CT Communications 10-Q 2007 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

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

For the quarterly period ended June 30, 2007

OR

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

For the transition period from                    to                    

Commission file number 0-19179

CT COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

NORTH CAROLINA (State or other jurisdiction of incorporation or organization)	56-1837282 (I.R.S. Employer Identification No.)
1000 Progress Place NE
P.O. Box 227, Concord, NC	28026-0227
(Address of principal executive offices)	(Zip Code)

(704) 722-2500
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year,
if changed since last report)

     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. Yesþ Noo

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

Large accelerated filero      Accelerated filerþ      Non-accelerated filero

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

APPLICABLE ONLY TO CORPORATE ISSUERS:

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

     20,292,660 shares of Common Stock outstanding as of July 31, 2007.

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

INDEX

	Page No.
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets—June 30, 2007 (Unaudited) and December 31, 2006		2
Condensed Consolidated Statements of Income (Unaudited)—Three and Six Months Ended June 30, 2007 and 2006		3
Condensed Consolidated Statements of Comprehensive Income (Unaudited)—Three and Six Months Ended June 30, 2007 and 2006		4
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)—Six Months Ended June 30, 2007 and 2006		5
Condensed Consolidated Statements of Cash Flows (Unaudited)—Six Months Ended June 30, 2007 and 2006		6
Notes to Condensed Consolidated Financial Statements (Unaudited)		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3. Quantitative and Qualitative Disclosures About Market Risk		33
Item 4. Controls and Procedures		34
PART II. Other Information
Item 1. Legal Proceedings		35
Item 1A. Risk Factors		35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		35
Item 3. Defaults Upon Senior Securities		36
Item 4. Submission of Matters to a Vote of Security Holders		36
Item 5. Other Information		36
Item 6. Exhibits		36
Signatures		37
Exhibit Index		38
EX-31.1
EX-31.2
EX-32

1

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements.

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands, except share data)

	(Unaudited)
	June 30,		December 31,
	2007		2006
ASSETS
Current assets:
Cash and cash equivalents	$	7,459	$	14,063
Short-term investments		92,619		86,741
Accounts receivable and unbilled revenue, net		16,168		16,419
Other		11,540		11,775
Total current assets		127,786		128,998
Investments		7,464		10,960
Property and equipment, net		214,852		209,908
Goodwill		9,906		9,906
Other intangibles, net		19,989		19,989
Other assets		8,011		7,597
Total assets	$	388,008	$	387,358
LIABILITIES AND STOCKHOLDERS’ EQUITY
Currrent liabilities:
Current portion of long-term debt	$	5,000	$	5,000
Accounts payable		6,949		12,553
Accrued payroll		5,483		8,636
Customer deposits and advance billings		4,754		4,618
Accrued pension and postretirement benefit cost		3,159		2,391
Other accrued liabilities		6,593		1,687
Total current liabilities		31,938		34,885
Long-term debt		32,500		35,000
Deferred income taxes		17,472		23,060
Postretirement and pension benefits		8,789		8,499
Other		12,744		6,536
Total liabilities		103,443		107,980
Stockholders’ equity:
Common stock, 20,287,993 and 20,035,823 shares outstanding at June 30, 2007 and December 31, 2006, respectively		61,925		59,132
Accumulated other comprehensive income		4,001		4,276
Retained earnings		218,639		215,970
Total stockholders’ equity		284,565		279,378
Total liabilities and stockholders’ equity	$	388,008	$	387,358

See accompanying notes to condensed consolidated financial statements (unaudited).

2

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income (Unaudited)

