• various risks to the price and volatility of our common stock;

• our substantial amount of debt and our ability to incur additional debt in the future;

• our need for a significant amount of cash to service and repay our debt and to pay dividends on our common stock;

• restrictions contained in our debt agreements that limit the discretion of our management in operating our business;

• the ability to refinance our existing debt as necessary;

• rapid development and introduction of new technologies and intense competition in the telecommunications industry;

• risks associated with our possible pursuit of future acquisitions;

• the integration of the Company and North Pittsburgh;

• economic conditions in our service areas in Illinois, Texas and Pennsylvania;

• system failures;

• loss of large customers or government contracts;

• risks associated with the rights-of-way for our network;

• disruptions in our relationship with third party vendors;

• loss of key management personnel and the inability to attract and retain highly qualified management and personnel in the future;

• changes in the extensive governmental legislation and regulations governing telecommunications providers and the provision of telecommunications services and subsidies;

• telecommunications carriers disputing and/or avoiding their obligations to pay network access charges for use of our network;

• high costs of regulatory compliance;

• the competitive impact of legislation and regulatory changes in the telecommunications industry;

• liability and compliance costs regarding environmental regulations; and

• the additional risk factors outlined in Part I - Item 1A - "Risk Factors" incorporated by reference from our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, and the other documents that we file with the SEC from time to time that could cause our actual results to differ from our current expectations and from the forward-looking statements discussed in this Report.

Many of these risks are beyond our ability to control or predict. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this Report. Because of these risks, uncertainties, and assumptions, you should not place undue reliance on these forward-looking statements. Furthermore, forward-looking statements speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of the SEC, we do not undertake any obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise.
Overview
We are an established rural local exchange company that provides communications services to residential and business customers in Illinois, Texas and Pennsylvania. Our main sources of revenues are our local telephone businesses which offer an array of services, including local dial tone, Voice Over Internet Protocol ("VOIP") service, custom calling features, private line services, long distance, dial-up and high-speed Internet access, which we refer to as Digital Subscriber Line or DSL, inside wiring service and maintenance, carrier access, billing and collection services, telephone directory publishing, Internet Protocol digital video service, which we refer to as IPTV, wholesale transport services on a fiber optic network in Texas and edge out Competitive Local Exchange Carrier ("CLEC") services in Pennsylvania. We also operate a number of complementary businesses, which offer telephone services to county jails and state prisons, operator services, equipment sales and telemarketing and order fulfillment services.
Acquisition of North Pittsburgh and New Credit Facility On December 31, 2007, we completed our acquisition of North Pittsburgh Systems, Inc., pursuant to an Agreement and Plan of Merger, dated as of July 1, 2007. At the effective time of the Merger, 80% of the shares of North Pittsburgh common stock converted into the right to receive $25.00 in cash, without interest, per share, for an approximate total of $300.1 million in cash, and each of the remaining shares of North Pittsburgh common stock converted into the right to receive 1.1061947 shares of our common stock or an approximate total of 3.32 million shares of our common stock. The total purchase price, including fees, was $346.8 million, net of cash acquired.
In connection with the acquisition, we entered into a new credit facility that provides for:
• a $50.0 million revolving credit facility that is currently undrawn;

• a $760.0 million term loan, the proceeds of which were drawn at closing of the acquisition; and

• a delayed draw term loan ("DDTL") in the amount of up to $140.0 million which was available to us until May 1, 2008, a portion of the proceeds of which were used for the purpose of redeeming our $130.0 million of outstanding senior notes along with the payment of any accrued interest and fees, as described below under "Redemption of Senior Notes."

Proceeds from the term loan along with cash on hand were used to:
• pay off our previous credit facility of $464.0 million plus accrued interest;

• fund the cash portion of the acquisition; and

• pay fees and expenses related to the acquisition and new financing.

