULATED
                                     LOSS                   DEFICIT               TOTAL
                                     ----                   -------               -----
<S>                               <C>                   <C>                    <C>
Balance, January 1, 2001 .....             --              (254,401)               259,530
     Exercise of stock options             --                    --                    107
     Management ownership
      allocation charge ......             --                    --                 24,017
     Amortization of deferred
      compensation ...........             --                    --                  8,406
     Issuance of detachable
      warrants ...............             --                    --                  3,366
     Issuance of common stock
      for asset acquisition ..             --                    --                  8,775
     Accretion of preferred
     stock ...................             --                    --                 (7,007)
     Accrued dividends on
      preferred stock ........             --                    --                (31,250)
     Acquisition of treasury
     shares ..................             --                    --                   (258)
     Issuance of executive
      loans ..................             --                    --                 (2,200)
     Net loss ................             --              (248,771)              (248,771)
     Change in fair value of
      interest rate swaps ....        (13,484)                   --                (13,484)
                                                                               -----------
     Comprehensive loss ......             --                    --               (262,255)
                                  -----------           -----------            -----------
Balance at December 31, 2001          (13,484)             (503,172)                 1,231
     Issuance of dividends
      and warrants related
      to Series A preferred
      stock ..................             --                    --                  1,910
     Management ownership
      allocation charge ......             --                    --                  5,050
     Amortization of deferred
      compensation ...........             --                    --                 10,915
     Forfeiture of stock
      options ................             --                    --                    117
     Issuance of Term C loan
      detachable
      warrants ...............             --                    --                  4,297
     Issuance of common stock
      for asset acquisition ..             --                    --                  1,908
     Issuance of common stock
      for employer 401(k)
      contributions ..........             --                    --                    677
     Accretion of preferred
     stock ...................             --                    --                 (8,802)
     Accrued dividends on
      preferred stock ........             --                    --                (35,860)
     Acquisition of treasury
      shares .................             --                    --                   (117)
     Refund of excess equity
      filing fees ............             --                    --                     18
     Net loss ................             --              (479,459)              (479,459)
     Change in fair value of
      interest rate swaps ....         (5,824)                   --                 (5,824)
     Comprehensive loss ......             --                    --               (485,283)
                                  -----------           -----------            -----------
Balance, December 31, 2002 ...    $   (19,308)          $  (982,631)           $  (503,939)
</TABLE>

           The accompanying notes to consolidated financial statements
               are an integral part of these financial statements.


                                     - 54 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
              CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
                       AND STOCKHOLDERS' EQUITY (DEFICIT)
                                    CONTINUED

              FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

                    (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                  REDEEMABLE PREFERRED
                                          STOCK                  COMMON STOCK
                                          -----                  ------------          TREASURY     ADDITIONAL
                                                              SHARES                    STOCK        PAID-IN        DEFERRED
                                  SHARES        AMOUNT      OUTSTANDING     AMOUNT      AMOUNT       CAPITAL      COMPENSATION
                                  ------        ------      -----------     ------      ------       -------      ------------
<S>                             <C>           <C>           <C>          <C>          <C>           <C>           <C>
Balance at December 31, 2002 .      251,588   $   243,532    42,342,981  $       425  $      (473)  $   498,439   $      (391)
     Exercise of stock options           --            --       100,473            1           --            26            --
     Stock option
      compensation expense ...           --            --            --           --           --         1,522          (571)
     Issuance of common stock
      for employer 401(k)
      contributions ..........           --            --     1,682,183           17           --           393            --
     Accretion of preferred
      stock ..................           --         5,334            --           --           --        (5,334)           --
     Accrued dividends on
      preferred stock ........           --        19,867            --           --           --       (19,867)           --
     Reclassification of
      Redeemable Preferred
      Stock as required by
      SFAS No. 150 ...........     (251,588)     (268,733)           --           --           --            --            --
     Net loss ................           --            --            --           --           --            --            --
     Change in fair value of
      interest rate swaps ....           --            --            --           --           --            --            --

     Comprehensive loss ......           --            --            --           --           --            --            --
                                -----------   -----------   -----------  -----------  -----------   -----------   -----------
Balance, December 31, 2003 ...           --   $        --    44,125,637  $       443  $      (473)  $   475,179   $      (962)
                                ===========   ===========   ===========  ===========  ===========   ===========   ===========
</TABLE>

<TABLE>
<CAPTION>
                                    ACCUMULATED
                                       OTHER
                                   COMPREHENSIVE     ACCUMULATED
                                       LOSS            DEFICIT             TOTAL
                                       ----            -------             -----
<S>                                <C>               <C>                <C>
Balance at December 31, 2002 .     $   (19,308)      $  (982,631)       $  (503,939)
     Exercise of stock options              --                --                 27
     Stock option
      compensation expense ...              --                --                951
     Issuance of common stock
      for employer 401(k)
      contributions ..........              --                --                410
     Accretion of preferred
     stock ...................              --                --             (5,334)
     Accrued dividends on
      preferred stock ........              --                --            (19,867)
     Reclassification of
      Redeemable Preferred
      Stock as required by
      SFAS No. 150 ...........              --                --                 --
     Net loss ................              --          (123,051)          (123,051)
     Change in fair value of
      interest rate swaps ....           5,808                --              5,808
                                                                        -----------
     Comprehensive loss ......              --                --           (117,243)
                                   -----------       -----------        -----------
Balance, December 31, 2003 ...     $   (13,500)      $(1,105,682)       $  (644,995)
                                   ===========       ===========        ===========
</TABLE>

           The accompanying notes to consolidated financial statements
               are an integral part of these financial statements.


                                     - 55 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                FOR YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                2003        2002        2001
                                                                                ----        ----        ----
<S>                                                                          <C>         <C>         <C>
Cash flows from operating activities:
Net loss ..................................................................  $(123,051)  $(479,459)  $(248,771)
Adjustments to reconcile net loss to net cash used in operating activities:
    Loss on disposition of assets .........................................        230         733         801
    Impairment loss on long-lived assets ..................................         --     294,524          --
    Depreciation and amortization .........................................     64,691      71,046      89,144
    Interest payable in-kind on long-term debt ............................     31,486      25,944       3,413
    Amortization of deferred financing costs ..............................      4,381       4,500       3,615
    Amortization of discount on long-term debt ............................      1,119         683          80
    Accretion of preferred stock ..........................................      5,974          --          --
    Accrued dividends on preferred stock ..................................     21,283          --          --
    Non-cash compensation and management ownership allocation charge ......        951      15,965      32,423
    Changes in assets and liabilities:
       Decrease/(increase) in accounts receivable, net ....................     12,356      (2,976)    (16,454)
       (Increase)/decrease in prepaid expenses and other current assets ...     (1,152)       (412)      3,003
       Increase in other long-term assets .................................       (413)       (420)     (2,767)
       (Decrease)/increase in accounts payable ............................     (6,455)      2,088      10,789
       (Decrease)/increase in accrued restructuring costs .................       (788)      4,721          --
       (Decrease)/increase in accrued expenses ............................    (14,290)      7,953      (1,911)
                                                                             ---------   ---------   ---------
          Net cash used in operating activities ...........................     (3,678)    (55,110)   (126,635)

Cash flows from investing activities:
    Capital expenditures ..................................................    (12,358)    (28,526)    (85,051)
    Proceeds from sale of assets ..........................................        135       1,012          --
    Purchase of investments ...............................................         --          --      (2,199)
    Proceeds from sale of investments .....................................         --          --       9,801
    Decrease in restricted cash ...........................................         --          --      30,000
    Purchase of accounts receivable .......................................         --          --      (3,518)
                                                                             ---------   ---------   ---------
       Net cash used in investing activities ..............................    (12,223)    (27,514)    (50,967)

Cash flows from financing activities:
       Additions to long-term debt ........................................      3,500     199,075      62,000
       Principal payments of long-term debt ...............................         --     (98,700)    (35,695)
       Proceeds from capital contributions and issuance of common stock ...         26          --         107
       Repurchase of treasury stock .......................................         --          --         (12)
       Payments under long-term capital leases for indefeasible rights to
       use fiber ..........................................................       (821)       (350)        (57)
       Payments of financing costs ........................................         --      (2,382)     (7,899)
                                                                             ---------   ---------   ---------
Net cash provided by financing activities .................................      2,705      97,643      18,444
                                                                             ---------   ---------   ---------
Net (decrease)/ increase in cash and cash equivalents .....................    (13,196)     15,019    (159,158)

Cash and cash equivalents, beginning of year ..............................     29,434      14,415     173,573
                                                                             ---------   ---------   ---------
Cash and cash equivalents, end of year ....................................  $  16,238   $  29,434   $  14,415
                                                                             =========   =========   =========
</TABLE>

           The accompanying notes to consolidated financial statements
               are an integral part of these financial statements.


                                     - 56 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2003

NOTE 1. DESCRIPTION OF BUSINESS

Choice One Communications Inc. and its wholly-owned subsidiaries (the "Company")
is an integrated communications provider offering facilities-based voice and
data telecommunications services. The Company, incorporated under the laws of
the State of Delaware on June 2, 1998, provides these services primarily to
small and medium-sized businesses in 29 second and third tier markets in the
northeastern and midwestern United States. The Company operates in one segment
and its services include local exchange and long distance services and
high-speed data and Internet services. The Company seeks to become the leading
integrated communications service provider in each market it serves by offering
a single source for competitively priced, high quality, customized
telecommunications services.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") which require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates. The accompanying financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
Refer to Note 4 for more details.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include all accounts of Choice One
Communications Inc. and all of its subsidiaries. All significant intercompany
balances and transactions have been eliminated.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents are highly liquid investments with original maturities
of three months or less. The carrying value of the cash equivalents approximates
fair value.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its retail and wholesale customers to make
required payments. If the financial condition of the Company's retail and
wholesale customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances could be required resulting in
additional expense to the Company and affecting its results of operations.

CONCENTRATIONS OF RISK

Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and trade accounts receivable. The
Company places its cash with high credit quality financial institutions. A
significant portion of the Company's sales are credit sales which are primarily
to customers whose ability to pay is dependent upon the industry economics
prevailing in the Company's markets; however, concentrations of credit risk with
respect to trade accounts receivables is limited due to generally short payment
terms. In addition, a significant portion of revenue is generated from wholesale
customers whose ability to pay is dependent on economic conditions, among other
wholesale customer specific factors. The Company has no significant
concentration of credit risk within its accounts receivable. As of and for the
years ended December 31, 2003, 2002 and 2001, no customers represented more than
10% of the Company's accounts receivable or revenue.

The Company leases its transport capacity from a limited number of suppliers and
is dependent upon the availability of transmission facilities owned by these
suppliers. The Company is vulnerable to the risk of being unable to renew
favorable supplier contracts, and the supplier not timely processing orders for
the Company's customers. The Company is at risk with respect to regulatory
agreements that govern rates charged by the suppliers.


                                     - 57 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets include prepaid rent, insurance,
software maintenance contracts and refundable deposits. Prepayments are expensed
on a straight-line basis over the life of the underlying agreement.

PROPERTY AND EQUIPMENT

Property and equipment includes switch equipment, computer equipment and
software, office furniture and equipment, indefeasible rights to use fiber
("IRUs"), construction in progress, assets held for use and leasehold
improvements. These assets are stated at cost, which includes direct costs,
capitalized labor and capitalized interest. Assets held for use are related to
the recovery of switch and collocation equipment from markets exited during 2002
which are expected to be re-deployed throughout the Company's remaining
operating markets. For financial reporting purposes, depreciation and
amortization are computed using the straight-line method over the following
estimated useful lives:

<TABLE>
<S>                                                        <C>
         Switch equipment................................  10 years
         Computer equipment and software.................  3-5 years
         Office furniture and equipment..................  3-7 years
         IRUs............................................  20 years
</TABLE>

Depreciation of switch equipment begins once the switches are placed in service.
Construction in progress costs relate to projects to acquire, install and make
operational various network components. Direct labor costs, monthly recurring
costs of the collocations, and interest costs incurred in connection with the
installation and construction of certain equipment are capitalized until such
equipment becomes operational. These costs are then amortized over the life of
the related asset.

Leasehold improvements are amortized using the straight-line method over the
shorter of the estimated life of the asset or the related lease term.
Betterments, renewals and extraordinary repairs that extend the life of the
asset are capitalized; other repairs and maintenance costs are expensed as
incurred.

Included in property and equipment are leases for IRUs which have been
capitalized. The present value of the minimum lease payments is recorded as a
liability. Amortization on the capitalized IRUs is computed on the straight-line
method over 20 years.

INTANGIBLES AND OTHER ASSETS

Intangible assets primarily consist of customer relationships, deferred
financing costs and other assets. Intangible assets also included goodwill until
it was determined that it was fully impaired during the three months ended June
30, 2002.

Customer relationships represent the fair value of the customer relationships
obtained through acquisitions and are being amortized using the straight-line
method over the estimated useful life of five years.

Deferred financing costs consist of capitalized amounts for bank financing fees,
professional fees and other expenses related to the Company's senior credit
facility and subordinated debt facility. These costs are being amortized using
the effective interest rate method, over the life of the related debt.
Amortization expense for these costs is included as a component of interest
expense in the consolidated statements of operations.

Goodwill represented the excess purchase price over the fair value of net assets
acquired and was being amortized using the straight-line method over the
estimated useful life of ten years. In January 2002, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." Under SFAS No. 142, goodwill is no longer amortized.
Amortization of the Company's goodwill ceased as of January 1, 2002, in
accordance with SFAS No. 142. The standard also requires that goodwill be
subject to at least an annual assessment for impairment through the application
of a fair value-based test.

DERIVATIVE FINANCIAL INSTRUMENTS

The Company does not engage in interest rate speculation. Derivative financial
instruments are utilized to hedge interest rate risk and are not held for
trading purposes. The Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended, on January 1, 2001. SFAS No.
133 requires that all derivative instruments, such as interest rate swap
agreements, be recognized in the financial statements and measured at fair value
regardless of the purpose or intent for holding them. The effect of the adoption
was recorded in accumulated other comprehensive loss for $6.0 million. Note 10
provides additional details on the Company's hedging activities.