(in thousands, except per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006 (1)			2007			2006 (1)
Operating revenue:
Wireline	$	35,734		$	34,341		$	71,385		$	68,279
Wireless		10,572			9,683			20,333			18,840
Total operating revenue		46,306			44,024			91,718			87,119
Operating expense:
Wireline cost of service (excludes depreciation of $6,555, $6,454, $13,076 and $12,987, respectively)		9,945			9,414			19,690			19,229
Wireless cost of service (excludes depreciation of $688, $636, $1,377 and $1,266, respectively)		5,509			5,259			11,046			10,429
Selling, general and administrative (excludes depreciation of $650, $883, $1,348 and $1,840, respectively)		18,217			16,547			34,316			31,462
Depreciation		7,893			7,973			15,801			16,093
Total operating expense		41,564			39,193			80,853			77,213
Operating income		4,742			4,831			10,865			9,906
Other income (expense):
Equity in income of unconsolidated companies, net		2			263			13			90,103
Interest, dividend income and gain on sale of investments		2,178			1,945			3,529			2,758
Impairment of investments		—			—			—			(876	)
Interest expense		(612	)		(869	)		(1,201	)		(1,893	)
Other (expense) income		(52	)		31			(116	)		21
Total other income		1,516			1,370			2,225			90,113
Income before income taxes		6,258			6,201			13,090			100,019
Income taxes		2,286			2,258			4,492			38,710
Net income		3,972			3,943			8,598			61,309
Dividends on preferred stock		—			1			—			1
Net income for common stock	$	3,972		$	3,942		$	8,598		$	61,308
Earnings per common share:
Basic	$	0.20		$	0.21		$	0.43		$	3.22
Diluted		0.20			0.20			0.42			3.17
Basic weighted-average shares outstanding		20,033			19,165			19,997			19,034
Diluted weighted-average shares outstanding		20,251			19,452			20,240			19,359

(1) Adjusted for the effect of SAB No. 108 items — See Note 3

See accompanying notes to condensed consolidated financial statements (unaudited).

3

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(in thousands, except share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006 (1)			2007			2006 (1)
Net income	$	3,972		$	3,943		$	8,598		$	61,309
Other comprehensive income (loss), net of tax:
Unrealized holding gains on available-for- sale securities		51			409			347			404
Reclassification adjustment for gains realized in net income		(593	)		(457	)		(593	)		(468	)
Amortization of prior service cost and net actuarial gains		(16	)		—			(29	)		—
Comprehensive income	$	3,414		$	3,895		$	8,323		$	61,245

(1) Adjusted for the effect of SAB No. 108 items — See Note 3

See accompanying notes to condensed consolidated financial statements (unaudited).

4

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

(in thousands)

										Accum. Other						Total
	4.5% Series			Common			Unearned			Comprehensive			Retained			Stockholders’
	Pref Stock			Stock			Compensation			Income			Earnings			Equity
Balance at December 31, 2005	$	61		$	42,946		$	(307	)	$	282		$	152,898		$	195,880
SAB 108 transition cumulative effect adjustment		—			—			—			—			(350	)		(350	)
Adjusted balance at January 1, 2006	$	61		$	42,946		$	(307	)	$	282		$	152,548		$	195,530
Net Income (1)		—			—			—			—			61,309			61,309
Issuance of 44,182 shares of common stock		—			616			—			—			—			616
Issuance of 501,159 shares for exercise of stock options		—			5,873			—			—			—			5,873
Forfeiture and cancellation of 48,556 common shares		—			(632	)		—			—			—			(632	)
Reversal of unamortized unearned compensation balance		—			(307	)		307			—			—			—
Tax benefits from exercised stock options		—			859			—			—			—			859
Preferred stock subject to redemption		(61	)		—			—			—			—			(61	)
Dividends declared:
4.5% preferred		—			—			—			—			(1	)		(1	)
Common stock		—			—			—			—			(3,836	)		(3,836	)
Other comprehensive loss		—			—			—			(64	)		—			(64	)
Restricted stock compensation net of $385 earned in 2006		—			588			—			—			—			588
Balance at June 30, 2006	$	—		$	49,943		$	—		$	218		$	210,020		$	260,181

								Accum. Other						Total
	4.5% Series		Common			Unearned		Comprehensive			Retained			Stockholders’
	Pref Stock		Stock			Compensation		Income			Earnings			Equity
Balance at December 31, 2006	$	—	$	59,132		$	—	$	4,276		$	215,970		$	279,378
FIN 48 transition cumulative effect adjustment		—		—			—		—			(1,075	)		(1,075	)
Adjusted balance at January 1, 2007	$	—	$	59,132		$	—	$	4,276		$	214,895		$	278,303
Net income		—		—			—		—			8,598			8,598
Issuance of 44,461 shares of common stock		—		1,060			—		—			—			1,060
Issuance of 31,650 shares for exercise of stock options		—		488			—		—			—			488
Forfeiture and cancellation of 22,650 common shares		—		(541	)		—		—			—			(541	)
Tax benefits from exercised stock options		—		429			—		—			—			429
Dividends declared:
Common stock		—		—			—		—			(4,854	)		(4,854	)
Other comprehensive income		—		—			—		(275	)		—			(275	)
Restricted stock compensation including $739 earned in 2007		—		1,357			—		—			—			1,357
Balance at June 30, 2007	$	—	$	61,925		$	—	$	4,001		$	218,639		$	284,565

(1) Adjusted for the effect of SAB No. 108 items — See Note 3

See accompanying notes to condensed consolidated financial statements (unaudited).

