Overview

Broadly, our strategy is to bring our business segment operations to positive operating income while maximizing positive cash flow in order to generate shareholder value from those operations. While operating income for business segment operations was negative in 2008, business segment operations were self-funded in 2008. We recognize that the 9% increase in net income for the year ended December 31, 2008, in comparison to the year ended December 31, 2007, was largely due to our Company's ownership in the O-P wireless partnership; however, we have also taken steps to improve business segment operating income and cash flow.

While 2007 was a year of significant reductions in operating costs coupled with establishing rigorous control over operating processes, 2008 has been a year of building the foundation for revenue improvements while continuing to drive down operating costs and generating positive net cash from operating activities. The strategy for improving operating revenue has been focused on stabilizing our ILEC and growing our CLEC operations. To build the foundations for those revenue improvements, we incurred costs to build both an internal direct sales force and an external agent network while concomitantly building out the competitive network.

Growing Revenues - Our ILEC continues to experience a loss of residential access lines due to sustained competition and wireless substitution for landline telephone services. To offset the revenue decline from residential access line losses, we focused on introducing new products and services to our ILEC customers while expanding our CLEC operating areas and introducing innovative new products and services to those customers.

In our ILEC areas, we became a reseller of DirecTV and created an alternative Triple Play bundle to complement our existing landline Triple Play bundle. This enabled us to expand our ability to provide a Triple Play bundle to include those customers previously not in our video serving area as well as offer more competitive video

pricing plans. Building on this more robust product set, we also intensified customer retention and recovery efforts to help stabilize the ILEC.

To generate additional revenue in our CLEC areas, we introduced an innovative new flagship business product named VoiceNet Complete, a hosted VoIP service primarily targeted at small- and medium-sized business customers. This product was also introduced to our ILEC business customers as a retention strategy. By the end of 2008, we added 80 new multi-year business contracts for our VoiceNet Complete services. We recognize recurring revenue over the life of VoiceNet contracts. When the necessary equipment is purchased outright by the customer or financed through a third party lender, we recognize the one time equipment revenue at the time of sale.

Controlling Expenses - We experienced a substantial reduction in employee benefit costs attributable to reduced management benefits, as well as, modified union contracts negotiated in the second quarter of the year. In addition, depreciation expenses declined as older equipment was retired from the network. Offsetting these lower expenses were higher wage costs due to the increase in sales staff and the costs associated with implementing our revenue initiatives, including the build out of our CLEC network. Also, a devastating ice storm in December 2008 resulted in significant one-time expenditures of operating expense and capital to restore service to our affected customers. We expect that some of these expenditures may be recovered by insurance proceeds in 2009.

Managing Capital Expenditures - We continued to invest in our operations to gain enhanced operating efficiencies and to enable the introduction of new services to our customers. This included the deployment of capital to upgrade our broadband services and build out our VoIP capability.

Creating Shareholder Value - We are firmly committed to creating value for our shareholders through the successful implementation of the above initiatives. We also remain committed to the expansion of our CLEC activities through either building or acquiring additional capability.

Acquisition of Additional O-P Interest - ($ in thousands)

On April 10, 2007, we completed the acquisition of an additional 0.6081% limited partnership interest in O-P. FairPoint Communications, Inc. ("FairPoint") had agreed to sell its interest in O-P to Cellco Partnership d/b/a Verizon Wireless ("Verizon Wireless"). We chose to exercise our right of first refusal pursuant to the partnership agreement of O-P to purchase a corresponding pro rata share of FairPoint's interest. As a result, we purchased 8.108% of the 7.5% limited partnership interest being sold by FairPoint. The price paid was $4,376. As a result of this transaction, we now hold an 8.108% limited partnership interest in O-P. 2008 represents a full year of income from our O-P partnership with this larger interest.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. Certain of these accounting policies require management to make estimates and assumptions about future events that could materially affect the reported amounts of assets, liabilities, revenues and expenses and any disclosure of contingent assets and liabilities. In the opinion of our management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in the consolidated financial statements.