                                     - 58 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

INCOME TAXES

Income taxes are accounted for in accordance with SFAS No. 109, "Accounting for
Income Taxes." SFAS No. 109 requires an asset and liability method of accounting
for income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for temporary differences between financial statement
and income tax bases of assets and liabilities. Deferred tax assets and
liabilities are measured using the tax rates and laws that are currently in
effect. In addition, the amount of any future tax benefits is reduced by a
valuation allowance until it is more likely than not that such benefits will be
realized.

DEFERRED COMPENSATION

The Company recognizes deferred compensation for the difference between the fair
market value of the Company's stock and the price at which such stock has been
sold to management employees since the formation of the Company, for the
difference between fair market value of the Company's stock and the exercise
price of certain options granted, and for restricted shares issued to employees.
The deferred compensation charge and management allocation charges included in
deferred compensation on the consolidated balance sheets are amortized over the
period in which the employee earns the right to sell the stock at market value
or, in the case of options and restricted stock, over the vesting period.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial instruments are disclosed in accordance with SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments", which requires that the
Company disclose the fair value of its financial instruments for which it is
practicable to estimate fair value. The following methods and assumptions were
used by the Company in estimating its fair value disclosures for financial
instruments:

Cash and cash equivalents, prepaid expenses and other current assets, accounts
payable and accrued expenses: The carrying value approximates fair value because
of the relatively short maturities of these instruments.

Long-term debt: The fair value of variable interest rate debt is approximately
equal to its carrying value. The fair value of fixed rate debt is based on the
current weighted average interest rates available to the Company for debt with
similar maturities.

Redeemable preferred stock: The fair value of redeemable preferred stock is
approximately equal to its liquidation value.

Interest rate swap agreements: The fair value of swap agreements is based on
quoted market prices for similar instruments.

The carrying values and related estimated fair values for the Company's
financial instruments are as follows (in thousands):

<TABLE>
<CAPTION>
                                                     2003                               2002
                                                     ----                               ----

                                       CARRYING VALUE    FAIR VALUE      CARRYING VALUE     FAIR VALUE
                                       --------------    ----------      --------------     ----------
<S>                                    <C>               <C>             <C>                <C>
  Long-term debt                         $ 631,976       $ 643,335          $ 595,941       $ 602,432
  Redeemable preferred stock             $ 295,990       $ 337,701          $ 243,532       $ 296,551
  Interest rate swap agreements          $ (13,500)      $ (13,500)         $ (19,308)      $ (19,308)
</TABLE>

COMPREHENSIVE INCOME

The Company accounts for comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income", which requires comprehensive income and its
components to be presented in the financial statements. During 2003, the Company
had other comprehensive income associated with the fair value of interest rate
swap agreements. During 2002 and 2001, the Company had other comprehensive loss
associated with the fair value of interest rate swaps.

NET LOSS PER COMMON SHARE

The Company calculates net loss per share under the provisions of the SFAS No.
128, "Earnings Per Share." SFAS No. 128 requires dual presentation of basic and
diluted earnings per share on the face of the income statement. Basic loss per
share is based on the weighted average number of common shares outstanding.
Diluted loss per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The Company had options and


                                     - 59 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

warrants to purchase 8,636,274, 8,756,357 and 8,010,087 shares outstanding at
December 31, 2003, 2002 and 2001, respectively, that were not included in the
calculation of diluted loss per share because the effect would be anti-dilutive.
As the effect would be anti-dilutive, a reconciliation of basic and diluted
earnings per share is not needed. Basic and diluted loss per common share for
all periods presented was computed by dividing the net loss attributable to
common stockholders by the weighted average outstanding common shares for the
period.

REVENUE RECOGNITION

Revenue from monthly recurring charges, enhanced features and usage is
recognized in the period in which service is provided in accordance with GAAP
and SEC Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial
Statements." Deferred revenue represents advance billings for services not yet
provided. Such revenue is deferred and recognized in the period in which service
is provided. The Company recognizes revenue from switched access and reciprocal
compensation based on actual usage and applicable rates per minute of usage,
adjusted for management's assessment of reasonable collectibility. Certain
judgments and estimates in measuring revenue and assessing the reasonable
assurance of collectibility, including regulatory interpretations and legal
challenges, may affect the Company's results of operations.

NETWORK COSTS

The liability for network costs is incurred to provide telecommunication
services to our customers and is recognized in the period in which the service
is utilized. Network costs include lease costs and costs of originating and
terminating calls incurred through third party providers and are expensed in the
period in which service is utilized. There is considerable judgment and
estimation of these costs based on line and circuit counts, estimated usage,
active collocation sites, contractual interpretations, and regulatory
interpretations and anticipated changes. Differences between actual and
estimated amounts may affect the Company's results of operations.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company reviews its long-lived assets in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If such events or changes in circumstances are
present, a loss is recognized if the carrying value of the asset is in excess of
the sum of the undiscounted cash flows expected to result from the use of the
asset and its eventual disposition. An impairment loss is measured as the amount
by which the carrying amount of the asset exceeds the fair value of the asset.

The determination of the value and any subsequent impairment of the Company's
remaining long-lived assets requires management to make estimates and
assumptions that may affect its consolidated financial statements. Factors that
may affect the recoverability of the Company's long-lived assets, include shifts
or reductions in the Company's client base, adverse changes in its expected
future cash flows and changes in its borrowing amounts and market interest
rates.

STOCK-BASED COMPENSATION

In accordance with SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure", the Company adopted the financial statement
measurement and recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation", effective January 1, 2003. Under SFAS No. 123, on a
prospective basis, the Company recognizes compensation expense for the fair
value of all stock options granted after December 31, 2002, over the vesting
period of the options. For stock options granted prior to December 31, 2002, the
Company accounts for stock based compensation issued to its employees in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees."
The Company's stock option plans are more fully described in Note 13.


                                     - 60 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

For stock options granted prior to December 31, 2002, the Company accounts for
stock based compensation issued to its employees in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees." Had compensation expense
been determined based on the fair value of the options at the grant dates for
awards granted prior to December 31, 2002 consistent with the method prescribed
in SFAS No. 123, the Company's net loss and net loss per share would have
increased to the pro forma amounts indicated below (in thousands, except per
share data):

<TABLE>
<CAPTION>
                                                                                   2003        2002        2001
                                                                                   ----        ----        ----
<S>                                                                             <C>         <C>         <C>
      Net loss, as reported ..................................................  $(123,051)  $(479,459)  $(248,771)

      Stock-based employee compensation expense included in reported net loss,
      net of related tax effects .............................................        951       1,106       1,322
      Total stock-based employee compensation expense determined under fair
      value based method for all awards, net of related tax effects ..........     (1,756)    (13,515)    (11,088)
                                                                                ---------   ---------   ---------
      Additional expense .....................................................       (805)    (12,409)     (9,766)
                                                                                ---------   ---------   ---------
      Net loss pro forma .....................................................  $(123,856)  $(491,868)  $(258,537)
                                                                                =========   =========   =========
</TABLE>

Net loss per share, basic and diluted:

<TABLE>
<CAPTION>
                                         2003         2002         2001
                                         ----         ----         ----
<S>                                    <C>          <C>          <C>
      As reported .................    $  (2.75)    $ (11.50)    $  (7.23)
      Pro forma ...................    $  (2.77)    $ (11.77)    $  (7.48)
</TABLE>

For purposes of the pro forma disclosure above, the fair value of each option
grant is estimated on the date of the grant using the Black-Scholes
option-pricing model and the following weighted average assumptions:

<TABLE>
<CAPTION>
                                                      2003              2002             2001
                                                      ----              ----             ----
<S>                                              <C>               <C>               <C>
         Dividend yield.......................     0.00 percent      0.00 percent      0.00 percent
         Expected volatility..................   203.16 percent    215.07 percent    129.70 percent
         Risk-free interest rate..............     3.18 percent      4.92 percent      4.96 percent
         Expected life........................        6 years           7 years           7 years
</TABLE>

NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations." This standard addresses the
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The standard is effective for fiscal years beginning after June 15, 2002.
The Company adopted this standard on January 1, 2003. The adoption of SFAS No.
143 did not have a material impact on the Company's consolidated financial
statements.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This standard amends Emerging Issue Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity." This statement requires that a
liability for costs associated with an exit or disposal activity be recognized
when the liability is incurred, rather than when an entity commits to an exit
plan. The standard also established the use of fair value for the measurement of
exit liabilities. The standard is effective for exit or disposal activities
initiated after December 31, 2002, with early application encouraged. The
Company adopted this standard on January 1, 2003. The adoption of this standard
did not have a material impact on the Company's consolidated financial
statements as it will only impact the Company's future exit or disposal
activities, if any.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement clarifies the accounting guidance on derivative instruments, including
certain derivative instruments embedded in other contracts, and hedging
activities. The standard is effective for contracts entered into or modified
after June 30, 2003. The Company adopted this standard on June 30, 2003. The
adoption of this standard has not had a material impact on the Company's
consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument


                                     - 61 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

that is within the scope of SFAS No. 150 as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. This statement is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities. The Company adopted this
standard on July 1, 2003. Upon adoption, the Company reclassified its
mandatorily redeemable preferred stock to long-term liabilities. The Company now
recognizes dividends declared and accretion related to this preferred stock as a
component of interest expense. Restatement of prior period classifications is
not permitted upon adoption of SFAS No. 150.

In November 2002, the FASB issued Financial Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 elaborates on the
existing disclosure requirements for most guarantees, and clarifies that at the
time a company issues a guarantee, the company must recognize an initial
liability for the fair value of the obligation it assumes under that guarantee
and must disclose that information in its interim and annual financial
statements. The initial recognition and measurement provisions apply on a
prospective basis to guarantees issued or modified after December 31, 2002. The
adoption of FIN No. 45 did not have a material impact on the Company's
consolidated financial statements.

In January 2003 the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities." The objective of FIN No. 46 is to improve financial reporting by
companies involved with variable interest entities. FIN No. 46 changes certain
consolidation requirements by requiring a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. The consolidation
requirements apply to entities created before February 1, 2003, no later than
the beginning of the first fiscal year or interim period beginning after
December 15, 2003, as amended by FASB Staff Position FIN 46R. The Company's
adoption of FIN No. 46 did not have a material impact on its consolidated
financial statements.

NOTE 4. GOING CONCERN MATTERS

The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business.

The Company has experienced net losses applicable to common stockholders of
$148.3 million, $524.1 million and $287.0 million for the years ended December
31, 2003, 2002 and 2001, respectively. At December 31, 2003, the Company had
$16.2 million in cash and cash equivalents and has drawn down all available
funding under its senior credit facility. The Company generated negative cash
flows from both operating and investing activities during the years ended
December 31, 2003, 2002 and 2001. The Company has a total stockholders' deficit
of $645.0 million as of December 31, 2003. These factors raise substantial doubt
about the Company's ability to continue as a going concern.

The Company has an operating plan for the year ended December 31, 2004 (the
"2004 plan"). The Company's viability is dependent upon its ability to continue
to generate and grow positive cash flows from operating activities. For each of
the three month periods ended September 30, 2003 and December 31, 2003, the
Company generated positive cash flows from operating activities. Although not
necessarily indicative of future cash flows from operating activities, these
quarters were the first quarters during which the Company generated positive
quarterly cash flows from operating activities. The success of the Company's
business strategy necessitates obtaining and retaining a significant number of
customers, generating significant and sustained growth in its cash flows from
operating activities and managing its costs and capital expenditures to be able
to meet its debt service obligations, including the repayment of principal
beginning June 30, 2004.

The Company's revenue and costs are dependent upon some factors that are not
entirely within its control, including regulatory changes, changes in
technology, and increased competition. Due to the uncertainty of these factors,
actual revenue and costs may vary from expected amounts, possibly to a material
degree, and such variations could affect the Company's future funding
requirements and its ability to achieve its 2004 plan. If the Company is unable
to achieve its 2004 plan objectives, the Company may need to raise additional
capital or obtain a covenant modification from its lenders. Additional financing
may also be required in response to changing conditions within the industry or
unanticipated competitive pressures. There can be no assurance that the Company
would be successful in raising additional capital or obtaining a covenant
modification from its lenders, if needed, on favorable terms or at all. Failure
to raise sufficient funds or modify the Company's covenants under these
circumstances may affect its ability to continue to operate its business.

The Company's senior credit facility contains certain covenants that are
customary for credit facilities of this nature. These covenants require the
Company to maintain an aggregate minimum amount of cash and committed financing
of $10.0 million through June 30, 2004 and, commencing on September 30, 2004,
require the Company to maintain certain leverage, fixed charges and interest
coverage


                                     - 62 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

ratios as described in the senior credit facility. The Company's ability to
comply with these covenants will primarily depend on its operating results,
which are subject to the uncertainties described above. A breach in observance
of any of these covenants, if unremedied in three business days, would cause an
event of default under the senior credit facilities and an event of default
under the Company's subordinated debt. An event of default would permit the
Company's obligations under its senior credit facility and its subordinated debt
to be declared to be immediately payable. If the lenders so accelerate the
Company's obligations, then the Company can make no assurances that it would be
able to obtain additional or substitute financing. An acceleration of the
Company's obligations would have a material adverse effect on its business,
financial condition and results of operations.

As of December 31, 2003, and from then through the date of filing of this
report, the Company was and is in compliance with all covenants under its senior
credit facility. However, it is reasonably likely, without covenant relief or
modification or other action, that the Company will be in breach of one or more
applicable covenants at some point during 2004. With respect to this situation,
the Company intends to pursue a variety of matters including changes to its
operating plans to enable the Company to remain in compliance, discussions with
lenders to gain certain waivers or modifications regarding its covenants which
will enable the Company to remain in compliance, and other possible actions and
strategic alternatives. To help guide and facilitate this effort, the Company
has engaged consultants to provide it with a broad range of financial advisory
services. The Company can make no assurances that it will be successful in any
or all of these efforts.