5

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

	Six Months Ended June 30,
	2007			2006 (1)
Cash flows from operating activities:
Net income	$	8,598		$	61,309
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		15,801			16,093
Stock compensation expense		3,200			1,957
Loss on retirements of fixed assets		190			190
Postretirement and pension benefits		1,029			511
Impairment of investments		—			876
Gain on sale of investment securities		(980	)		(947	)
Accrued interest income on short-term investments		(76	)		(431	)
Equity in income of unconsolidated companies		(13	)		(90,103	)
Undistributed patronage dividends		(97	)		(110	)
Deferred income taxes and tax credits		329			(2,415	)
Change in income taxes payable		3,226			13,780
Changes in operating assets and liabilities		(8,959	)		(3,140	)
Net cash provided by (used in) operating activities		22,248			(2,430	)
Cash flows from investing activities:
Capital expenditures		(21,082	)		(13,051	)
Proceeds from sale of property, plant and equipment		146			50
Proceeds from sale of wireless spectrum (net of costs to sell of $353)		—			15,647
Proceeds from sale of investments		3,971			1,375
Proceeds from sale of short-term investments		26,930			6,000
Purchases of short-term investments		(32,733	)		(100,438	)
Purchases of investments		(15	)		(151	)
Payment for wireless spectrum		—			(300	)
Distribution from unconsolidated companies		273			97,899
Net cash (used in) provided by investing activities		(22,510	)		7,031
Cash flows from financing activities:
Repayment of long-term debt		(2,500	)		(12,500	)
Dividends paid		(4,854	)		(3,837	)
Tax benefits credited to additional paid-in-capital		429			859
Redemption of preferred stock		(11	)		—
Proceeds from common stock issuances		594			4,843
Net cash used in financing activities		(6,342	)		(10,635	)
Net cash used in discontinued operations — operating activities		—			(95	)
Net decrease in cash and cash equivalents		(6,604	)		(6,129	)
Cash and cash equivalents at beginning of period		14,063			23,011
Cash and cash equivalents at end of period	$	7,459		$	16,882
Supplemental disclosure of non-cash financing activities:
Common and nonvested shares issued under long-term incentive plans	$	1,572		$	714

(1) Adjusted for the effect of SAB No. 108 items — See Note 3

See accompanying notes to condensed consolidated financial statements (unaudited).

6

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.	MERGER OF CT COMMUNICATIONS, INC. AND WINDSTREAM CORPORATION
	CT Communications, Inc., a North Carolina corporation (the “Company”), announced on May 25, 2007 that it entered into an Agreement and Plan of Merger, (the “Merger Agreement”), with Windstream Corporation, a Delaware corporation (“Windstream”), pursuant to which Windstream Marlin, Inc., a wholly owned subsidiary of Windstream (“Merger Sub”) will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation. Pursuant to the Merger Agreement, at the effective time of the Merger, each outstanding share of common stock of the Company (the “Shares”), other than any Shares owned by the Company or any subsidiary of the Company, Merger Sub or any direct or indirect wholly owned subsidiary of Windstream, will be canceled and converted automatically into the right to receive $31.50 in cash, without interest. The Merger is conditioned, on certain customary conditions, including the approval of the Merger Agreement by the shareholders of the Company, the approval of the Federal Communications Commission and other regulatory approvals.
	On July 9, 2007, the Federal Trade Commission notified the Company that its request for early termination of the waiting period had been granted. On or about July 6, 2007, the Company distributed to all shareholders of record as of June 28, 2007, a definitive proxy statement related to a special meeting of shareholders to be held on August 23, 2007. At the special meeting, the shareholders will consider and vote on the proposal to approve the Merger Agreement with Windstream. The acquisition is expected to close during the third quarter of 2007. However, factors outside of management’s control could delay or prevent completion of the proposed Merger. A change in control of the Company could trigger modification of terms of certain plans or agreements, including contracts and employee benefit arrangements. The Merger Agreement provides that the Company may be required to pay Windstream a termination fee of $19 million in certain circumstances. For the six months ended June 30, 2007, the Company recorded $1.8 million of transaction related costs in operating expense associated with the proposed Merger.
2.	BASIS OF PRESENTATION
	In the opinion of management, the accompanying unaudited financial statements contain all adjustments consisting of only normal recurring accruals necessary to present fairly the Company’s financial position as of June 30, 2007 and December 31, 2006 and the results of its operations and cash flows for the three and six months ended June 30, 2007 and June 30, 2006. These unaudited financial statements do not include all disclosures associated with the Company’s annual financial statements and should be read along with the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements, as well as the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
	One area of significant estimation relates to the Company’s participation in revenue pooling arrangements with other local exchange carriers administered by the National Exchange Carrier Association (“NECA”), a quasi-governmental non-profit organization. NECA’s pooling arrangements are based on nationwide average costs that are applied to certain projected demand quantities, and therefore, revenues are initially recorded based on estimates. These estimates involve a variety of complex calculations, and the ultimate amount realized from the pools may differ from the Company’s estimates. During the second quarter of 2007, the Company recorded a $1.0 million increase in universal service revenue based on the final 2006 cost study. In addition, the results of operations for the three and six months ended June 30, 2007 are not necessarily indicative of the results to be expected for the full year.
3.	RECLASSIFICATIONS
	In certain instances, amounts previously reported in the 2006 consolidated financial statements have been reclassified to conform to the presentation of the 2007 consolidated financial statements. Such reclassifications have no effect on net income or retained earnings as previously reported, except for the adjustments discussed below related to Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”.