Our investment in O-P is accounted for under the equity method of accounting. Our investment in Zefcom was accounted for under the equity method prior to its sale in January 2006.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. Significant estimates include, but are not limited to, depreciation expense, allowance for doubtful accounts, pension and postretirement expenses and income taxes. Actual results could differ from those estimates.

We recognize revenue in accordance with Staff Accounting Bulletin ("SAB") 104 "Revenue Recognition in Financial Statements." We recognize revenue when
(i) persuasive evidence of an arrangement between us and the customer exists,
(ii) the delivery of the product to the customer has occurred or service has been provided to the customer, (iii) the price to the customer is fixed or determinable and (iv) collectability of the sales or service price is assured. Telephone and network access revenues are primarily derived from usage of our network and facilities. Telephone and network access revenues are recognized as the corresponding services are rendered to customers. Long distance revenue is recognized monthly as services are provided. Directory advertising revenue is recorded ratably over the life of the directory. Revenues from online services, which include broadband Internet and video, are recorded when the services are rendered. Other service and sales revenue is recognized when services are provided or the sales transactions are completed. It is our policy to classify sales taxes collected from its customers as a reduction of revenue.

We record deferred taxes that arise from temporary differences resulting from differences between the financial statements and the tax basis of assets and liabilities. Deferred taxes are classified as current or non-current, depending on the classification of the assets and liabilities to which they relate. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws on the date of enactment. Our deferred taxes result principally from differences in the timing of depreciation, and in the accounting for pensions and other postretirement benefits.

We record property, plant and equipment at cost. Construction costs, labor and applicable overhead related to installations and interest during construction are capitalized. Costs of maintenance and repairs of property, plant and equipment are charged to operating expense. The estimated useful life of support equipment (vehicles, computers, etc.) ranges from 3 to 19 years. The estimated useful life of Internet and Video equipment ranges from 3 to 15 years. The estimated useful life of communication and network equipment ranges from 10 to 15 years. The estimated useful life of buildings and other equipment ranges from 14 to 50 years. Depreciation expense is computed using the straight line method. Prior to the adoption of SFAS No. 101 in 2008, and in accordance with regulatory accounting guidelines when units of property are retired, sold or otherwise disposed of in the ordinary course of business, the gross book value is charged to accumulated depreciation with no gain or loss recognized.

Consolidated Results of Operations - 2008 compared to 2007 and 2007 compared to 2006 ($ in thousands)

We will discuss factors that affected our overall results for the past two years. We will also discuss our expected revenue and expense trends for the year ending December 31, 2009 in our "Operating Environment and Trends of the Business" section.

Operating Revenues

Operating revenues decreased $1,052 (or 4%) to $22,990 in 2008 from $24,042 in 2007. This decrease was due primarily to:

• A decrease in local network service revenues of $357 (or 11%) mainly as a result of access lines loss attributable to competitive land line telephone service as well as wireless and VoIP substitution.

• A decrease in long distance revenue of $551 (or 15%) due mainly to losses in our customer base as our access lines continue to decrease, a direct effect of customers switching to our promotional prices, and declining minutes of use.

• A decrease in data service revenues of $258 (or 5%) mainly due to a decrease in dial-up service revenues from the continued migration of customers to broadband providers other than us. These decreases were partially offset by an increase of $282 for new product lines which includes a VoIP-based product mainly for business customers and DirecTV that we began offering in 2008.

• These decreases were partially offset by an increase of $132 (or 7%) in other services and sales mainly due to circuit revenue.

Our operating revenues decreased by $1,194 (or 5%) to $24,042 in 2007 from $25,236 in 2006. The decrease was due primarily to: (1) lower Online services revenues mainly due to lower dial-up and broadband Internet revenues from the continued loss of customers who migrated to other high speed Internet providers, partially offset

by increased Video revenues, (2) lower local network services revenues mainly due to customers switching to competitors' telephone service and the loss of second access lines that were being utilized for dial-up Internet as customers continued to switch to broadband Internet services, (3) lower other services and sales revenues, due to lower demand for ancillary services and (4) lower network access service revenues mainly due to lower local switch support revenues received from the USF and declining billable switched access minutes and flat rates. These decreases were slightly offset by higher long distance network service revenues due to billing of additional minutes to recover for under billed minutes.