NOTE 5. PROPERTY AND EQUIPMENT

Property and equipment, at cost, consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                             DECEMBER 31, 2003         DECEMBER 31, 2002
                                                             -----------------         -----------------
<S>                                                          <C>                       <C>
         Switch equipment............................           $     306,492             $     300,506
         Computer equipment and software.............                  61,161                    55,598
         Office furniture and equipment..............                  10,111                     9,950
         Leasehold improvement.......................                  23,253                    22,815
         IRUs........................................                  68,352                    67,548
         Assets held for use.........................                   5,849                     5,132
         Construction in progress....................                   4,338                     5,665
                                                                -------------             -------------
                Total property and equipment.........                 479,556                   467,214
         Less:  accumulated amortization on IRUs.....                  (8,896)                   (5,452)
                accumulated depreciation.............                (175,237)                 (125,051)
                                                                -------------             -------------
                Property and equipment, net..........           $     295,423             $     336,711
                                                                =============             =============
</TABLE>

Capitalized labor included in property and equipment was $1.1 million, $3.3
million and $3.4 million during the years ended December 31, 2003, 2002 and
2001, respectively. Capitalized monthly recurring costs of collocations in
property and equipment were not material during the periods presented.
Capitalized interest costs associated with borrowings used to finance the
construction of long-term assets were not material during the periods presented.
Capitalized leases for IRUs and other equipment included in property and
equipment amounted to $34.3 million and 33.5 million at December 31, 2003 and
2002, respectively.

Depreciation expense, including the amortization of IRUs, for the years ended
December 31, 2003, 2002 and 2001, amounted to $53.9 million, $60.3 million, and
$45.5 million, respectively.

In May 2001, the Company approved a plan to abandon the assets related to its
Richmond, Virginia market. The writedown of abandoned assets includes equipment
and leasehold costs associated with collocating in the facilities of the
established telephone company located in the Richmond, Virginia area. The
writedown of abandoned assets of $0.8 million is included in the consolidated
statement of operations.

During September 2002, the Company committed to a plan to exit its Ann Arbor and
Lansing, Michigan market and to reduce reliance on certain collocation sites
within other markets through network optimization initiatives as described in
Note 14 to the consolidated financial statements. In conjunction with the plan,
the Company evaluated the related long-lived assets for impairment. The Company
recorded an impairment charge of approximately $7.3 million for the value of
unrecoverable leasehold improvements and other general equipment that was
abandoned, which was reported in impairment loss on long-lived assets in the
consolidated statement of operations.

The restructuring plan and related asset impairment also required the Company to
evaluate for impairment its equipment held for use. It was determined that a
portion of this equipment would not be used. The Company recorded an impairment
charge of $4.0 million


                                     - 63 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

related to this equipment that was abandoned which is reported in impairment
loss on long-lived assets in the consolidated statement of operations.

NOTE 6. ACCOUNTING FOR INTANGIBLE ASSETS

The Company accounts for certain intangible assets with finite lives in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." The
following schedule sets forth the major classes of intangible assets held by the
Company (in thousands):

<TABLE>
<CAPTION>
                                                          DECEMBER 31, 2003           DECEMBER 31, 2002
                                                          -----------------           -----------------
<S>                                                       <C>                         <C>
Amortized intangibles:

     Customer relationships..........................         $     53,635                $      53,635
     Deferred financing costs........................               29,815                       29,785

         Less: accumulated amortization
                  Customer relationships.............              (36,513)                     (25,787)
                  Deferred financing costs...........              (14,336)                     (10,154)
                                                              ------------                -------------

         Intangible assets, net .....................         $     32,601                $      47,479
                                                              ============                =============
</TABLE>

Deferred financing costs are amortized to interest expense over the life of the
related debt using the effective interest rate method. The Company continues to
amortize its intangible assets that have finite lives. The estimated
amortization expense for customer relationships, which have an estimated life of
five years, is as follows for the following fiscal periods (in thousands):

<TABLE>
<S>                                                  <C>
         2004.....................................   $10,616
         2005.....................................     6,027
         2006.....................................       370
         2007.....................................       109
</TABLE>

Amortization expense, excluding amortization of IRUs, was $10.8 million, $10.7
million and $43.6 million for the years ended December 31, 2003, 2002 and 2001,
respectively.

The Company ceased amortizing its goodwill as a result of the adoption of SFAS
No. 142. A reconciliation of reported net income for the years ended December
31, 2003, 2002 and 2001 to reflect the adoption of SFAS No. 142 on January 1,
2002, is as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                               2003          2002          2001
                                                               ----          ----          ----
<S>                                                          <C>           <C>           <C>
      Net loss ..........................................    $(123,051)    $(479,459)    $(248,771)
         Goodwill amortization ..........................           --            --        33,010
                                                             ---------     ---------     ---------
      Adjusted net loss .................................     (123,051)     (479,459)     (215,761)
      Accretion and accrued dividends on preferred stock        25,201        44,662        38,257
                                                             ---------     ---------     ---------
      Adjusted net loss applicable to common stockholders    $(148,252)    $(524,121)    $(254,018)
                                                             =========     =========     =========

      Net loss per share, basic and diluted as reported .    $   (2.75)    $  (11.50)    $   (7.23)
      Goodwill amortization per share ...................           --            --          0.83
                                                             ---------     ---------     ---------
      Adjusted net loss per share, basic and diluted ....    $   (2.75)    $  (11.50)    $   (6.40)
                                                             =========     =========     =========
</TABLE>

During the three-months ended June 30, 2002, the Company noted a significant
adverse change in the business climate of the Company and the telecommunications
industry in general. These circumstances required the Company to perform an
interim goodwill impairment test. Based on the results of this test, the Company
recorded an impairment charge of $283.0 million. The amount of the impairment
charge was determined by utilizing a combination of market-based methods to
estimate the fair value of the assets in accordance with SFAS No. 142. In
addition, the Company recorded a $0.3 million charge to write-down the value of
acquired customer relationships related to the Company's web hosting and design
services in accordance with the provisions of SFAS No. 144. Both charges are
reported in impairment loss on long-lived assets on the consolidated statement
of operations.


                                     - 64 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

A summary of the changes in the Company's net goodwill by reporting unit at
December 31, 2002 is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                Web Hosting
                                         Telecommunications      and Design            Total
                                         ------------------      ----------            -----
<S>                                      <C>                    <C>                  <C>
Balance at December 31, 2001 ......          $ 280,148           $   2,757           $ 282,905

Additions to goodwill .............                 79                  --                  79
Impairment charge .................           (280,227)             (2,757)           (282,984)
                                             ---------           ---------           ---------

Balance at December 31, 2002 ......          $      --           $      --           $      --
                                             =========           =========           =========
</TABLE>

NOTE 7. OTHER ASSETS

Other assets consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                      DECEMBER 31, 2003         DECEMBER 31, 2002
                                                      -----------------         -----------------
<S>                                                   <C>                       <C>
     Investment in Fibertech Networks, LLC.......         $     3,943             $       3,943
     Other assets, net...........................               1,153                       870
                                                          -----------             -------------
                                                          $     5,096             $       4,813
                                                          ===========             =============
</TABLE>

The Company has a minority equity investment in Fibertech Networks, LLC
("Fibertech") which is accounted for using the cost method. The Company has no
significant control over Fibertech. Fibertech designs, constructs and leases
high performance fiber networks in second and third tier markets in the
northeast and mid-atlantic regions of the United States. As a minority investor,
the Company has the right to appoint one representative to Fibertech's board of
managers and has a vote in determining the new markets in which Fibertech will
develop and build local loops. The Company has a master facilities agreement
with Fibertech that provides the Company with a 20-year IRU fiber, without
electronics, in 13 of Choice One's market cities.

NOTE 8. ACCRUED EXPENSES

Accrued expenses consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                    DECEMBER 31, 2003         DECEMBER 31, 2002
                                                                    -----------------         -----------------
<S>                                                                 <C>                       <C>
                  Accrued network costs........................        $    19,438               $    33,936
                  Accrued payroll and payroll
                      related benefits.........................              4,354                     2,883
                  Accrued collocation costs....................              2,986                     5,723
                  Accrued interest.............................              1,062                     1,222
                  Accrued restructuring costs..................                761                     1,695
                  Deferred revenue.............................              5,381                     4,990
                  Other........................................              8,645                     7,932
                                                                       -----------               -----------
                                                                       $    42,627               $    58,381
                                                                       ===========               ===========
</TABLE>

During the fourth quarter of 2002, the Company determined that a portion of the
revenue related to billings for monthly recurring line charges and calling
features ("MRCs") should have been deferred at the end of previous quarterly and
annual reporting periods. However, the Company also determined that the effect
of not previously deferring a portion of theses revenues was not material to any
previous annual consolidated results of operations or financial position, and
therefore previously issued consolidated financial statements have not been
restated. The impact is similarly not material to results of operations for the
year ended December 31, 2002. Consequently, the Company recorded an adjustment
of $4.6 million in the fourth quarter of 2002 to establish deferred revenue for
the cumulative amount of MRC billings that were recognized for periods preceding
the fourth quarter of 2002 that relate to services rendered in the fourth
quarter of 2002. The effect of this adjustment was to reduce reported revenues
for the fourth quarter and full fiscal year of 2002 by $4.6 million, and to
increase operating loss and net loss by the same amount and for the same
periods. The effect of this adjustment on a per share basis is $0.09 and $0.10
for the fourth quarter and full fiscal year of 2002, respectively.


                                     - 65 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 9. LONG-TERM DEBT

Long-term debt outstanding consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                   DECEMBER 31, 2003         DECEMBER 31, 2002
                                                                   -----------------         -----------------
<S>                                                                <C>                       <C>
         Senior credit facility:
             Term A loan....................................           $   125,000             $    125,000
             Term B loan....................................               125,000                  125,000
             Term C loan....................................                45,224                   41,389
             Term D loan....................................                 4,375                      875
             Revolver.......................................               100,000                  100,000
         Subordinated notes.................................               232,377                  203,677
                                                                       -----------             ------------
                  Total debt................................               631,976                  595,941
                     Less: current portion..................                12,220                       --
                                                                       -----------             ------------
                  Long-term debt, net of current portion....           $   619,756             $    595,941
                                                                       ===========             ============
</TABLE>

Included in the subordinated notes is a discount on the notes of $2.2 million
and $2.8 million as of December 31, 2003 and 2002, respectively. Included in the
Term C loan is a discount of $3.6 million and $4.1 million, and payable in-kind
("PIK") interest which accreted to principal of $4.3 million and $1.0 million as
of December 31, 2003 and 2002, respectively.

The discount on the subordinated notes is being amortized over the nine-year
term of the subordinated notes. For the years ended December 31, 2003, 2002, and
2001, $0.6 million, $0.5 million and $0.1 million of the discount was amortized,
respectively. The discount on the Term C loan is being amortized over its seven
and one-half year term. For the years ended December 31, 2003 and 2002, $0.5
million and $0.2 million of the discount was amortized, respectively.

Maturities of long-term debt (excluding unamortized discount and including PIK
interest) are as follows for the years ending December 31 (in thousands):

<TABLE>
<S>                                                        <C>
        2004..........................................     $    12,220
        2005..........................................          32,231
        2006..........................................          60,356
        2007..........................................          68,794
        2008..........................................         118,674
        Thereafter....................................         345,482
                                                           -----------
          Total debt..................................         637,757
              Less: discount on long-term debt........           5,781
                                                           -----------
          Long-term debt, net of discount.............     $   631,976
                                                           ===========
</TABLE>

The Company's Third Amended and Restated Credit Agreement ("Credit Agreement")
provides the Company with the following borrowing limits, maturities and
interest rates (in thousands):

<TABLE>
<CAPTION>
                                PRINCIPAL
                                  AMOUNT          MATURITY                INTEREST RATE OPTIONS              INTEREST TERMS
                                  ------          --------                ---------------------              --------------
<S>                             <C>           <C>                    <C>                                  <C>
Revolving credit facility.....  $ 100,000        July 31, 2008       LIBOR + 4.00% or Base Rate+3.00%*    Payable monthly
Term A loan - multiple draw...    125,000        July 31, 2008       LIBOR + 4.00% or Base Rate+3.00%*    Payable monthly
Term B loan...................    125,000     January 31, 2009       LIBOR + 4.75% or Base Rate+3.75%     Payable monthly
Term C loan...................     44,500       March 31, 2009       LIBOR + 5.75% or Base Rate+4.75%     Accrues to principal**
Term D loan...................      4,375     January 31, 2009       LIBOR + 4.00% or Base Rate+3.00%*    Payable monthly
</TABLE>

 *  -The applicable margin is determined by a grid tied to the Company's
     leverage ratio. Initially, the applicable margin is 4.0% if the LIBOR rate
     is used, or 3.0% if the Base Rate is used.

**  -Interest on the Term C loan accrues to principal through March 31, 2004,
     and thereafter is payable monthly.

Borrowings under the Credit Agreement are collateralized by substantially all of
the assets of the Company. The Credit Agreement contains certain covenants that
are customary for credit facilities of this nature, all of which are defined in
the Credit Agreement. These covenants require the Company to maintain an
aggregate minimum amount of cash and committed financing of $10.0 million
through June 30, 2004, impose limits on its capital expenditures that vary
annually, and require it to maintain certain leverage, fixed charges and
interest coverage ratios as described in the Credit Agreement. A default in
observance of these covenants, if unremedied in three


                                     - 66 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(3) business days, could cause the lenders to declare the principal and interest
outstanding at that time to be payable immediately. The Company was in
compliance with all covenants under the Credit Agreement for the year ended
December 31, 2003.

The aggregate commitment under the Credit Agreement is reduced as follows:

      -     For the revolving credit and Term A facilities:

<TABLE>
<CAPTION>
                                               PERCENTAGE                TOTAL
                                                REDUCTION              PERCENTAGE
            QUARTERS ENDING                    PER QUARTER             REDUCTION
            ---------------                    -----------             ---------
<S>                                            <C>                      <C>
            6/30/2004 through 9/30/2004           1.25%                    2.5%
            12/31/2004 through 9/30/2005          2.50%                   10.0%
            12/31/2005 through 9/30/2006          6.25%                   25.0%
            12/31/2006 through 6/30/2008          7.50%                   52.5%
            Maturity date                           N/A                   10.0%
                                                                        ------
                                                                         100.0%
</TABLE>

      -     For the Term B and Term D loan facilities:

<TABLE>
<CAPTION>
                                                PERCENTAGE                TOTAL
                                                 REDUCTION              PERCENTAGE
             QUARTERS ENDING                    PER QUARTER             REDUCTION
             ---------------                    -----------             ---------
<S>                                             <C>                     <C>
             06/30/2004 through 9/30/2008          0.25%                    4.5%
             12/30/2008                           47.50%                   47.5%
             Maturity date                           N/A                   48.0%
                                                                         ------
                                                                          100.0%
</TABLE>

      -     All principal and deferred interest on the Term C loan is due at
            maturity on March 31, 2009.