7

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

	As discussed in Note 4 below, effective in the first quarter of 2007, the Company modified the financial reporting of its operating segments into four operating segments to show amounts previously reported as the Company’s Internet operating segment as a product within the other operating segments. Accordingly, prior period segment information has been recast to conform to the current period presentation. There was no impact on the consolidated financial statements.
	In September 2006, the Securities and Exchange Commission (“SEC”) issued SAB No. 108 to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. The Company adopted SAB No. 108 on December 31, 2006 and recorded related adjustments using the cumulative effect transition method as of January 1, 2006. The Company has recast its financial results for the three and six months ended June 30, 2006, to reflect the 2006 impact of the SAB No. 108 items.
4.	SEGMENT INFORMATION
	Statement of Financial Accounting Standards (“SFAS”) No. 131 “Disclosures about Segments of an Enterprise and Related Information”, establishes standards for reporting information about operating segments, which requires segmentation based on internal organization and reporting of revenue and operating income based on internal accounting methods. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.
	Historically, the Company has reported its results of operations in six separate operating segments as defined by SFAS No. 131. These six segments were its incumbent local exchange carrier (“ILEC”) segment, competitive local exchange carrier (“CLEC”) segment, Wireless segment, Greenfield segment, Internet segment, and Palmetto MobileNet, L.P. (“Palmetto”) segment.
	During 2006, the Company sold its investment in Palmetto and as a result no longer reports results for that segment after December 31, 2006. During the first quarter of 2007, the Company launched its video product to trial customers located within the ILEC service territory, and as a result, the Company evaluated whether video should be accounted for as a separate operating segment or as a product within the Company’s existing operating segments. This in turn led the Company to reassess how it manages the business and its assumptions, methodologies and reporting classifications associated with all of its reporting segments. In response to the increased focus on integrated telecommunications bundled offerings and the addition of new product offerings, the Company has modified its financial reporting processes to present revenues and expenses by defined customer groups. This method of presentation will report revenues and expenses by customer relationship to aid in decision-making. As a result of the restructuring of the Company’s financial reporting process and the assessment performed, the Company modified its segment reporting to report four operating segments: ILEC, CLEC, Greenfield, and Wireless, effective January 1, 2007. As a result, the former Internet segment results have been included in the ILEC, CLEC, and Greenfield segment results for all periods presented. All other business units, investments and operations of the Company that do not fall under these segments and do not meet reporting guidelines and thresholds are reported under “Other”.
	Accounting policies of the segments are the same as those described in the summary of significant accounting policies included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. The Company’s management evaluates performance based on certain operating metrics, including operating revenue and operating income. Intersegment transactions are eliminated. All segments reported below provide services primarily within North Carolina.

