ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

During the three-month period ended March 31, 2009, net income increased by 88%, from $760 to $1,427 in comparison to the three-month period ended March 31, 2008. This increase was attributable primarily to a $746 increase in earnings from the Orange County-Poughkeepsie Limited Partnership (the "O-P") and a $250 insurance reimbursement related to last year's ice storm damage.

This discussion and analysis provides information about the important aspects of our operations and investments, both at the consolidated and segment levels, and include discussions of our results of operations, financial position and sources and uses of cash. The presentation of dollar amounts in this discussion is in thousands. This discussion and analysis should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and our Consolidated Financial Statements and Notes therein contained in our Annual Report on Form 10-K for the year ended December 31, 2008.

We provide Incumbent Local Exchange Carrier ("ILEC") and Competitive Local Exchange Carrier ("CLEC") communication services, to customers in the Lower Hudson Valley of New York and New Jersey. Our services include providing local and toll telephone service to residential and business customers, access and billing and collection services to interexchange carriers, VoIP services, Internet access and video service. We report our results in two operating segments: Telephone and Online. The telephone segment provides telecommunications services, including local, network access, long distance services, yellow and white pages advertising, electronic publishing and wireless service. The Online segment provides video, broadband and VoIP services.

Consistent with the past several years, we have continued to experience overall declines in revenue and access lines due to sustained competition and wireless substitution for landline telephone services in our regulated franchise area.

Our recently announced completion of the acquisition of certain of the assets of US Datanet Corporation extends our CLEC customer base nationwide and expands the scope of our product offerings to include business telecommunications conferencing and wholesale. The acquisition is a step in the execution of our corporate strategy to profitably expand our business beyond our regulated franchise area.

Results of Operations for the three months ended March 31, 2009 and 2008

OPERATING REVENUES

Operating revenues for the three-month period ended March 31, 2009 decreased by $102 (or 2%) from $5,644 in the same quarter in 2008 to $5,542. This decrease was due primarily to:

· A decrease in long distance revenue of $160 (or 20%) due mainly to the effect of customers switching to our promotional prices and declining minutes of use.

· A decrease in local network service revenues of $38 (or 5%) mainly as a result of access line loss attributable to competitive land line telephone service as well as wireless and VoIP substitutions.

· A decrease in other services and sales revenues of $27 (6%) due primarily to lower revenue associated with leased equipment, inside wire and other ancillary services.

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Index

Partially offset by:

· An increase in data service revenues of $110 (or 8%) mainly due to our new product lines, which include a VoIP based product primarily for business customers and DirecTV that we began offering in 2008. Despite this overall increase in data services revenue, our dial-up service revenues decreased from the continued migration of customers to broadband providers other than us.

· An increase in network access revenues of $24 (or 1%) mainly due to additional revenue received from the Universal Service Fund.

OPERATING EXPENSES

Operating expenses for the three-month period ended March 31, 2009 increased $2 (or 1%) to $6,476 from $6,474 for the same quarter in 2008. This increase was due primarily to:

· Cost of services and products increased $60 (or 3%) due mainly to higher content costs for video services, access costs for long distance services and trunk line costs.

· Selling, general and administrative expenses increased $113 (or 4%) due mainly to higher professional fees partially offset by lower wages and benefits.

Partially offset by:

· Depreciation and amortization expense decreased $171 (or 13%) primarily due to certain types of broadband equipment being fully depreciated.

OTHER INCOME (EXPENSE)

Other income (expense) for the three-month period ended March 31, 2009 increased $1,103 (or 55%) to $3,114 from $2,011 in the same quarter 2008. This increase is due mainly to:

· An increase in income from equity method investments of $746 as a result of increased earnings from the O-P. The reimbursement from our insurance company of $250 for storm damage incurred in 2008.

LIQUIDITY AND CAPITAL RESOURCES

We had $8,258 of cash and cash equivalents available at March 31, 2009 as compared with $7,677 at December 31, 2008. Our cash equivalents consist primarily of money market mutual funds and bank certificates of deposit.

We have a $4,000 line of credit with Provident Bank (the "Bank") of which the entire amount remained unused at March 31, 2009. In the event of a drawdown, interest would be applied based on a variable rate that is a function of the Prime Commercial Lending Rate as listed in the Wall Street Journal. Borrowings are on a demand basis with limited restrictions relating to written notification to the Bank requesting a drawdown, the use of requested funds, and the expected means for repayment. As of March 31, 2009, $5,316 in principal amount was outstanding under the CoBank ACB term credit facility. The final payment is due July 20, 2012. We are required to make interest and outstanding principal payments in quarterly installments under the term debt facility.

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Index

CASH FROM OPERATING ACTIVITIES

Our primary source of funds continues to be generated from operations and cash distributions from the O-P. Our cash distributions from the O-P totaled $2,432 and $2,189 for the three months ended March 31, 2009 and 2008, respectively. The O-P's cash distributions are made to us on a quarterly basis at the discretion of the general partner. The increase in the O-P's revenues discussed above reflects revenues as accrued for accounting purposes. The amounts discussed in this paragraph reflect actual cash receipts by us from the O-P.

CASH FROM INVESTING ACTIVITIES

Capital expenditures totaled $491 during the three months ended March 31, 2009 as compared to $945 for the corresponding period in 2008.

CASH FROM FINANCING ACTIVITIES

Dividends declared on our common shares by the Board of Directors were $0.22 per share for the three months ended March 31, 2009 and were $0.20 for the three months ended March 31, 2008. The total amount of dividends paid on our common shares by us for each of the three-month periods ended March 31, 2009 and 2008 was $1,185 and $1,071, respectively.

CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Form 10-Q, including, without limitation, statements containing the words "believes," "anticipates," "intends," "expects" and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others the following: general economic and business conditions, both nationally and in the geographic regions in which we operate; industry capacity; demographic changes; technological changes and changes in consumer demand; existing governmental regulations and changes in or the failure to comply with, governmental regulations; legislative proposals relating to the businesses in which we operate; competition; or the loss of any significant ability to attract and retain qualified personnel. Given these uncertainties, current and prospective investors should be cautioned in their reliance on such forward-looking statements. We disclaim any obligation to update any such factors or to publicly announce the results of any revision to any of the forward-looking statements contained herein to reflect future events or developments. For a further discussion of the matters described above, see Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008 and within this Quarterly Report on Form 10-Q.