Operating Expenses

Operating expenses decreased $914 (or 4%) to $24,226 in 2008 from $25,140 in 2007. This decrease was due primarily to:

• A decrease in selling, general and administrative expenses of $1,219 (or 10%) to $10,589 in 2008 from $11,808 in 2007. This reduction was due mainly to a postretirement liability curtailment gain of $235 resulting from the elimination of benefits of certain union employees as a result of the new union agreement. Lower wages and benefits, professional fees, insurance and hiring costs also contributed to the decrease.

• A decrease in depreciation expense of $553 (or 11%) to $4,699 in 2008 from $5,252 in 2007 due mainly to some types of broadband equipment fully depreciating during 2007, partially offset by an increase associated with the creation of a business operating support system during fiscal year 2007.

These expense reductions were partially offset by:

• An increase in cost of services and products of $858 (or 11%) to $8,938 in 2008 from $8,080 in 2007 due mainly to increased content costs for video services, access costs for long distance services, trunk line, plant maintenance and costs associated with our new product lines for VoIP-based services and DirecTV.

Operating expenses decreased $3,890 (or 13%) to $25,140 in 2007 from $29,030 in 2006. This decrease was due primarily to: (1) lower selling, general and administrative expenses mainly as a result of lower professional fees, the elimination of a reserve established for employees electing the Voluntary Termination Incentive Plan in 2006 - partially offset by increases in bonus accrual for management employees in 2007, higher salaries for sales, advertising and promotion costs, and the allowance for bad debt; (2) lower costs of services and sales expenses due mainly to a reduction in computer expense related to the implementation of the new Enterprise Resource Planning ("ERP") system, a decrease in central office and cable and wire equipment, a one-time credit for previously incurred costs for trunk line charges, lower costs associated with carrier access billing, and the outsourcing of the Internet/Video help desk functions as of July 1, 2006; (3) lower depreciation expense primarily due to the decreased depreciation associated with lower depreciable assets in 2007 as a result of equipment that was fully depreciated in 2006 and taken out of service.

Other Income (Expense)

Other income (expense) increased $980 (or 10%) to $10,366 in 2008 from $9,386 in 2007. This increase was due primarily to:

• An increase in income from an equity method investment of $706 (or 7%) to $10,357 in 2008 from $9,651 in 2007 as a result of increased earnings from our investment in O-P in fiscal year 2008.

• A reduction of interest expense of $191 (or 90%) mainly as a result of the reversal of accrued interest for our FIN 48 liability which was de-recognized due to the approval by the IRS to allow the reporting of its taxable income in future periods.

Partially offset by:

• An increase in other expenses of $83 (or 160%) due mainly to increases in taxes and donations.

Other income (expenses) decreased $445 (or 5%) to $9,386 in 2007 from $9,831 in 2006. This decrease was due primarily to: (1) a non-recurring gain from the sale of Zefcom in 2006 and (2) lower interest income earned

during 2007 due mainly to reduced cash equivalents. These decreases were partially offset by higher interest expense associated with a FIN 48 tax liability and higher earnings from O-P.

Segment Results Overview

The Telephone segment, which operates as a retail and wholesale seller of communications services, accounted for approximately 76% of our consolidated operating revenues in each of 2008 and 2007. This segment provides telecommunications services, including local networks, network access, long distance voice, customer premise equipment, private branch exchange ("PBX") equipment, wireless and directory advertising services (yellow and white pages advertising and electronic publishing).

The Online segment accounted for approximately 24% of our consolidated segment operating revenues in each of 2008 and 2007. This segment provides high speed (broadband Internet) and dial-up Internet services, and video over VDSL and ADSL2+ (a digital TV product). In response to customer demand, the Online segment has introduced a limited High Definition ("HD") video offering and is actively engaged in research and development to upgrade its current video offering to include Video on Demand ("VOD").

In both 2007 and 2006, the Telephone operating segment accounted for approximately 76% and the Online segment accounted for 24% of consolidated operating revenues.