8

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Amounts as of and for the three and six months ended June 30, 2006 have been recast to conform to the current period presentation. Selected data by the Company’s four operating business segments as of and for the three and six months ended June 30, 2007 and 2006, was as follows (in thousands):

Three months ended June 30, 2007

	ILEC		CLEC			Greenfield			Wireless		Other			Total
External revenue	$	27,182	$	5,377		$	3,175		$	10,572	$	—		$	46,306
External expense		16,462		5,083			2,511			8,583		1,032			33,671
Depreciation		5,145		700			1,129			693		226			7,893
Operating income (loss)	$	5,575	$	(406	)	$	(465	)	$	1,296	$	(1,258	)	$	4,742

Three months ended June 30, 2006⁽¹⁾

	ILEC		CLEC			Greenfield			Wireless		Other			Total
External revenue	$	26,105	$	5,354		$	2,882		$	9,683	$	—		$	44,024
External expense		15,174		4,988			2,543			8,229		286			31,220
Depreciation		5,347		728			1,032			641		225			7,973
Operating income (loss)	$	5,584	$	(362	)	$	(693	)	$	813	$	(511	)	$	4,831

Six months ended June 30, 2007

	ILEC		CLEC			Greenfield			Wireless		Other			Total
External revenue	$	54,304	$	10,742		$	6,339		$	20,333	$	—		$	91,718
External expense		32,031		10,012			4,874			16,985		1,150			65,052
Depreciation		10,300		1,421			2,243			1,386		451			15,801
Operating income (loss)	$	11,973	$	(691	)	$	(778	)	$	1,962	$	(1,601	)	$	10,865
Segment assets at June 30, 2007	$	272,908	$	15,792		$	33,133		$	35,449	$	30,726		$	388,008

Six months ended June 30, 2006⁽¹⁾

	ILEC		CLEC			Greenfield			Wireless		Other			Total
External revenue	$	52,028	$	10,573		$	5,678		$	18,840	$	—		$	87,119
External expense		29,059		10,134			5,035			16,200		692			61,120
Depreciation		10,825		1,443			2,046			1,276		503			16,093
Operating income (loss)	$	12,144	$	(1,004	)	$	(1,403	)	$	1,364	$	(1,195	)	$	9,906
Segment assets at June 30, 2006	$	262,648	$	16,714		$	31,964		$	33,192	$	39,065		$	383,583

(1) Adjusted for the effect of SAB No. 108 items — See Note 3

9

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Reconciliation to income before income taxes (in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006 (1)			2007			2006 (1)
Segment operating income	$	4,742		$	4,831		$	10,865		$	9,906
Other income (expense):
Equity in income of unconsolidated companies, net		2			263			13			90,103
Interest, dividend income and gain on sale of investments		2,178			1,945			3,529			2,758
Impairment of investments		—			—			—			(876	)
Interest expense		(612	)		(869	)		(1,201	)		(1,893	)
Other (expense) income		(52	)		31			(116	)		21
Total other income		1,516			1,370			2,225			90,113
Income before income taxes	$	6,258		$	6,201		$	13,090		$	100,019

(1) Adjusted for the effect of SAB No. 108 items — See Note 3

5.	INCOME TAXES
	Income tax expense was $2.3 million for both the three months ended June 30, 2007 and 2006, for effective tax rates of 36.5% and 36.4%, respectively. Income tax expense decreased to $4.5 million for the six months ended June 30, 2007, compared to income tax expense of $38.7 million for the six months ended June 30, 2006. In addition, the effective rate decreased to 34.3% for the first six months of 2007 compared to 38.7% for the same prior period in 2006 due to higher tax-exempt interest income from the Company’s increased investment in federal and state tax-exempt auction-rate securities.
	The Company will incur expenditures necessary to facilitate the proposed Merger of the Company with Windstream in accordance with the Merger Agreement executed on May 25, 2007. The Company expects that these expenditures could be significant. Certain of these costs may be non-deductible for income tax purposes if the Merger is completed. During the three months ended June 30, 2007, $0.7 million of the transaction-related expenses incurred may be non-deductible if the transaction closes and could result in a potential future tax liability of $0.3 million.
	The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a charge of $1.1 million to the January 1, 2007 balance of retained earnings. As of the date of adoption, the Company had unrecognized tax benefits of $8.0 million. Included in the balance at January 1, 2007, are $2.3 million of unrecognized tax benefits that, if recognized, would affect the effective tax rate.
	The Company files a consolidated federal income tax return and separate income tax returns in several state jurisdictions. The Company is no longer subject to federal income tax examinations for years before 2000 and is no longer subject to state and local income tax examinations by tax authorities for years before 2003.
	The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. In conjunction with the adoption of FIN 48, the Company recognized approximately $1.8 million for the potential payment of interest and penalties at January 1, 2007, which is included as a component of the $8.0 million unrecognized tax benefit noted above. During the three months ended June 30, 2007, the Company recognized approximately $0.2 million in potential interest and penalties associated with uncertain tax positions. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of overall income tax expense.
	Currently, $3.8 million of unrecognized tax benefits relates to an ongoing IRS audit that may be settled by June 30, 2008 and is included in income taxes payable.