As of December 31, 2003, the maximum borrowings under the Term A loan, Term B
loan, Term C loan, Term D loan, revolver loan and the subordinated notes were
all outstanding. At December 31, 2003, $278.2 million of the outstanding
borrowings was variable rate debt and $355.4 million of the outstanding
borrowings was fixed rate debt, including variable rate debt fixed by the
interest rate swap agreement. The weighted average floating interest rate and
the weighted average fixed swapped interest rate at December 31, 2003 were 5.49%
and 11.68%, respectively.

As of December 31, 2003, the Company had principal borrowings of $230.4 million
in subordinated notes, excluding the discount of $2.2 million and PIK interest
of $4.2 million that accrued but has not accreted to principal. Interest on the
subordinated notes is fixed at 13% and accretes to the principal semi-annually
until November 2006. Thereafter, interest will be payable quarterly, in cash,
based on LIBOR plus an applicable margin. During 2003, $27.6 million in PIK
interest accreted to principal. The subordinated notes mature on November 9,
2010.

On September 13, 2002, the Company completed new debt financing of $48.9
million, a waiver of the default of the revenue covenant at June 30, 2002 from
its lending institutions, and an amendment to the Company's existing senior
credit facility. Morgan Stanley Capital Partners and the lenders of the
Company's subordinated notes provided the Company with a $44.5 million senior
secured term loan facility (the Term C loan). Additionally, certain of the
Company's existing senior lenders made available a separate term loan facility
of $4.4 million (the Term D loan) to be drawn in five equal quarterly
installments commencing on December 31, 2002 and ending on December 31, 2003,
and maturing on January 31, 2009.


                                     - 67 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

As discussed in Note 5, the Company maintains capital leases related to IRUs and
other equipment. The future minimum payments under the leases as of December 31,
2003 are as follows (in thousands):

<TABLE>
<CAPTION>
                        YEAR ENDING DECEMBER 31,               TOTAL PAYMENTS
                        ------------------------               --------------
<S>                                                            <C>
           2004............................................      $     3,307
           2005............................................            3,240
           2006............................................            3,242
           2007............................................            3,244
           2008............................................            3,247
           Thereafter......................................           43,836
                                                                 -----------
              Total minimum lease payments.................           60,116
                Less: amounts representing interest........           27,117
                Less: current portion of capital leases....              962
                                                                 -----------
              Long-term portion of capital leases..........      $    32,037
                                                                 ===========
</TABLE>

NOTE 10. DERIVATIVE INSTRUMENTS

The Company accounts for its derivative instruments in accordance with SFAS No.
133, as amended, which requires that all derivative financial instruments, such
as interest rate swap agreements, be recognized in the financial statements and
measured at fair value regardless of the purpose or intent for holding them.

The Company uses derivative instruments to manage its interest rate risk. The
Company does not use the instruments for speculative purposes. Interest rate
swaps were employed as a requirement under the Company's Second Amended and
Restated Credit Agreement. The Third Amended and Restated Credit Agreement does
not have such a requirement. This agreement does prohibit the Company from
entering into any new interest rate swap, collar, cap, floor or forward rate
agreements without the prior written consent of the lenders. The interest
differential to be paid or received under the related interest rate swap
agreements is recognized over the life of the related debt and is included in
interest expense or income. The Company designates these interest rate swap
agreements as cash flow hedges. The fair value of the interest rate swap
agreements designated and effective as a cash flow hedging instrument is
included in accumulated other comprehensive loss. Credit risk associated with
counterparty performance is mitigated by using major financial institutions with
high credit ratings.

At December 31, 2003, the Company had an interest rate swap agreement with a
notional principal amount of $125.0 million expiring in February 2006. The
interest rate swap agreement is based on the three-month LIBOR, which is fixed
at 6.94%. Approximately 31% of the underlying facility debt is being hedged with
the interest rate swap. The Company also had an interest rate swap agreement
with a notional principal amount of $62.5 million that expired in May 2003. The
fair value of the interest rate swap agreement was $13.5 million and $19.3
million as of December 31, 2003 and 2002, respectively. The fair value of the
interest rate swap agreements is estimated based on quotes from brokers and
represents the estimated amount that the Company would expect to pay to
terminate the interest rate swap agreements at the reporting date.

The fair value of the interest rate swap agreements is included in accumulated
other comprehensive loss on the consolidated balance sheet and the change in the
fair value of the interest rate swap agreements is the only component of other
comprehensive loss. Comprehensive loss was $117.2 million, $485.3 million and
$262.3 million for the years ended December 31, 2003, 2002 and 2001,
respectively.

NOTE 11. REDEEMABLE PREFERRED STOCK

In August 2000, the Company issued 200,000 shares of Series A senior cumulative
redeemable preferred stock and related warrants in a private placement for
$200.0 million. The Series A preferred stock was issued to three of the Morgan
Stanley Capital Partners entities, related parties to the Company. Each share of
Series A preferred stock has a stated value of $1,000 and ranks senior to each
other class or series of the Company's capital stock.


                                     - 68 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Dividends accrue at the rate of 14.0% per annum, cumulative and compounded
quarterly. The Company may pay dividends in additional shares of Series A
preferred stock or in cash, at the Company's option. However, the Company is
prohibited from paying cash dividends until such time as the obligations under
the senior credit facility are paid in full. The Series A preferred stock
matures on August 1, 2012, at which time the Company must redeem the shares for
their stated value plus any accrued and unpaid dividends. The Series A preferred
stock is not redeemable by the Company prior to August 1, 2005. For redemptions
of the Series A preferred stock between August 1, 2005 and the maturity date of
August 1, 2012, the Company must pay a premium on amounts redeemed based on the
following schedule:

<TABLE>
<S>                                                  <C>
     August 1, 2005 to July 31, 2006                    107%
     August 1, 2006 to July 31, 2007                 104.67%
     August 1, 2007 to July 31, 2008                 102.33%
     August 1, 2008 and thereafter                      100%
</TABLE>

In the case of a liquidation or a change in control during the first five years
or any time through the maturity date, the premium on redeemed amounts would be
100% and 101%, respectively.

In March 2002, holders of the Company's Series A senior cumulative preferred
stock agreed to irrevocably waive certain of their redemption rights with
respect to 60,000 shares of Series A preferred stock (shares covered by such
waiver are described herein as non-redeemable Series A preferred stock and all
other shares are described as redeemable Series A preferred stock). The
redemption rights waived included the mandatory redemption on the maturity date
of August 1, 2012 and the mandatory redemption for cash upon a change in
control.

In consideration for the holders' irrevocable waiver of these redemption rights
(and for no other consideration), the holders of the non-redeemable Series A
preferred stock were granted warrants to purchase shares of the Company's common
stock. The Company issued to the holders warrants to purchase 1,177,015 shares
of common stock at an exercise price of $1.64 per share. The warrants vested 40
percent on the date of issuance, March 31, 2002, and then, if the waiver had not
been terminated, 20 percent each on October 1, 2002, January 1, 2003 and April
1, 2003.

The Company, at its sole discretion elected to terminate the waiver in September
2002. As a result, approximately 706,209 unvested warrants expired and 470,806
vested warrants will expire on September 25, 2007. Pursuant to anti-dilution
provisions in such warrants, triggered by the issuance of new warrants to the
Company's lenders under the Term C loan facility, the holders were entitled to
warrants to purchase 540,785 shares of common stock at $1.64 per share. The
60,000 shares of non-redeemable Series A preferred stock at June 30, 2002 were
converted to shares of redeemable Series A preferred stock at September 30,
2002.

Also in March 2002, the Company declared the dividends due on its redeemable
Series A preferred stock through March 31, 2002 and issued such dividends in the
form of 51,588 shares of redeemable Series A preferred stock. These 51,588
shares of redeemable Series A preferred stock and 8,412 additional shares of
redeemable Series A preferred stock aggregate to the 60,000 shares of Series A
preferred stock for which the Company received the waiver as described above.
The relative fair value of the non-redeemable Series A preferred stock was
included in stockholders' equity until the Company terminated the waiver in
September 2002, and the relative fair value of the related warrants was included
in additional paid-in capital.

Accretion of preferred stock was $11.3 million, $8.8 million and $7.0 million
for the years ended December 31, 2003, 2002 and 2001, respectively. Accretion of
preferred stock represents the value of stock warrants that are a component of
the preferred stock, and is accreted over the life of the warrants. Dividends on
preferred stock of $68.5 million and $27.4 million were accrued at December 31,
2003 and 2002, respectively.

On July 1, 2003, the Company adopted SFAS No. 150. "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." Upon
adoption, the Company reclassified its mandatorily redeemable preferred stock,
previously given mezzanine presentation, to long-term liabilities. The Company
now recognizes dividends declared and accretion related to this preferred stock
as a component of interest expense. Restatement of prior period classifications
is not permitted upon adoption of the standard.

NOTE 12. STOCKHOLDERS' EQUITY

In February 2000, upon the consummation of the Company's initial public
offering, the Company was required by GAAP to record the increase (based upon
the valuation of the common stock implied by the initial public offering) in the
assets of Choice One LLC allocated to management as a $119.9 million increase in
additional paid-in capital, with a corresponding increase in non-cash deferred


                                     - 69 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

compensation. The Company was required to record $62.4 million as an initial
non-cash, nonrecurring charge to operating expense and the remaining $57.5
million was recorded as a deferred management ownership allocation charge. The
Company amortized $10.9 million, and $24.0 million of the deferred charge during
the years ended December 31, 2002 and 2001, respectively. The management
ownership allocation charge was fully amortized at December 31, 2002.

As the estimated fair value of the Company had exceeded the price at which
ownership units of Choice One LLC had been sold to management employees since
the formation of the Company and prior to the initial public offering, the
Company recognized deferred compensation of $4.4 million as of December 31,
1999, of which $0.3 million and $0.9 million had been amortized to expense
during the years ended December 31, 2002 and 2001, respectively. The deferred
compensation was fully amortized at December 31, 2002.

In connection with the issuance of its Series A preferred stock in August 2000,
the Company issued warrants to the holders of the Series A preferred stock. The
warrants to purchase 1,747,454 shares of the Company's common stock are
exercisable in whole or in part at any time. The warrant exercise price is $0.01
per share of common stock. Pursuant to the anti-dilution provisions of these
warrants, triggered by the issuance of new warrants to the Company's lenders in
September 2002, the holders are now entitled to purchase, upon exercise, an
additional 259,735 shares of the Company's common stock. The exercise price for
all 2,007,189 of these warrants is $0.01 per share. The warrants will expire on
August 1, 2012. Refer to Note 11 for a description of the additional warrants
issued in March 2002 to the Series A preferred stock holders.

In consideration for the loans extended to the Company under the Credit
Agreement and the other amendments and waivers effected pursuant to the Credit
Agreement and the Bridge Agreement Amendment in September 2002, the Company
issued warrants to purchase shares of the Company's common stock to the lenders
under the Term C loan facility. These warrants are exercisable for up to
10,596,137 shares of common stock, representing 20% of the issued and
outstanding common stock of the Company on September 13, 2002, on a fully
diluted basis after giving effect to the issuance of the new warrants. These
warrants may be exercised until September 13, 2007 at an exercise price of $0.01
per share. Of these, warrants to purchase 7,944,700 shares of common stock are
immediately exercisable. Warrants to purchase 2,651,437 shares of common stock
issued to those lenders under the Term C loan facility who are also lenders
under the Bridge Agreement Amendment will not become exercisable prior to
September 13, 2004. If the Company satisfies its outstanding obligations under
the Bridge Agreement Amendment in full, including payment of accrued and unpaid
interest, prior to September 13, 2004, the warrants to purchase 2,651,437 shares
of common stock will expire; otherwise they will become exercisable on September
13, 2004.

In addition, the Company has issued additional warrants to the lenders under the
Bridge Agreement Amendment that may, upon the occurrence of certain events as
summarized below and more fully described in the Form of Warrant for the
Purchase of Common Stock (the "Form of Warrant"), become exercisable for up to
an additional 4,851,872 shares of common stock, representing 10% of the issued
and outstanding common stock of the Company on September 13, 2002, on a fully
diluted basis after giving effect to the issuance of such new warrants. These
new warrants, which are not currently exercisable and will only become
exercisable under limited circumstances as described in the Form of Warrant,
have an exercise price of $0.01 per share. If they have not already become
exercisable, these warrants will automatically expire when the Company has
satisfied its obligations under the Bridge Agreement Amendment in full.

The relative fair value of the warrants issued in consideration for the loans
extended on September 13, 2002, was $4.3 million and is included in additional
paid-in capital. All of these newly issued warrants are entitled to
anti-dilution protection and the warrant holders have been granted rights with
respect to the registration of the shares issuable upon exercise thereof under
the Securities Act of 1933. The anti-dilution protection includes provisions
that will increase the number of shares of common stock issuable upon exercise
of the warrants under certain circumstances such as a subsequent below market
issuance of common stock (or warrants to purchase common stock), a stock split,
recapitalization or similar event. The issuance of the new warrants to the
Company's lenders as described above triggered the anti-dilution provisions in
the Company's previously issued warrants. As a result of the issuance of the new
warrants on September 13, 2002, the number of shares of common stock issuable
upon exercise of these previously issued outstanding warrants increased by
595,430 shares, resulting in potential dilution to the Company's existing
stockholders in addition to the potential dilution resulting from the issuance
of the new warrants to the Company's lenders. The previously issued outstanding
warrants were increased as described elsewhere in the notes to the consolidated
financial statements.

If the warrants to purchase 2,651,437 and 4,851,872 shares of common stock
issued to the lenders under the Bridge Agreement Amendment, that are not
currently exercisable, become exercisable in accordance with their terms,
additional anti-dilution adjustments will be required with respect to all issued
and outstanding warrants with the exception of these warrants issued to the
lenders under the Bridge Agreement Amendment.