For further segment information see Note 7 to the Consolidated Financial Statements contained in Item 15(a).

Telephone

Local network service revenue decreased mainly as the result of an 11% decrease in access lines in 2008. Access line losses were mainly the result of customers switching to a competing cable provider's bundle package and the continued loss of second access lines used for dial-up Internet connections by customers switching to broadband Internet outside our service area.

Network access service revenue includes end user, local switching support, switched access and special access revenue categories. These revenues increased slightly, resulting from additional revenues received for local switching support, offset by a decrease in declining billable switched access minutes.

Long distance services revenue includes network services resulting from the transport of intraLATA (outside the local calling area) and interLATA (traditional long distance) calls and subscribers to our long distance plan. Network service revenues declined as the volume of intraLATA call minutes continued to drop as customers continued to switch to wireless and IP-based services. Long distance subscribers increased 2% over 2007.

Directory advertising revenue decreased 4% over 2007 as the sale of local and regional ad pages declined, offset by a slight increase in national ad pages. We expect an industry trend of a slowdown in the growth in the demand for traditional directory ad pages to continue as more customers migrate to web-based advertising.

Other service and sales revenues includes services related to billing and collections provided to other carriers, inside wire revenue, circuit revenue and reciprocal compensation. These revenues increased 9%, primarily due to increases in private line and rent revenue, partially offset by decreased ancillary revenues such as billing and collection and inside wire due to lower customer demand for these products.

Telephone operations expenses decreased in 2008 mainly due to the reduction of professional and consulting fees and lower salaries and benefits due to a reduction in work force. We also reported a postretirement liability curtailment gain resulting from the elimination of benefits of certain union employees as a result of the new union agreement.

Other income (expenses) increased in 2008 mainly due to the increase in income from an equity method investment as a result of higher earnings from our investment in OP and a reduction of interest expense mainly as a result of the reversal of accrued interest for our FIN 48 liability which was derecognized due to the approval by the IRS to allow the reporting of its taxable income in future periods.

Online

Online revenues declined in 2008 largely due to the loss of dial-up customers who migrated to broadband Internet services as well as customers lost to competition. These decreases were partially offset by an increase for new product lines which includes a VoIP-based product mainly for business customers and DirecTV that the Company began offering in 2008.

Online expenses decreased in 2008 mainly due to lower depreciation expense largely associated with full depreciation of some Internet equipment and lower trunk line expenses reflecting efficiencies generated from better management of capacity requirements.

Investments

Investment in Orange County-Poughkeepsie Limited Partnership

We are a limited partner in O-P and had an 8.108% investment interest as of December 31, 2008 which is accounted for under the equity method of accounting. The majority owner and general partner is Verizon Wireless of the East L.P. On April 10, 2007, we completed the acquisition of an additional 0.6081% limited partnership interest in O-P by purchasing 8.108% of the 7.5% limited partnership interest being sold by FairPoint Communications, Inc. ("FairPoint"). FairPoint had agreed to sell its interest in O-P to Cellco Partnership d/b/a Verizon Wireless ("Verizon Wireless"). We chose to exercise our right of first refusal pursuant to the partnership agreement of O-P to purchase a corresponding pro rata share of FairPoint's interest. The price paid for the additional 0.6081% was $4,376. Of this amount, we have allocated $4,081 to the excess of the cost of the investment over the fair value of the assets acquired and it is deemed to be goodwill. The investment in O-P represented 14% and 15% of total assets as of December 31, 2008 and 2007, respectively, and the income from equity method investments represented 113%, 116% and 155% of income before income taxes and extraordinary items for the years ended December 31, 2008, 2007 and 2006, respectively.

Liquidity and Capital Resources

We had $7,677 of cash and cash equivalents available at December 31, 2008.

O-P distributions have a significant impact on liquidity. For more information see risk factors on page 8.

Our 2009 capital plan includes expenditures relating to the expansion of our broadband, internet and video. We expect that we will have sufficient cash to fund these activities.