Redemption of Senior Notes
On April 1, 2008, we redeemed all of our outstanding senior notes. The total amount of the redemption was $136.3 million including a call premium of $6.3 million. The senior note redemption and the payment of accrued interest through the redemption date was funded using $120.0 million of borrowings on the DDTL together with cash on hand. In the second quarter of 2008, we recognized a charge of $9.2 million related to the redemption premium and the write-off of unamortized deferred financing costs in connection with the redemption. Factors Affecting Results of Operations
Revenues
Telephone Operations and Other Operations. To date, our revenues have been derived primarily from the sale of voice and data communications services to residential and business customers in our rural telephone companies' service areas. We do not anticipate significant growth in revenues in our Telephone Operations segment due to its primarily rural service area, except through acquisitions such as that of North Pittsburgh, but we do expect relatively consistent cash flow from year-to-year due to stable customer demand, limited competition in the majority of our territories and a generally supportive regulatory environment.
Local Access Lines and Bundled Services. Local access lines are an important element of our business. An "access line" is the telephone line connecting a person's home or business to the public switched telephone network. The monthly recurring revenue we generate from end users, the amount of traffic on our network and related access charges generated from other carriers, the amount of federal and state subsidies we receive and most other revenue streams are directly related to the number of local access lines in service. We had 276,793 and 286,186 local access lines in service as of June 30, 2008 and December 31, 2007, and 229,007 at June 30, 2007, prior to our acquisition of North Pittsburgh.
Many rural telephone companies have experienced a loss of local access lines due to challenging economic conditions, increased competition from wireless providers, competitive local exchange carriers and, in some cases, cable television operators. We have not been immune to these conditions. Both Suddenlink and Comcast, cable competitors in Texas, have launched a competing voice product in the second quarter, which caused a spike in our line loss for the quarter. In our estimation, cable companies are now virtually 100% launched covering 85% of our territory.
We also lost local access lines due both to the disconnection of second telephone lines by our residential customers in connection with their substituting DSL or cable modem service for dial-up Internet access and to substituting wireless service for wireline service. As of June 30, 2008 and December 31, 2007 we had 9,847 and 10,685 second lines, respectively, and we had 7,357 second lines prior to our acquisition of North Pittsburgh. The disconnection of second lines represented 9.9% and 10.8% of our residential line loss in the periods ending June 30, 2008 and June 30, 2007, respectively. We expect to continue to experience modest erosion in access lines.

We have mitigated the decline in local access lines with increased average revenue per access line by focusing on the following:
• aggressively promoting DSL service, including selling DSL as a stand-alone service;

• bundling value-adding services, such as DSL or IPTV, with a combination of local service, custom calling features, voicemail and Internet access;

• maintaining excellent customer service standards, particularly as we introduce new services to existing customers; and

• keeping a strong local presence in the communities we serve.

We have implemented a number of initiatives to gain new local access lines and retain existing local access lines by enhancing the attractiveness of the bundle with new service offerings, including unlimited long distance, and promotional offers like discounted second lines. With the launch of IPTV, we are marketing our "triple play" bundle, which includes local telephone service, DSL and IPTV. As of June 30, 2008, IPTV was available to approximately 130,000 homes in our markets. Our IPTV subscriber base has grown from 9,577 as of June 30, 2007 to 14,112 as of June 30, 2008. We launched IPTV in our Pennsylvania markets in April 2008. In addition to our access line and video initiatives, we intend to continue to integrate best practices across our Illinois, Texas and Pennsylvania regions.
Additionally, we continue to look for ways to enhance current products and introduce new services to ensure that we remain competitive and continue to meet our customers' needs. These initiatives include offering:
• hosted VOIP, which was launched in certain Texas markets in 2005 to meet the needs of small to medium sized business customers who want robust function without having to purchase a traditional key or PBX phone system;

• VOIP service for residential customers, which is being offered both as a growth opportunity and as an alternative to the traditional phone line for customers who are considering a switch to a cable competitor;

• DSL service which has been made available to users who do not have our access line. This expands our customer base and creates additional revenue generating opportunities;

• a DSL tier with speeds up to 10 Mbps is now being offered for those customers desiring greater Internet speed; and

• High definition video service and digital video recorders in all of our IPTV markets.

These efforts may act to mitigate the financial impact of any access line loss we may experience.
Because of our promotional efforts and through the acquisition of North Pittsburgh, the number of DSL subscribers we serve grew substantially. We had 86,575, 81,337 and 58,225 DSL lines in service as of June 30, 2008, December 31, 2007 and June 30, 2007, respectively. Currently over 95% of our rural telephone companies' local access lines are DSL capable.
We have also utilized service bundles, which included combinations of local service, custom calling features, voicemail and Internet access as a revenue generation tool and a customer retention tool in our Illinois and Texas markets. Our service bundles totaled 45,272, 45,971 and 45,209 at June 30, 2008, December 31, 2007 and June 30, 2007, respectively. We intend to implement a similar bundling strategy in the North Pittsburgh market as well.