                                     - 70 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

In connection with the rollover of its subordinated debt in November 2001, the
Company issued warrants to purchase 1,890,294 shares of common stock at an
exercise price of $2.25 per share of common stock. The warrants expire on
November 9, 2006. Pursuant to the anti-dilution provisions of these warrants,
triggered by the issuance of new warrants to the Company's lenders in September
2002, the holders are now entitled to purchase, upon exercise, an additional
265,716 shares of the Company's common stock. The exercise price for all
2,156,010 of these warrants has been adjusted to $1.97 per share.

In connection with the acquisition of US Xchange in August 2000, the Company
issued 535,296 restricted shares to the employees of US Xchange. The restricted
shares vested over two years at a rate of 50% per annum. Deferred compensation
related to the issuance of the restricted shares for $14.8 million was recorded
to stockholders' equity, of which $3.6 million and $6.3 million was amortized
during the years ended December 31, 2002, and 2001, respectively. The deferred
compensation related to the issuance of the restricted shares was fully
amortized at December 31, 2002. Since the acquisition date, the Company also
reacquired certain of these restricted shares from employees who have terminated
their employment with the Company. These shares are classified as treasury stock
in the accompanying financial statements.

In connection with the purchase of certain assets from FairPoint Communications
Solutions Corp. ("FairPoint") in December 2001, the Company issued 2,500,000
shares of common stock. The purchase price included contingent consideration
payable in shares of the Company's common stock, based upon the achievement of
certain operational metrics within 120 days of the closing date. In May 2002,
based on the achievement of those operational metrics, 1,000,000 shares were
issued to FairPoint as final consideration.

In August 2001, the Company loaned an aggregate of $2.2 million to its chief
executive officer and top four executives. The loans bear interest at a rate of
5.72% and have a term of three years (subject to acceleration in the event of
termination of employment). The loans, which are non-recourse and secured by
100% of the common stock owned by the respective executives, are included as a
reduction to additional paid-in-capital in the consolidated financial
statements.

The agreements and terms of the Series A senior cumulative redeemable preferred
stock prohibit the Company from paying dividends on its common stock. The
agreements and terms of the subordinated notes prohibit the Company from paying
dividends on its common stock in cash. The agreements and terms of the Credit
Agreement prohibit the Company from paying dividends on its Series A senior
cumulative redeemable preferred stock in cash.

The Company's certificate of incorporation provides that it may issue preferred
stock without shareholder approval. Under certain circumstances, as defined in
the certificate of incorporation and by-laws, preferred stock could be issued by
the Company in connection with a shareholder rights plan. The issuance of
preferred stock in connection with a shareholder rights plan could cause
substantial dilution to any person or group that attempts to acquire the Company
on terms not approved in advance by the Company's board of directors.

NOTE 13. STOCK OPTION PLANS

The Company currently maintains two stockholder approved stock option plans.
Persons to whom options are granted under the 1998 Employee Stock Option Plan
(the "1998 Plan"), the number of shares granted to each and the period over
which the options become exercisable are determined by the Employee Option Plan
Administrative Committee. The options granted have a term of ten years. The
vesting terms in effect for outstanding grants are equal rates over a four-year
period, or 20% on the first anniversary date and the remaining 80% vesting
monthly over 24 months. The total number of shares authorized under the 1998
Plan is 10,000,000, as amended in December 2001.

Options under the 1999 Director Stock Incentive Plan (the "1999 Plan") are
issued to attract and retain outside directors of the Company. The number of
shares granted and the period over which the options become exercisable are
determined by the Board of Directors. The options granted have a term of ten
years and vest at equal rates over a four-year period. The total number of
shares authorized under the 1999 Plan is 531,896.

The weighted average fair value of options granted during the years ended
December 31, 2003, 2002 and 2001 was $0.26, $3.20 and $6.34, respectively.


                                     - 71 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The following is a summary of the activity in the Company's plans during the
years ended December 31, 2003, 2002, and 2001:

<TABLE>
<CAPTION>
                                           2003                            2002                            2001
                                           ----                            ----                            ----
                                                WEIGHTED AVG.                   WEIGHTED AVG.                    WEIGHTED AVG.
                                   SHARES      EXERCISE PRICE      SHARES       EXERCISE PRICE      SHARES       EXERCISE PRICE
                                   ------      --------------      ------       --------------      ------       --------------
<S>                             <C>            <C>               <C>            <C>               <C>            <C>
Options outstanding,
     beginning of year ..        6,059,563        $  11.89        4,372,339        $   9.82        2,643,806        $  15.52
Options granted .........        5,399,971            0.27        2,667,586            3.21        2,474,994            6.84
Options exercised .......         (100,473)           0.27               --              --          (20,056)           5.36
Options exchanged .......       (4,119,524)           8.15               --              --               --              --
Options forfeited .......       (1,300,057)           9.01         (980,362)           8.04         (726,405)          12.73
                               -----------                       ----------                       ----------
Options outstanding,
     end of year ........        5,939,480            1.50        6,059,563            8.09        4,372,339            9.82
                               ===========                       ==========                       ==========

Options exercisable .....        1,880,515            3.38        1,889,595           11.89          713,891           12.54
</TABLE>

The weighted-average remaining contractual life of options outstanding was 9.1
years, with exercise prices ranging from $0.16 to $40.81, as of December 31,
2003. None of the options expired during 2003, 2002 and 2001 respectively.

Options outstanding as of December 31, 2003 consisted of the following:

<TABLE>
<CAPTION>
                                      OPTIONS OUTSTANDING                                 OPTIONS EXERCISABLE
                                      -------------------                                 -------------------
                                          WEIGHTED-AVG.        WEIGHTED-AVERAGE                          WEIGHTED-AVERAGE
      RANGE OF                              REMAINING         EXERCISE PRICE PER                        EXERCISE PRICE PER
   EXERCISE PRICES    NUMBER OF SHARES   CONTRACTUAL LIFE            SHARE         NUMBER OF SHARES            SHARE
   ---------------    ----------------   ----------------            -----         ----------------            -----
<S>                   <C>               <C>                   <C>                  <C>                  <C>
  $ 0.16 to $ 0.30        4,854,685           9.4 years             $  0.27            1,294,465              $  0.26
    0.32 to   0.37          235,875           9.3                      0.33               10,700                 0.36
    0.89 to   1.34           61,975           8.4                      0.93               23,292                 0.94
    1.63 to   2.40          117,725           8.1                      1.79               41,625                 1.74
    2.54 to   3.50          158,912           7.6                      3.38               78,020                 3.30
    4.00 to   5.52           22,502           6.8                      4.96               15,002                 4.72
    6.19 to   7.52          238,896           7.2                      6.39              220,008                 6.38
    9.31 to  12.19           61,099           6.8                     10.87               44,249                11.07
   14.48 to  20.00          105,732           6.5                     17.61               77,926                17.71
   28.25 to  40.81           82,079           6.5                     30.92               75,228                30.75
                          ---------                                                    ---------
  $ 0.16 to $40.81        5,939,480           9.1 years             $  1.50            1,880,515              $  3.38
                          =========                                                    =========
</TABLE>

As the estimated fair market value of the Company's stock exceeded the exercise
price of certain options granted prior to the Company's initial public offering
in February 2000, the Company has recognized non-cash deferred compensation
expense of $0.2 million, $1.1 million, and $1.3 million during the years ended
December 31, 2003, 2002 and 2001, respectively. The non-cash deferred
compensation is amortized to expense over the vesting period of the options, and
will be fully amortized in January 2004.

In November 2002, the Company approved a voluntary stock option exchange program
for eligible employee option holders under the 1998 Plan. Options granted on or
before January 2, 2002 were eligible for the exchange program, except for
performance-based options granted on January 1, 2002. To participate in the
exchange program, employees must have been continually employed by the Company
throughout the tender offer period and until the grant of new options. Employee
participation in the program was strictly voluntary and options issued under the
Company's 1999 Plan were excluded from the stock option exchange program. The
number of new options issued varied depending on the exercise price of the
options tendered according to the following exchange ratios:

<TABLE>
<CAPTION>
                                                    NUMBER OF NEW OPTIONS TO BE
                                                   GRANTED AS A PERCENT OF SHARES
FOR OPTIONS WITH EXERCISE PRICES:                    COVERED BY TENDERED OPTIONS
---------------------------------                    ---------------------------
<S>                                                <C>
$4.00 and under                                                 80%
$4.01 to $8.00                                                  65%
$8.01 to $20.00                                                 40%
Over $20.00                                                     25%
</TABLE>


                                      - 72 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The tender offer period commenced on December 19, 2002, with 4,482,021 options
eligible for exchange, and was completed on January 21, 2003. Pursuant to the
terms of the tender offer, the outstanding options properly tendered for
exchange by employees was 4,119,524, or approximately 92% of the outstanding
options eligible for exchange. On January 21, 2003, the Company granted to those
eligible employees new options to purchase 2,582,986 shares of common stock with
an exercise price of $0.26 per share. All tendered options that were fully
vested on January 21, 2003 were replaced with new options that were also fully
vested. For tendered options that had not yet vested, the vesting schedule for
replacement options was extended by one year.

NOTE 14. RESTRUCTURING COSTS

In September 2002, the Company identified opportunities to optimize the use of
capital and company assets and committed to a plan of workforce reductions,
closing operations in its Ann Arbor and Lansing, Michigan market and reducing
reliance on certain collocation sites. On September 5, 2002, the Company
announced it had reduced its workforce by 102 operational and administrative
positions. All positions were terminated by September 30, 2002 and termination
benefits for these positions were included in the restructuring costs. In
addition, approximately 100 positions were eliminated through normal attrition.

On October 9, 2002, the Company notified its customers in the communities of Ann
Arbor and Lansing, Michigan that the Company would be ceasing its operations in
that market. The Company stopped selling services to new clients in this market
and notified existing customers of the decision and the approximate time
remaining until services were terminated, which was in December 2002. The
Company has redeployed certain equipment from this market to other markets to
optimize its network assets. Revenue and operating results of the Ann Arbor and
Lansing, Michigan market were not significant to the Company's consolidated
results of operations.

In connection with the above activities, the Company recorded restructuring
costs of $5.3 million, comprised of employee termination benefits of $0.6
million, contractual lease obligations of $3.4 million and network facility
costs of $1.3 million.

During February 2003, the Company modified a portion of its restructuring plan
related to reduced reliance on certain collocation sites. As the Company engaged
in its restructuring actions in the first quarter of 2003, the Company was
informed that additional costs would be charged to it by the established
telephone companies in connection with the restructuring. Based on this new
information, the Company reduced the number of collocation sites that would be
affected. As a result of this plan modification, the Company reversed
approximately $0.7 million in restructuring costs related to the collocation
sites. At the same time, the Company increased the restructuring accrual for
$0.1 million in termination benefits and other network facility costs that
became known during the first quarter of 2003.

At December 31, 2003, approximately $1.3 million of the total restructuring
costs recognized had been paid to date, $0.6 million related to employee
termination benefits, $0.4 million related to lease obligations, and $0.3
million related to network facility costs. It is anticipated that the remaining
charges will be liquidated within the next calendar year, except for contractual
lease obligations of $2.6 million that extend beyond one year and are included
in other long-term liabilities.

The following table highlights the cumulative restructuring activities through
December 31, 2003 (in thousands):

<TABLE>
<CAPTION>

                                                       TERMINATION         LEASE           NETWORK
                                                         BENEFITS       OBLIGATIONS     FACILITY COSTS        TOTAL
                                                         --------       -----------     --------------        -----
<S>                                                    <C>              <C>              <C>              <C>
Initial restructuring charge ......................    $        559     $      3,440     $      1,283     $      5,282
Payment of benefits and other obligations .........            (537)             (24)              --             (561)
                                                       ------------     ------------     ------------     ------------
Balance at December 31, 2002 ......................              22            3,416            1,283            4,721
Payment of benefits and other obligations .........             (72)            (384)            (332)            (788)
Adjustments due to plan modifications .............              50               --             (585)            (535)
                                                       ------------     ------------     ------------     ------------

Balance at December 31, 2003.......................    $         --     $      3,032     $        366     $      3,398
                                                       ============     ============     ============     ============
</TABLE>

NOTE 15. INCOME TAXES

The Company had approximately $598.1 million and $496.1 million of net operating
loss carryforwards for federal income tax purposes at December 31, 2003 and
2002, respectively. The net operating loss carryforwards will begin to expire in
2020, if not


                                      - 73 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

previously utilized. Application of Internal Revenue Code section 382 may limit
the utilization of the net operating loss carryforwards. The Company has
recorded a valuation allowance equal to the net deferred tax assets at December
31, 2003 and 2002 due to the uncertainty of future operating results. The
valuation allowance will be reduced at such time as management believes it is
more likely than not that the net deferred tax assets will be realized. Any
reductions in the valuation allowance will reduce future income tax provisions.

The deferred tax asset is comprised of the following at December 31 (in
thousands):

<TABLE>
<CAPTION>
                                                     2003          2002
                                                     ----          ----
<S>                                               <C>           <C>
      Intangible assets ......................    $ (12,859)    $ (18,320)
      Accelerated depreciation ...............      (34,223)      (24,268)
      Start-up and other capitalized costs ...          270           835
      Capital leases .........................       13,312        14,550
      Subordinated debt deferred interest ....       22,500        11,257
      Restructuring charges ..................        1,359         1,888
      Net operating loss carryforwards .......      203,354       168,676
      Accounts receivable reserve ............        1,216         5,433
      Miscellaneous ..........................           95            82
                                                  ---------     ---------
           Gross deferred tax asset ..........      195,024       160,133
      Less: valuation allowance ..............     (195,024)     (160,133)
                                                  ---------     ---------
           Net deferred tax asset ............    $      --     $      --
                                                  =========     =========
</TABLE>

Under existing tax law, all operating expenses incurred prior to a company
commencing its principal operations are capitalized and amortized over a
60-month period for tax purposes.