We also have an unsecured $4,000 line of credit with Provident Bank, of which the entire amount remained unused as of December 31, 2008. Interest is at a variable rate and borrowings are on a demand basis without restrictions. We are in compliance with all loan covenants under the line of credit.

We have an unsecured loan with CoBank ACB. The CoBank loan remains outstanding until all indebtedness and obligations of the Company under the facility have been paid or satisfied, but no later than July 2012 (the "Maturity Date"). The unpaid principal balance accrues interest at an interest rate determined or selected by us. We may select a variable rate option, a long-term fixed rate option or a LIBOR option. We selected the variable rate option, and the average interest rate on borrowings for the period January 1 through December 31, 2008 was approximately 4.87%. Interest is paid quarterly each January, April, June and October. The outstanding principal is being repaid in 32 consecutive quarterly installments which started in October 2004, with the last such installment due on the Maturity Date. On the Maturity Date, the amount of then unpaid principal plus accrued interest and fees is due in full. As of December 31, 2008 $5,695 of the principal amount was outstanding under the CoBank facility.

Under the terms of the CoBank facility, we are is required to comply with certain loan covenants, which include but are not limited to the achievement of certain financial ratios, as set forth in the agreement, as well as certain financial reporting requirements. As of December 31, 2008, we were not in default on any of these loan covenants.

Cash from Operating Activities

Our source of funds continues to be primarily generated from cash distributions from O-P. Our cash distributions from O-P for our share of O-P earnings totaled $10,865 for the year ended December 31, 2008 compared to $9,484 for the year ended December 31, 2007. O-P's cash distributions are made to us on a quarterly basis at the discretion of the general partner.

Cash from Investing Activities

Capital expenditures totaled $3,586 during the year ended December 31, 2008 compared to $3,944 for the corresponding period of 2007.

We purchased an additional 0.6081% of O-P for $4,376, on April 10, 2007, bringing our total ownership interest in the investment to 8.108% as of December 31, 2008 and 2007.

Cash from Financing Activities

Dividends, declared by the Board of Directors of the Company, were $0.80 per share for the year ended December 31, 2008 as compared to $0.80 and $1.80 in 2007 and 2006, respectively. Of the dividends paid in 2006, $1.00 per share represented a special dividend declared by the board. The total amount of dividends paid by us for the year ended December 31, 2008 on its common shares was $4,290 as compared to $4,282 in 2007 and $9,633 in 2006.

Inflation is still a factor in our economy and we continue to seek ways to mitigate its impact. To the extent permitted by competition or regulation, we pass increased costs on to its customers by increasing sales prices over time.

Off-Balance Sheet Arrangements

As of December 31, 2008, we did not have any material off-balance sheet arrangements.

Contractual Obligations and Commitments

Below is a summary of our material contractual obligations and commitments as of
December 31, 2008:


                                                                     Payments Due by Period
                                                   Less                                    More
                                                   than          1-3          3-5          than
                                                  1 Year        Years        Years        5 Years        Total
                                                                        ($ in thousands)

Long-term debt, including current maturities(a)   $ 1,519      $ 3,038      $ 1,138      $       -      $ 5,695
Interest expense(b)                                   179          215           36              -          430
Operating leases(c)                                   300          344           17              -          661
Trunk line agreements(d)                              969            -            -              -          969
Other long-term obligations(e)                        509            -            -              -          509

Total Contractual obligations and commitments     $ 3,476      $ 3,597      $ 1,191      $       -      $ 8,264

(a) Pursuant to the loan agreement, principal payments relating to long-term debt commenced on October 2004 and will continue for 32 consecutive quarters from that date until repaid in full.

(b) Long-term debt is at a variable rate. Interest payments are calculated based upon a current interest rate of 3.15%. This rate is subject to fluctuation in the future.

(c) We lease tower space for transmission of content for its Video product. In addition, we also lease office and parking space, and vehicles.

(d) Represents contractual commitments, with a specified contract life, to purchase access to trunk lines from other carriers for the transmission of voice, data and video.

(e) We are required to make minimum contributions to its pension and postretirement plans. These amounts are not estimable for years after 2009.

Operating Environment and Business Trends

2009 Revenue Trends

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