Our plan is to continue to execute our customer retention program by delivering excellent customer service and improving the value of our bundle with DSL and IPTV. However, if these actions fail to mitigate access line loss, or we experience a higher degree of access line loss than we currently expect, it could have an adverse impact on our revenues and earnings.
The following sets forth several key metrics as of the end of the periods presented:

                                         June 30,       December 31,      June 30,
                                           2008           2007 (1)          2007
      Local access lines in service:
      Residential                          174,641            183,070       151,645
      Business                             102,152            103,116        77,362

      Total local access lines             276,793            286,186       229,007

      IPTV subscribers                      14,112             12,241         9,577
      ILEC DSL subscribers                  86,575             81,337        58,225

                                           100,687             93,578        67,802
      VOIP subscribers                       4,088              2,465         1,822
      CLEC Access Line Equivalents (2)      73,713             70,063             -

      Total connections                    455,281            452,292       298,631


      Long distance lines (3)              167,767            166,599       150,863
      Dial-up subscribers                    5,687              6,783        10,223

(1) In connection with the acquisition of North Pittsburgh, we acquired 36,411 residential access lines, 25,988 business access lines, 14,713 DSL subscribers, 87 VOIP subscribers, 70,063 CLEC access line equivalents and 18,223 long distance lines.

(2) CLEC access line equivalents represent a combination of voice services and data circuits. The calculations represent a conversion of data circuits to an access line basis. Equivalents are calculated by converting data circuits (basic rate interface, primary rate interface, DSL, DS-1, DS-3 and Ethernet) and SONET-based (optical) services
(OC-3 and OC-48) to the equivalent of an access line.

(3) Reflects the inclusion of long distance service provided as part of our VOIP offering while excluding CLEC long distance subscribers.

As of December 31, 2007 and for the period ended June 30, 2008, our operating statistics include metrics and results associated with our acquisition of North Pittsburgh. In addition, we are now including VOIP lines and CLEC access line equivalents in its total connection count and reflecting T-1 voice grade equivalents in its access line count for the Pennsylvania RLEC, which is consistent with our methodology in Illinois and Texas and with industry norms. Expenses
Our primary operating expenses consist of cost of services, selling, general and administrative expenses and depreciation and amortization expenses. Cost of Services and Products
Our cost of services includes the following:
• operating expenses relating to plant costs, including those related to the network and general support costs, central office switching and transmission costs and cable and wire facilities;

• general plant costs, such as testing, provisioning, network, administration, power and engineering; and

• the cost of transport and termination of long distance and private lines outside our rural telephone companies' service area.

We have agreements with carriers to provide long distance transport and termination services. These agreements contain various commitments and expire at various times. We believe we will meet all of our commitments in these agreements and believe we will be able to procure services for future periods. We are currently procuring services for future periods, and at this time, the costs and related terms under which we will purchase long distance transport and termination services have not been determined. We do not expect, however, any material adverse affects from any changes in any new service contract. Selling, General and Administrative Expenses Selling, general and administrative expenses include the following:
• selling and marketing expenses;

• expenses associated with customer care;

• billing and other operating support systems; and

• corporate expenses, including professional service fees, and non-cash stock compensation.

Our Telephone Operations segment incurs selling, marketing and customer care expenses from its customer service centers and commissioned sales representatives. Our customer service centers are the primary sales channels for residential and business customers with one or two phone lines, whereas commissioned sales representatives provide customized solutions to larger business customers. In addition, we use customer retail centers for various communication needs, including new telephone, Internet and IPTV purchases in Illinois and Texas.
Each of our Other Operations businesses primarily use an independent sales and marketing team comprised of dedicated field sales account managers, management teams and service representatives to execute our sales and marketing strategy. We have operating support and back office systems that are used to enter, schedule, provision and track customer orders, test services and interface with trouble management, inventory, billing, collections and customer care service systems for the local access lines in our operations. We have migrated most key business processes of our Illinois and Texas operations onto single, company-wide systems and platforms. Our objective is to improve profitability by reducing individual company costs through centralization, standardization and sharing of best practices. We successfully completed the integration of our Illinois and Texas billing systems in the third quarter of 2007. Upon closing of the acquisition we were able to immediately convert the North Pittsburgh accounting and payroll functions to our existing systems and began integrating many other functions to our systems. For the six months ended June 30, 2008 and June 30, 2007 we spent $2.1 million and $0.5 million, respectively, on integration and restructuring expenses (which included projects to integrate our support and back office systems).
Depreciation and Amortization Expenses
We recognize depreciation expenses for our regulated telephone plant using rates and lives approved by the Illinois Commerce Commission, the Public Utility Commission of Texas and the Pennsylvania Public Utility Commission. The provision for depreciation on nonregulated property and equipment is recorded using the straight-line method based upon the following useful lives:

                                                          Years
                  Buildings                                15-35
                  Network and outside plant facilities      5-30
                  Furniture, fixtures and equipment         3-17
                  Capital leases                              11

Amortization expenses are recognized primarily for our intangible assets considered to have finite useful lives on a straight-line basis based on the pattern over which we believe we will derive value from our customer lists. In accordance with Statement of Financial Accounting Standards, or SFAS, No. 142, "Goodwill and Other Intangible Assets," goodwill and intangible assets that have indefinite useful lives are not amortized but rather are tested at least annually for impairment. Because trade names have been determined to have indefinite lives, they are not amortized. Customer relationships are amortized over their useful life, at a weighted average life of approximately 10 years. The following summarizes our revenues and operating expenses on a consolidated basis for the three months ended June 30, 2008 and June 30, 2007:

                                                           Three Months Ended June 30,
                                                    2008                                 2007
                                                           % of Total                           % of Total
                                       $ (millions)         Revenues        $ (millions)         Revenues
Revenues
Telephone Operations
Local calling services                 $        26.5              24.9 %    $        21.0              26.0 %
Network access services                         24.6              23.1               17.5              21.6
Subsidies                                       13.4              12.6               11.1              13.8
Long distance services                           6.3               5.9                3.6               4.4
Data and internet services                      15.2              14.3                9.1              11.2
Other services                                   9.6               9.0                8.7              10.8

Total Telephone Operations                      95.6              89.8               71.0              87.8
Other Operations                                10.9              10.2                9.9              12.2

Total operating revenues                       106.5             100.0               80.9             100.0

Expenses
Operating expenses
Telephone Operations                            52.9              49.7               37.9              46.9
Other Operations                                10.2               9.6               10.1              12.5
Depreciation and amortization                   22.3              20.9               16.6              20.5

Total operating expenses                        85.4              80.2               64.6              79.9


Income from operations                          21.1              19.8               16.3              20.1

Interest expense, net                          (16.0 )           (15.0 )            (11.5 )           (14.2 )
Other income (expense), net                     (4.7 )            (4.4 )              1.7               2.1
Income tax expense                              (0.2 )            (0.2 )             (1.0 )            (1.2 )

Net income                             $         0.2               0.2 %    $         5.5               6.8 %

Segments
In accordance with the reporting requirement of SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," we have two reportable business segments, Telephone Operations and Other Operations. The results of operations for North Pittsburgh are included in the Telephone Operations segment for the periods following its acquisition on December 31, 2007. The results of operations discussed below reflect our consolidated results.

Results of Operations
For the Three Months Ended June 30, 2008 Compared to June 30, 2007 Revenues
Our revenues increased by 31.6% or $25.6 million, to $106.5 million for the three months ended June 30, 2008, from $80.9 million for the three months ended June 30, 2007. Our discussion and analysis of the components of the variance follows:
Telephone Operations Revenues
Local calling services revenues increased by 26.2% or $5.5 million, to $26.5 million for the three months ended June 30, 2008 compared to $21.0 million for the same period in 2007. The increase is primarily due to $6.8 million of incremental local calling revenue as a result of the acquisition of North Pittsburgh. Without the effect of North Pittsburgh, local calling revenue decreased by $1.3 million primarily due to a decline in local access lines as previously discussed under "Factors Affecting Results of Operations." Network access services revenues increased by 40.6%, or $7.1 million, to $24.6 million for the three months ended June 30, 2008 compared to $17.5 million for the same period in 2007. The increase is primarily due to $7.6 million of incremental network access revenue as a result of the acquisition of North Pittsburgh. Without the effect of North Pittsburgh, network access revenue decreased by $0.5 million. The decrease in revenue is primarily the result of decreasing minutes of use.
Subsidies revenues increased by 20.7%, or $2.3 million, to $13.4 million for the three months ended June 30, 2008 compared to $11.1 million for the same period in 2007. The increase is primarily due to $1.9 million of incremental subsidy revenue as a result of the acquisition of North Pittsburgh. Without the effect of North Pittsburgh, subsidy revenue increased by $0.4 million. The increase is primarily due to the impact of out of period settlements in our interstate common line support fund.
Long distance services revenues increased by 75.0% or $2.7 million, to $6.3 million for the three months ended June 30, 2008 compared to $3.6 million for the same period in 2007. The increase is primarily due to $3.0 million of . . .