The Company had no income tax expense for the years ended December 31, 2003,
2002 and 2001. Income tax expense differed from the statutory U.S. federal
income tax rate of 34% as a result of the following (in thousands):

<TABLE>
<CAPTION>
                                                                2003          2002          2001
                                                                ----          ----          ----
<S>                                                           <C>          <C>           <C>
      Tax benefit at statutory  rate .....................    $(51,888)    $(183,442)    $(100,460)
      Change in valuation allowance ......................      34,891        65,896        64,580
      Impairment of goodwill .............................          --        99,138            --
      Accretion and accrued dividends on preferred stock .      18,360        15,632        13,390
      Deferred compensation ..............................         333         5,588        11,348
      Amortization on goodwill ...........................          --            --        12,372
      Other ..............................................      (1,696)       (2,812)       (1,230)
                                                              --------     ---------     ---------
                                                              $     --     $      --     $      --
                                                              ========     =========     =========
</TABLE>

NOTE 16. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

<TABLE>
<CAPTION>
Supplemental disclosures of cash flow information (in thousands):      2003       2002       2001
                                                                       ----       ----       ----
<S>                                                                  <C>        <C>        <C>
    Interest paid ...............................................    $29,838    $32,402    $53,072
    Capital lease obligations for IRUs ..........................    $ 1,024    $19,966    $10,972
    Capital lease obligations for other equipment ...............    $    --    $   220    $    --
    Issuance of common stock for employer 401(k) contribution ...    $   410    $   677    $    --
</TABLE>

In December 2001, the Company acquired certain network assets from FairPoint
through the issuance of 2,500,000 shares of common stock in the amount of $8.8
million, based on the stock price on the closing date. In addition, as part of
the transaction, the Company purchased the retail accounts receivable of
FairPoint. The total cash consideration for the transaction was $5.7 million.
The transaction was completed in May 2002, with the issuance of an additional
1,000,000 shares of common stock in the amount of $1.8 million, based on the
stock price on that date.

NOTE 17. RELATED PARTIES

The Company maintains a master facilities agreement with Fibertech, a company
that designs, constructs and leases high performance fiber networks in second
and third tier markets in the Northeast and Mid-Atlantic regions of the United
States. The agreement provides the Company with a 20-year IRU for fiber, without
electronics, in 13 of Choice One's market cities. As of and for the years


                                     - 74 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

ended December 31, 2003 and 2002, the amount paid to Fibertech was $0.7 million
and $0.3 million, respectively. At December 31, 2003 and 2002, the amount owed
to Fibertech was $31.4 million and $30.6 million, respectively. The amount owed
to Fibertech, as stated, is the present value of the future minimum lease
payments.

In addition to the master facilities agreement, the Company made a minority
equity investment in Fibertech, in return for which the Company has the right to
appoint one representative to its board of managers, and has a vote in
determining the new markets in which Fibertech will develop and build local
loops. The Company's Chief Executive Officer and Chairman serves on Fibertech's
Board of Managers.

In addition, Fleet Equity Partners, a related party to the Company, has a
significant equity investment in Fibertech.

The Company also maintains a fiber optic and grant of indefeasible right to use
agreement with RVP Fiber L.L.C. The 20-year IRU was acquired as part of the
acquisition of US Xchange. A shareholder of RVP Fiber L.L.C. is also a
shareholder of the Company, and has the right to appoint one representative to
the board of directors of the Company pursuant to the merger agreement with US
Xchange.

Morgan Stanley Capital Partners, a related party to the Company, purchased
200,000 shares of the Company's series A senior cumulative preferred stock on
August 1, 2000. Morgan Stanley Capital Partners is also a lender of the
Company's Term C loan.

Morgan Stanley Senior Funding, a related party to the Company, was sole lead
arranger and one of the lenders for the Company's subordinated notes and was one
of the lenders for the Company's senior credit facility.

In August 2001, the Company loaned an aggregate of $2.2 million to its chief
executive officer and top four executives. The loans bear interest at a rate of
5.72% and have a term of three years (subject to acceleration in the event of
termination of employment). The loans, which are non-recourse and are secured by
100% of the common stock owned by the respective executives, are included as a
reduction to additional paid-in capital in the consolidated financial
statements.

NOTE 18. COMMITMENTS AND CONTINGENCIES

LITIGATION

From time to time, the Company is involved in legal proceedings arising in the
ordinary course of business. Other than as described below, the Company believes
there is no litigation pending against it that could have, individually or in
the aggregate, a material adverse effect on its financial position, results of
operations or cash flows.

On November 20, 2001, the Company and three of its officers were named in a
complaint filed in the United States District Court of the Southern District of
New York on behalf of a class of persons consisting of certain purchasers of the
Company's common stock in its initial public offering which was completed on
February 23, 2000. The complaint seeks damages based on allegations that the
Company's Registration Statement and Prospectus relating to the offering
contained material misstatements and/or omissions regarding the compensation
received by the underwriters of the offering and certain transactions engaged in
by the underwriters. This case, which has been consolidated with more than 300
other cases against other companies involving similar allegations, also names
six underwriters of the Company's offering and the offerings of other issuers,
and alleges that the underwriters engaged in a pattern of conduct to extract
inflated commissions in excess of the amounts disclosed in offering materials
and manipulated the post-offering markets in connection with hundreds of
offerings by engaging in stabilizing transactions and issuing misleading and
fraudulent analyst and research reports. The complaint alleges that the Company
is strictly liable under Section 11 of the Securities Act of 1933 because Item
508 of Regulation S-K allegedly required the disclosure of commissions to be
paid to underwriters and of stabilizing transactions, and that the Company and
its officers acted with scienter, or recklessness, in failing to disclose these
facts, in violation of Section 10(b) of the Securities Exchange Act and Rule
10b-5 promulgated thereunder. The claims against the individual defendants were
dismissed without prejudice, by an agreement with the plaintiffs. After the
court denied motions to dismiss the cases, the parties entered into a mediation
which has resulted in the execution of a Memorandum of Understanding by the
Company and approximately 300 other issuers who are the subject of similar
litigation. The settlement contemplated by the Memorandum of Understanding will
not involve any payments by the Company and would terminate only the claims by
the plaintiffs against issuers. The claims against the underwriters will
continue, and the Company will be required to participate in limited discovery
related to those claims. It is expected that a Settlement Agreement formalizing
the terms of the settlement will be signed within the next 90 days and the
processes to finalize the settlement, including the certification of a class and
obtaining court approval of the settlement, will continue through at least the
end of the year. There are a number of conditions to the finalization of the
settlement and it is not presently possible to predict whether


                                     - 75 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

all of those conditions will be satisfied.

OPERATING LEASE AGREEMENTS

The Company leases office space and certain other equipment under various
operating leases. The majority of these leases expire through 2011, with less
than 1% expiring through 2019. The minimum aggregate payments under
noncancelable leases are as follows for the years ending December 31 (in
thousands):

<TABLE>
<S>                                                         <C>
          2004........................................      $    7,926
          2005........................................           7,183
          2006........................................           6,832
          2007........................................           6,709
          2008........................................           6,227
          Thereafter..................................           5,823
                                                            ----------
                                                            $   40,700
                                                            ==========
</TABLE>

Rent expense for the years ended December 31, 2003, 2002 and 2001 was
approximately $7.1 million, $8.1 million and $7.7 million, respectively.

401(k) PLAN

The Company provides a defined contribution 401(k) plan to substantially all of
its employees meeting certain service and eligibility requirements. The Company
makes a monthly matching contribution equal to 50 percent of the employees'
contributions up to a maximum of 6 percent of their eligible compensation. The
matching contribution vests 20% per year beginning after the first year of
employment. The matching contribution may be made in cash or common stock, at
the Company's option. In December 2001, 3,000,000 shares of common stock were
authorized for use in the 401(k) plan. As of December 31, 2003, 2,688,996 shares
of common stock had been issued in the 401(k) plan as matching contributions.
Matching contributions were approximately $1.0 million, $1.8 million and $1.3
million during the years ended December 31, 2003, 2002 and 2001, respectively.

ANNUAL INCENTIVE PLAN

All full-time noncommissioned Choice One employees are eligible to participate
in the Company's bonus program. The total amount included in operations for
incentive bonuses was approximately $1.2 million, $0.1 million and $1.5 million
during the years ended December 31, 2003, 2002 and 2001, respectively.

OTHER AGREEMENTS

The Company maintains sponsorship agreements with a number of professional
sports teams, including the Buffalo Bills, New England Patriots, Pittsburgh
Steelers and Green Bay Packers. Under these agreements, the Company obtains
certain marketing and signage rights and becomes the exclusive
telecommunications provider for these teams. For the marketing and signage
rights, the Company commits to payments under varying terms of the individual
agreements. The following table summarizes the annual commitments under these
agreements for the years shown as of December 31, 2003 (in thousands):

<TABLE>
<CAPTION>
                                        2004     2005       2006      2007      2008     TOTAL
                                        ----     ----       ----      ----      ----     -----
<S>                                   <C>       <C>        <C>       <C>       <C>      <C>
Total commitments...................  $ 1,215   $  878     $  421    $  335    $  170   $ 3,019
</TABLE>

Payments under these sponsorship agreements are expensed on a straight-line
method over the life of each agreement.

The Company maintains a master facilities agreement with Fibertech. The
agreement includes preferred pricing for the first five years of the agreement.
The Company has committed to four fibers in each cable in 13 cities. The
Company's commitment could be up to $74.4 million over the 20-year term of the
agreement, subject to certain performance criteria and price reductions in
accordance with the agreement.

The Company maintains agreements with WilTel Communications Group ("WilTel") and
Global Crossing ("Global") for network access. These agreements require minimum
commitments on the part of the Company. The agreement with WilTel is for a term
of 42 months, expiring in February 2006, and requires a minimum monthly
commitment that totals $0.7 million per year. The agreement with Global is for a
term of approximately 2 years, expiring in December 2004, and requires a minimum
monthly commitment that totals $1.8 million per year.


                                     - 76 -
<PAGE>
                 CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                              1ST QUARTER      2ND QUARTER      3RD QUARTER      4TH QUARTER
2003
<S>                                           <C>              <C>              <C>              <C>
Revenue ..................................    $     80,100     $     82,189     $     80,822     $     79,780
Loss from operations .....................          (9,890)          (7,028)          (5,272)          (6,981)
Net loss applicable to common stockholders         (38,619)         (36,621)         (35,228)         (37,784)
Basic and diluted net loss per share .....    $      (0.72)    $      (0.68)    $      (0.65)    $      (0.70)

2002
Revenue ..................................    $     70,595     $     73,191     $     74,439     $     72,554
Loss from operations .....................         (33,205)        (324,114)         (39,352)         (21,616)
Net loss applicable to common stockholders         (57,809)        (349,828)         (65,957)         (50,527)
Basic and diluted net loss per share .....    $      (1.37)    $      (8.17)    $      (1.47)    $      (0.97)

2001
Revenue ..................................    $     34,850     $     41,751     $     48,792     $     56,205
Loss from operations .....................         (52,681)         (52,093)         (47,947)         (44,844)
Net loss applicable to common stockholders         (74,068)         (74,010)         (70,601)         (68,349)
Basic and diluted net loss per share .....    $      (1.96)    $      (1.87)    $      (1.78)    $      (1.71)
</TABLE>

As described in Note 8, the Company recorded an adjustment of $4.6 million
($0.09 on a per share basis) in the fourth quarter of fiscal 2002 relating to
previously recorded revenue which should have been deferred. The impact of not
previously deferring revenue was immaterial to prior quarterly periods for 2002
and 2001.


                                     - 77 -
<PAGE>
                         CHOICE ONE COMMUNICATIONS INC.

                 SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              ADDITIONS
                                                                      Charged
                                     January 1,      Charged to     (credited) to                   December 31,
                                        2003          expense      other accounts    Deductions         2003
                                    ------------    ------------   --------------   ------------    ------------
<S>                                 <C>             <C>            <C>              <C>             <C>
Allowance for doubtful accounts     $     13,583    $      3,349    $        334    $     14,225    $      3,041
Deferred tax valuation allowance    $    160,133    $     34,891    $         --    $         --    $    195,024
Restructuring costs ............    $      4,721    $         --    $       (535)   $        788    $      3,398
</TABLE>

<TABLE>
<CAPTION>
                                                               ADDITIONS
                                     January 1,      Charged to      Charged to                     December 31,
                                        2002           expense     other accounts    Deductions         2002
                                    ------------    ------------   --------------   ------------    ------------
<S>                                 <C>             <C>            <C>              <C>             <C>
Allowance for doubtful accounts     $      3,289    $     18,747    $        646    $      9,099    $     13,583
Deferred tax valuation allowance    $    108,429    $     51,704    $         --    $         --    $    160,133
Restructuring costs ............    $         --    $      5,282    $         --    $        561    $      4,721
</TABLE>

<TABLE>
<CAPTION>
                                                                ADDITIONS
                                     January 1,      Charged to      Charged to                     December 31,
                                        2001           expense     other accounts    Deductions         2001
                                    ------------    ------------   --------------   ------------    ------------
<S>                                 <C>             <C>            <C>              <C>             <C>
Allowance for doubtful accounts     $      2,372    $      2,756    $      1,133    $      2,952    $      3,289
Deferred tax valuation allowance    $     43,849    $     64,580    $         --    $         --    $    108,429
</TABLE>


                                     - 78 -
<PAGE>
                                   SIGNATURES

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

Dated:  March 30, 2004

                                 CHOICE ONE COMMUNICATIONS INC.


                                 By:    /s/ Steve M. Dubnik
                                    ----------------------------------------

                                    Steve M. Dubnik, Chairman of the Board,
                                    President and Chief Executive Officer

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

<TABLE>
<CAPTION>
                    Name                                      Title                               Date
                    ----                                      -----                               ----
<S>                                           <C>                                            <C>
                                              Chairman, President and Chief                  March 30, 2004
        /s/ Steve M. Dubnik                   Executive Officer (Principal
        ---------------------------           Executive Officer)
              Steve M. Dubnik
                                                                                             March 30, 2004
                                              Executive Vice President and Chief
        /s/ Ajay Sabherwal                    Financial Officer (Principal
        ---------------------------           Financial and Accounting Officer)
               Ajay Sabherwal

        /s/  John B. Ehrenkranz                             Director                         March 30, 2004
        ---------------------------
             John B. Ehrenkranz

        /s/  Howard Hoffen                                  Director                         March 30, 2004
        ---------------------------
               Howard Hoffen

        /s/  Leigh Abramson                                 Director                         March 30, 2004
        ---------------------------
               Leigh Abramson

        /s/ Louis L. Massaro                                Director                         March 30, 2004
        ---------------------------
              Louis L. Massaro

        /s/ Emil D. Duda
        ---------------------------
                Emil D. Duda                                Director                         March 30, 2004
</TABLE>


                                     - 79 -
<PAGE>
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER       DESCRIPTION                                           LOCATION
    ------       -----------                                           --------
<S>              <C>                                                   <C>
      3.1        Amended and Restated Certificate of Incorporation     Incorporated by reference from Exhibit 3.1
                                                                       to Choice One Communication Inc.'s
                                                                       Registration Statement on Form S-1 declared
                                                                       effective on February 16, 2000 located under
                                                                       Securities and Exchange Commission File No.
                                                                       333-91321 ("February 2000 Registration
                                                                       Statement")

      3.2        Amended and Restated Bylaws                           Incorporated by reference from Exhibit 3.2
                                                                       to the February 2000 Registration Statement

      3.3        Certificate of Designations for Series A Senior       Incorporated by reference from Exhibit 3.1
                 Cumulative Preferred Stock                            to the August 10, 2000 8-K filing located
                                                                       under the Securities and Exchange Commission
                                                                       File No. 29279

      3.4        Certificate of Amendment of Certificate of            Incorporated by reference from Exhibit 10.25
                 Designations for Series A Senior Cumulative to        the Company's 10-K filed on April 1, 2002
                 Preferred Stock of Choice One Communications Inc.

      3.5        Certificate of Amendment of Certificate of            Incorporated by reference from Exhibit 3.4
                 Incorporation with Certificate of Designations, to    the Company's 10-Q filed on May 15, 2002.
                 Preferences and Rights of Series A Senior
                 Cumulative Preferred Stock dated March 30, 2002

      3.6        Certificate of Amendment of Certificate of            Incorporated by reference from Exhibit 4.6
                 Designations for Series A Senior Cumulative           to the Company's 8-K filed on September 27,
                 Preferred Stock                                       2002.

      4.1        Registration Rights Agreement dated as of July 8,     Incorporated by reference from Exhibit 10.10
                 1998, among Choice One Communications Inc., the       to the February 2000 Registration Statement
                 Investor Holders and the Management Holders

      4.2        Amendment No. 1 dated as of February 18, 1999 to      Incorporated by reference from Exhibit 10.11
                 Registration Rights Agreement dated as of July 8,     to the February 2000 Registration Statement
                 1998, among Choice One Communications Inc., the
                 Investor Holders and the Management Holders

      4.3        Amendment No. 2 dated as of June 30, 1999 to          Incorporated by reference from Exhibit 10.12
                 Registration Rights Agreement dated as of July 8,     to the February 2000 Registration Statement
                 1998, among Choice One Communications Inc., the
                 Investor Holders and the Management Holders

      4.4        Amendment No. 3 dated as of June 30, 1999 to          Incorporated by reference from Exhibit 10.13
                 Registration Rights Agreement dated as of July 8,     to the February 2000 Registration Statement
                 1998, among Choice One Communications Inc., the
                 Investor Holders and the Management Holders

      4.5        Amendment No. 4 dated as of August 1, 2000 to         Incorporated by reference from Exhibit 10.1
                 Registration Rights Agreement dated as of July 8,     to the Company's 8-K filed on August 10, 2000
                 1998, among Choice One Communications Inc., the
                 Investor Holders and the Management Holders
</TABLE>


                                     - 80 -
<PAGE>
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER       DESCRIPTION                                           LOCATION
    ------       -----------                                           --------
<S>              <C>                                                   <C>
      4.6        Amendment No. 5 dated as of November 9, 2001 to       Incorporated by reference from Exhibit 10.22
                 Registration Rights Agreement dated as of July 8,     to the Company's 10-K filed on April 1, 2002
                 1998, among Choice One Communications Inc., the
                 Investor Holders and the Management Holders

      4.7        Amendment No. 6 dated as of May 22, 2002 to           Incorporated by reference from Exhibit 10.23
                 Registration Rights Agreement dated as of July 8,     to the Company's 10-Q filed on August 14,
                 2002 among Choice One Communications Inc., the        2002
                 Investor Holders and the Management Holders.

      4.8        Amendment No. 7 dated as of September 13, 2002 to     Incorporated by reference from Exhibit 4.2
                 Registration Rights Agreement dated as of July 18,    to the Company's 8-K filed on September 27,
                 1998, among Choice One Communications Inc., the       2002
                 Investors Holders and the Management Holders

      4.9        Debt Registration Rights Agreement dated as of        Incorporated by reference from Exhibit 10.23
                 November 9, 2001 among Choice One Communications      to the Company's 10-K filed on April 1, 2002
                 Inc., Morgan Stanley Senior Funding, Inc., First
                 Union Investors and CIBC Inc.

     4.10        Equity Registration Rights Agreement dated as of      Incorporated by reference from Exhibit 10.24
                 November 9, 2001 among Choice One Communications      to the Company's 10-K filed on April 1, 2002
                 Inc., Morgan Stanley Senior Funding, Inc., First
                 Union Investors and CIBC Inc.

     4.11        Amendment No. 1 dated as of September 13, 2002 to     Incorporated by reference from Exhibit 4.1
                 Equity Registration Rights Agreement dated as of      to the Company's 8-K filed on September 27,
                 November 9, 2001, among Choice One Communications     2002
                 Inc., Morgan Stanley Senior Funding, Inc.,
                 Wachovia Investors, Inc. (f/k/a First Union
                 Investors, Inc.), and CIBC Inc.

     4.12        Investor Rights Agreement dated as of December 19,    Incorporated by reference from Exhibit 10.25
                 2001 between FairPoint Communications Solutions       to the Company's 10-K filed on April 1, 2002
                 Corp. and Choice One Communications Inc.

     4.13        Agreement dated as of March 31, 2002 between Choice   Incorporated by reference from Exhibit 10.41
                 One Communications Inc. and the Holders set forth     to the Company's 10-Q filed on May 15, 2002.
                 on the signature pages thereto (Morgan
                 Stanley Dean Witter Capital Partners IV,
                 L.P., MSDW IV 892 Investors, L.P., Morgan
                 Stanley Dean Witter Capital Investors IV,
                 L.P.)

     4.14        Warrant to Purchase Shares of Common Stock of         Incorporated by reference from Exhibit 10.4,
                 Choice One Communications Inc.                        10.5 and 10.6 to the Company's 8-K filed on
                                                                       August 10, 2000

     4.15        Warrant to Purchase Shares of Common Stock of         Incorporated by reference from Exhibit
                 Choice One Communications Inc.                        10.42, 10.43 and 10.44 to the Company's 10-K
                                                                       filed on April 1, 2002

     4.16        Form of Warrant for the Purchase of Shares of         Incorporated by reference from Exhibit 10.44
                 Common Stock of Choice One Communications Inc.        to the Company's 10-Q filed on May 15, 2002.
</TABLE>


                                     - 81 -
<PAGE>
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER       DESCRIPTION                                           LOCATION
    ------       -----------                                           --------
<S>              <C>                                                   <C>
     4.17        Form of Warrant for the Purchase of Shares of         Incorporated by reference from Exhibit 10.45
                 Common Stock of Choice One Communications Inc.        to the Company's 10-Q filed on May 15, 2002.
                 (warrant to purchase a number of shares in
                 accordance with the definition of warrant share
                 amount)

     4.18        Form of Warrant for the Purchase of Shares Of         Incorporated by reference from Exhibit 4.3
                 Common Stock Of Choice One Communications Inc.        to the Company's 8-K filed on September 27,
                 (warrant to purchase a number of shares in            2002
                 accordance with the definition of Warrant Share
                 Amount) dated September 13, 2002

     4.19        Form of Warrant for the Purchase of Shares Of         Incorporated by reference from Exhibit 4.4
                 Common Stock Of Choice One Communications Inc.        to the Company's 8-K filed on September 27,
                 dated September 13, 2002                              2002

     4.20        Form of Warrant for the Purchase of Shares Of         Incorporated by reference from Exhibit 4.5
                 Common Stock Of Choice One Communications Inc.        to the Company's 8-K filed on September 27,
                 (warrant to purchase a number of shares in            2002
                 accordance with the definition of Warrant Share
                 Amount) dated September 13, 2002

     4.21        Securities Purchase Agreement dated as of August 1,   Incorporated by reference from Exhibit 10.7
                 2000 among Morgan Stanley Dean Witter Capital         to the Company's 8-K filed on August 10, 2000
                 Partners IV, L.P., Morgan Stanley Dean Witter
                 Capital Partners IV 892 Investors, L.P.,
                 Morgan Stanley Dean Witter Capital Investors
                 IV, L.P., and Choice One Communications Inc.
                 relating to the purchase and sale of
                 securities of Choice One Communications Inc.

     4.22        Warrant Issuance Agreement dated as of September      Incorporated by reference from Exhibit 10.8
                 13, 2002 among Choice One Communications Inc., the    to the Company's 8-K filed on September 27,
                 Issuer, Wachovia Investors, Inc., Morgan Stanley      2002
                 Emerging Markets Inc., CIBC Inc., Morgan
                 Stanley Dean Witter Capital Partners IV,
                 L.P., MSDW IV 892 Investors, L.P., Morgan
                 Stanley Dean Witter Capital Investors IV,
                 L.P., the Holders and Morgan Stanley & Co.
                 Incorporated

     10.1        1998 Management Stock Incentive Plan of Choice One    Incorporated by reference from Exhibit 4.1
                 Communications Inc. (May 2000 Restatement)            to the September 29, 2000 S-8 located under
                                                                       Securities and Exchange Commission File No.
                                                                       333-47002

     10.2        Amendment No. 1 to the 1998 Management Stock          Incorporated by reference from Exhibit 4.4
                 Incentive Plan of Choice One Communications Inc.      to the December 21, 2001 S-8 located under
                 (May 2000 Restatement)                                Securities and Exchange Commission File No.
                                                                       333-75712

     10.3        1999 Directors' Stock Incentive Plan of Choice One    Incorporated by reference from Exhibit 4.1
                 Communications Inc.                                   to the September 29, 2000 S-8 located under
                                                                       Securities and Exchange Commission File No.
                                                                       333-47008

</TABLE>


                                     - 82 -
<PAGE>
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER       DESCRIPTION                                           LOCATION
    ------       -----------                                           --------
<S>              <C>                                                   <C>
     10.4        Transaction Agreement, dated as of July 8, 1998,      Incorporated by reference from Exhibit 10.3
                 among Choice One Communications Inc., Choice One      to the February 2000 Registration Statement
                 Communications L.L.C. and holders of Investor
                 Equity and Management Equity

     10.5        Amendment No. 1 dated as of December 18, 1998 to      Incorporated by reference from Exhibit 10.4
                 Transaction Agreement, dated as of July 8, 1998,      to the February 2000 Registration Statement
                 among Choice One Communications Inc., Choice One
                 Communications L.L.C. and holders of Investor
                 Equity and Management Equity

     10.6        Amendment No. 2 dated as of February 18, 1999 to      Incorporated by reference from Exhibit 10.5
                 Transaction Agreement, dated as of July 8, 1998,      to the February 2000 Registration Statement
                 among Choice One Communications Inc., Choice One
                 Communications L.L.C. and holders of Investor
                 Equity and Management Equity

     10.7        Amendment No. 3 dated as of May, 14 1999 to           Incorporated by reference from Exhibit 10.6
                 Transaction Agreement, dated as of July 8, 1998,      to the February 2000 Registration Statement
                 among Choice One Communications Inc., Choice One
                 Communications L.L.C. and holders of Investor
                 Equity and Management Equity

     10.8        Amendment No. 4 dated as of June 30, 1999 to          Incorporated by reference from Exhibit 10.7
                 Transaction Agreement, dated as of July 8, 1998,      to the February 2000 Registration Statement
                 among Choice One Communications Inc., Choice One
                 Communications L.L.C. and holders of Investor
                 Equity and Management Equity

     10.9        Amendment No. 5 dated as of June 30, 1999 to          Incorporated by reference from Exhibit 10.8
                 Transaction Agreement, dated as of July 8, 1998,      to the February 2000 Registration Statement
                 among Choice One Communications Inc., Choice One
                 Communications L.L.C. and holders of Investor
                 Equity and Management Equity

     10.10       Amendment No. 6 dated as of November 18, 1999 to      Incorporated by reference from Exhibit 10.9
                 Transaction Agreement, dated as of July 8, 1998,      to the February 2000 Registration Statement
                 among Choice One Communications Inc., Choice One
                 Communications L.L.C. and holders of Investor
                 Equity and Management Equity

     10.11       Amendment No. 7 dated as of August 1, 2000 to         Incorporated by reference from Exhibit 10.2
                 Transaction Agreement, dated as of July 8, 1998,      to the Company's 8-K filed on August 10, 2000
                 among Choice One Communications Inc., Choice
                 One Communications L.L.C and holders of
                 Investor Equity and Management Equity

     10.12       Amendment No. 8 dated as of December 20, 2000 to      Incorporated by reference from Exhibit 10.11
                 Transaction Agreement, dated as of July 8, 1998,      to the Company's 10-K filed on March 6, 2001
                 among Choice One Communications Inc., Choice
                 One Communications L.L.C and holders of
                 Investor Equity and Management Equity
</TABLE>


                                     - 83 -
<PAGE>
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER       DESCRIPTION                                           LOCATION
    ------       -----------                                           --------
<S>              <C>                                                   <C>
     10.13       Amendment No. 9 dated as of March 13, 2001 to         Incorporated by reference from Exhibit 10.12
                 Transaction Agreement, dated as of July 8, 1998,      to the Company's 10-Q filed on August 14,
                 among Choice One Communications Inc., Choice One      2001
                 Communications L.L.C. and holders of Investor
                 Equity and Management Equity

     10.14       Amendment No. 10 dated as of June 21, 2001 to         Incorporated by reference from Exhibit 10.12
                 Transaction Agreement, dated as of July 8, 1998,      to the Company's 10-Q filed on August 14,
                 among Choice One Communications Inc., Choice One      2001
                 Communications L.L.C. and holders of Investor
                 Equity and Management Equity

     10.15       Amendment No. 10 dated as of November 9, 2001 to      Incorporated by reference from Exhibit 10.15
                 Transaction Agreement, dated as of July 8, 1998,      to the Company's 10-K filed on April 1, 2002
                 among Choice One Communications Inc., Choice One
                 Communications L.L.C. and holders of Investor
                 Equity and Management Equity (this Amendment
                 No. 10 is a distinct and separate amendment
                 from the Amendment No. 10 dated June 21, 2001
                 referenced in Exhibit 10.14 above)

     10.16       Amendment No. 11 dated as of December 19, 2001 to     Incorporated by reference from Exhibit 10.16
                 Transaction Agreement, dated as of July 8, 1998,      to the Company's 10-K filed on April 1, 2002
                 among Choice One Communications Inc., Choice One
                 Communications L.L.C. and holders of Investor
                 Equity and Management Equity

     10.17       Amendment No. 13 dated as of September 12, 2002 to    Incorporated by reference from Exhibit 10.9
                 the Transaction Agreement, dated as of July 18,       to the Company's 8-K filed on September 27,
                 1998, among Choice One Communications Inc. Choice     2002
                 One Communications L.L.C. and holders of Investor
                 Equity and Management Equity (as defined therein)

     10.18       Form of Executive Purchase Agreement dated July 8,    Incorporated by reference from Exhibit 10.14
                 1998 among the Choice One Communication Inc.,         to the February 2000 Registration Statement
                 Choice One Communications L.L.C. and Certain
                 Executives of the Registrant

     10.19       Executive Purchase Agreement dated as of July 8,      Incorporated by reference from Exhibit 10.15
                 1998 among the Choice One Communication Inc.,         to the February 2000 Registration Statement
                 Choice One Communications L.L.C. and Steve M.
                 Dubnik

     10.20       Executive Purchase Agreement dated as of July 8,      Incorporated by reference from Exhibit 10.16
                 1998 among the Choice One Communication Inc.,         to the February 2000 Registration Statement
                 Choice One Communications L.L.C. and Mae
                 Squire-Dow

     10.21       Executive Purchase Agreement dated as of July 8,      Incorporated by reference from Exhibit 10.17
                 1998 among the Choice One Communication Inc.,         to the February 2000 Registration Statement
                 Choice One Communications L.L.C. and Philip
                 Yawman
</TABLE>


                                     - 84 -
<PAGE>
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER       DESCRIPTION                                           LOCATION
    ------       -----------                                           --------
<S>              <C>                                                   <C>
     10.22       Executive Purchase Agreement dated as of July 8,      Incorporated by reference from Exhibit 10.18
                 1998 among the Choice One Communication Inc.,         to the February 2000 Registration Statement
                 Choice One Communications L.L.C. and Kevin Dickens

     10.23       Executive Purchase Agreement dated as of July 8,      Incorporated by reference from Exhibit 10.19
                 1998 among the Choice One Communication Inc.,         to the February 2000 Registration Statement
                 Choice One Communications L.L.C. and Ajay Sabherwal

     10.24       Third Amended and Restated Credit Agreement dated     Incorporated by reference from Exhibit 10.1
                 as of September 13, 2002 among Choice One             to the Company's 8-K filed on September 27,
                 Communications Inc., as Guarantor, its Subsidiaries   2002
                 as Borrowers, Wachovia Investor, Inc. (f/k/a
                 First Union Investors, Inc.), as
                 Administrative Agent and Collateral Agent,
                 General Electric Capital Corporation, as
                 Syndication Agent, Morgan Stanley Senior
                 Funding, Inc., as Documentation Agent, and
                 the Lenders thereto (the "Amended Credit
                 Agreement")

     10.25       Third Amended and Restated Pledge Agreement dated     Incorporated by reference from Exhibit 10.2
                 as of September 13, 2002 made by Choice One           to the Company's 8-K filed on September 27,
                 Communications Inc. and its Subsidiaries listed on    2002
                 the signature pages thereto in favor of
                 Wachovia Investor, Inc. (f/k/a First Union
                 Investors, Inc.), as Administrative Agent,
                 for the ratable benefit of such
                 Administrative Agent and the Lenders under
                 the Amended Credit Agreement

     10.26       Third Amended and Restated Security Agreement dated   Incorporated by reference from Exhibit 4.2
                 as of September 13, 2002 made by Choice One           to the Company's 8-K filed on September 27,
                 Communications Inc. and its Subsidiaries listed on    2002
                 the signature pages thereto in favor of
                 Wachovia Investor, Inc. (f/k/a First Union
                 Investors, Inc.), as Administrative Agent,
                 for the ratable benefit of such
                 Administrative Agent and the Lenders under
                 the Amended Credit Agreement.

     10.27       Subordinated Guarantee dated as of September 13,      Incorporated by reference from Exhibit 10.7
                 2002 made by the subsidiaries of Choice One           to the Company's 8-K filed on September 27,
                 Communications Inc. listed on the signature pages     2002
                 thereto in favor of Morgan Stanley Senior
                 Funding, Inc., as Bridge Collateral Agent,
                 for the ratable benefit of itself and the
                 financial institutions as are, or may from
                 time to time become, parties to the Bridge
                 Agreement Amendment

     10.28       Bridge Financing Agreement dated as of August 1,      Incorporated by reference from Exhibit 10.3
                 2000 among Choice One Communications Inc., the        to the Company's 8-K filed on August 10, 2000
                 Lenders party hereto, and Morgan Stanley Senior
                 Funding, Inc., as Administrative Agent
</TABLE>


                                     - 85 -
<PAGE>
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER       DESCRIPTION                                           LOCATION
    ------       -----------                                           --------
<S>              <C>                                                   <C>
     10.29       Third Amendment to the Bridge Financing Agreement     Incorporated by reference from Exhibit 10.4
                 dated as of September 13, 2002, with respect to the   to the Company's 8-K filed on September 27,
                 Bridge Financing Agreement dated as of August 1,      2002
                 2000, among the Choice One Communications Inc., as
                 Borrower, Morgan Stanley Senior Funding, Inc., as
                 Administrative Agent and the Lenders thereto (the
                 "Bridge Agreement Amendment")

     10.30       Form of Rollover Note for the Bridge Financing        Incorporated by reference from Exhibit 10.46
                 Agreement dated as of August 1, 2000 among Choice     to the Company's 10-K filed on April 1, 2002
                 One Communications Inc., the Lenders party hereto,
                 and Morgan Stanley Senior Funding, Inc., as
                 Administrative Agent

     10.31       Bridge Pledge Agreement dated as of September 13,     Incorporated by reference from Exhibit 10.5
                 2002 made by Choice One Communications Inc. and its   to the Company's 8-K filed on September 27,
                 Subsidiaries listed on the signature pages thereto    2002
                 in favor of Morgan Stanley Senior Funding,
                 Inc., as Bridge Collateral Agent, for the
                 ratable benefit of itself and the financial
                 institutions as are, or may from time to time
                 become, parties to the Bridge Agreement
                 Amendment

     10.32       Bridge Security Agreement dated as of September 13,   Incorporated by reference from Exhibit 10.6
                 2002 made by Choice One Communications Inc. and its   to the Company's 8-K filed on September 27,
                 Subsidiaries listed on the signature pages thereto    2002
                 in favor of Morgan Stanley Senior Funding,
                 Inc., as Bridge Collateral Agent, for the
                 ratable benefit of itself and the financial
                 institutions as are, or may from time to time
                 become, parties to the Bridge Agreement
                 Amendment.

     10.33       Lease between the Registrant and                      Incorporated by reference from Exhibit 10.21
                 Bendersen-Rochester Associates, LLC dated October     to the February 2000 Registration Statement
                 14, 1998, as amended

     10.34       General Agreement between the Registrant and          Incorporated by reference from Exhibit 10.23
                 Lucent Technologies effective as of July 17, 1998,    to the February 2000 Registration Statement
                 as amended

     10.35       Service Bureau Agreement between the Registrant and   Incorporated by reference from Exhibit 10.24
                 Saville Systems Inc. effective September 30, 1998     to the February 2000 Registration Statement

     10.36       Agreement and Plan of Merger by and among Choice      Incorporated by reference from Exhibit 99.2
                 One Communications Inc., Barter Acquisition           to the Company's 8-K/A filed on May 16, 2000
                 Corporation, US Xchange, Inc. and the Stockholder
                 of US Xchange, Inc. dated as of May 14, 2000

     10.37       Fiber Optic Agreement and Grant of IRU dated          Incorporated by reference from Exhibit 10.9
                 August 1, 2000 by and between Choice One              to the Company's 8-K filed on August 10, 2000
                 Communications Inc. and RVP Fiber Company,
                 L.L.C.
</TABLE>


                                     - 86 -
<PAGE>
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER       DESCRIPTION                                           LOCATION
    ------       -----------                                           --------
<S>              <C>                                                   <C>
     10.38       Form of Executive Employment Agreement                Incorporated by reference from Exhibit 10.10
                 between former executives of US Xchange, Inc.         to the Company's 8-K filed on August 10, 2000
                 and Choice One Communications Inc.

     10.39       Master Facilities Agreement between Fiber             Incorporated by reference from Exhibit 10.1
                 Technologies Operating Company, LLC and               to the Company's 10-Q for the quarter ended
                 Choice One  Communications Inc. dated as of           June 30, 2000
                 May 31, 2000 *

     10.40       Amendment No. 1 dated as of December 7, 2001 to       Incorporated by reference from Exhibit 10.45
                 Master Facilities Agreement and Assignment and        to the Company's 10-Q for the quarter ended
                 Assumption among Choice One Communications Inc.,      June 30, 2003
                 Fiber Technologies Construction Company, LLC
                 and Fiber Technologies Networks, LLC dated as
                 of May 31, 2000. *

     10.41       Amendment No. 2 dated as of May 2, 2002 to Master     Incorporated by reference from Exhibit 10.46
                 Facilities Agreement and Assignment and Assumption    to the Company's 10-Q for the quarter ended
                 among Choice One Communications Inc., Fiber           June 30, 2003
                 Technologies Construction Company, LLC and Fiber
                 Technologies Networks, LLC dated as of May 31,
                 2000. *

     10.42       Amendment No. 3 dated as of June 13, 2002 to Master   Incorporated by reference from Exhibit 10.47
                 Facilities Agreement and Assignment and Assumption    to the Company's 10-Q for the quarter ended
                 among Choice One Communications Inc., Fiber           June 30, 2003
                 Technologies Construction Company, LLC and Fiber
                 Technologies Networks, LLC dated as of May 31,
                 2000.

     10.43       Amendment No. 4 dated as of August 15, 2002 to        Incorporated by reference from Exhibit 10.48
                 Master Facilities Agreement and Assignment and        to the Company's 10-Q for the quarter ended
                 Assumption among Choice One Communications Inc.,      June 30, 2003
                 Fiber Technologies Construction Company, LLC and
                 Fiber Technologies Networks, LLC dated as of May
                 31, 2000. *

     10.44       Amendment No. 5 dated as of September 23, 2002 to     Incorporated by reference from Exhibit 10.49
                 Master Facilities Agreement and Assignment and        to the Company's 10-Q for the quarter ended
                 Assumption among Choice One Communications Inc.,      June 30, 2003
                 Fiber Technologies Construction Company, LLC and
                 Fiber Technologies Networks, LLC dated as of May
                 31, 2000. *

     10.45       Amendment No. 6 dated as of October 29, 2002 to       Incorporated by reference from Exhibit 10.50
                 Master Facilities Agreement and Assignment and        to the Company's 10-Q for the quarter ended
                 Assumption among Choice One Communications Inc.,      June 30, 2003
                 Fiber Technologies Construction Company, LLC and
                 Fiber Technologies Networks, LLC dated as of May
                 31, 2000. *

     10.46       Amendment No. 8 to the Master Facilities Agreement    Incorporated by reference from Exhibit 10.51
                 and Assignment and Assumption among Choice One        to the Company's 10-Q for the quarter ended
                 Communications Inc., Fiber Technologies Networks,     September 30, 2003
                 LLC and Fiber Technologies Construction Company,
                 LLC and dated as of May 31, 2000. *
</TABLE>


                                     - 87 -
<PAGE>
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER       DESCRIPTION                                           LOCATION
    ------       -----------                                           --------
<S>              <C>                                                   <C>
     10.47       Choice One Communications Inc. 401(k) Plan            Incorporated by reference from Exhibit 4.3
                                                                       to the October 23, 2000 S-8 located under
                                                                       Securities and Exchange  Commission  File No.
                                                                       333-48430

     10.48       Amendment No.1 and No. 2 to the Choice One            Incorporated by reference from Exhibit 4.4
                 Communications Inc. 401(k) Plan                       to the December 21, 2001 S-8 located under
                                                                       Securities and Exchange Commission File No.
                                                                       333-75710

     10.49       Network Transition Agreement dated as of November     Incorporated  by reference from Exhibit 10.53
                 7, 2001 between FairPoint Communications Solutions    to the Company's 10-K filed on April 1, 2002
                 Corp., Choice One Communications Inc. and selected
                 subsidiaries of Choice One Communications Inc.

     21.1        Subsidiaries of Choice One Communications Inc.        Filed herewith

     23.1        Consent of  Deloitte & Touche LLP, independent        Filed herewith
                 auditors

     23.2        Consent of  PricewaterhouseCoopers LLP, independent   Filed herewith
                 public accountants

     31.1        Certification by Chief Executive Officer filed        Filed herewith
                 herewith pursuant to 18 U.S.C. Section 1350, as
                 adopted pursuant to Section 302 of the
                 Sarbanes-Oxley Act of 2002

     31.2        Certification by Chief Financial Officer filed        Filed herewith
                 herewith pursuant to 18 U.S.C. Section 1350, as
                 adopted pursuant to Section 302 of the
                 Sarbanes-Oxley Act of 2002

     32.0        Certification by Chief Executive Officer and Chief    Filed herewith
                 Financial Officer filed herewith pursuant to
                 18 U.S.C. Section 1350, as adopted pursuant
                 to Section 906 of the Sarbanes-Oxley Act of
                 2002
</TABLE>

* Portions of this agreement or amendment have been omitted and filed separately
with the Commission pursuant to an application for confidential treatment under
Rule 24b-2, which was granted by the Commission until May 31, 2013.


                                     - 88 -