10

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

6.	RECENT ACCOUNTING PRONOUNCEMENTS
	SFAS No. 159
	In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities,” which amends statement No. 115. SFAS No. 159 permits business entities to measure eligible items at fair value at specified election dates, and report unrealized gains and losses on items for which fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company will adopt SFAS No. 159 on January 1, 2008, and is currently evaluating the impact of SFAS No. 159 on the results of operations, financial position and cash flows.
	Emerging Issues Task Force Issue No. 06-4
	In September 2006, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 06-4 (“EITF 06-4”), “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”. The scope of EITF 06-4 is limited to the recognition of a liability and related compensation costs for endorsement split-dollar life insurance policies that provide a benefit to an employee that extends to postretirement periods. The EITF reached a consensus that for a split-dollar life insurance arrangement within the scope of EITF 06-4, an employer should recognize a liability for future benefits in accordance with existing accounting guidance. EITF 06-4 is effective for fiscal years beginning after December 15, 2006. The Company adopted EITF 06-4 on January 1, 2007, with no material effect on its consolidated financial statements.
	EITF Issue No. 06-5
	In September 2006, the EITF reached a consensus on EITF Issue No. 06-5 (“EITF 06-5”), “Accounting for Purchases of Life Insurance — Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4”. The EITF reached a conclusion that a policyholder should consider any additional amounts included in the contractual terms of the policy in determining the amount that could be realized under the insurance contract and that a policyholder should determine the amount that could be realized under the life insurance contract assuming the surrender of an individual-life by individual-life policy (or certificate by certificate in a group policy). EITF 06-5 is effective for fiscal years beginning after December 15, 2006. The Company adopted EITF 06-5 on January 1, 2007, with no material effect on its consolidated financial statements.
	SFAS No. 157
	In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, and therefore does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company will adopt SFAS No. 157 on January 1, 2008 and is currently evaluating the impact of SFAS No. 157 on the results of operations, financial position and cash flows.
	FASB Interpretation No. 48
	In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of SFAS No. 109, “Accounting for Income Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109 and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The evaluation of a tax position in accordance with this Interpretation is a two-step process. The first step is recognition, in which the enterprise determines whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step is measurement. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a charge of approximately $1.1 million to the January 1, 2007 balance of retained earnings. As of the date of adoption, the Company had unrecognized tax benefits of $8.0 million. Included in the balance at January 1, 2007, are $2.3 million of unrecognized tax benefits that, if recognized, would affect the effective tax rate.

11

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

	EITF Issue No. 06-3
	In June 2006, the EITF reached a consensus on EITF Issue No. 06-3 (“EITF 06-3”), “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement”. The EITF reached a consensus that the scope of EITF 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but are not limited to, sales, use, value added, and some excise taxes. The EITF also reached a consensus that the presentation of taxes within the scope of this issue on either a gross (included in revenues and costs) or a net (excluded from revenues) basis is an accounting policy decision that should be disclosed. In addition, for any such taxes that are reported on a gross basis, a company should disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant. The Company presents sales and excise taxes received from customers on a net basis. Universal Service Administration Company (“USAC”) payments remitted as well as USAC revenue received from customers, are recorded on a gross basis. For the three months ended June 30, 2007, the Company included $0.7 million of revenue and $0.8 million of expense in its consolidated financial statements, compared to $0.6 million of revenue and $0.6 million of expense for the three months ended June 30, 2006. For the six months ended June 30, 2007 the Company recorded $1.2 million in USAC revenue and $1.6 million in USAC expense compared to $1.1 million in revenues and $1.2 million in expenses for the same six months in the prior year. EITF 06-3 is effective for fiscal years beginning after December 15, 2006. The Company adopted EITF 06-3 on January 1, 2007, with no material effect on its consolidated financial statements.
7.	STOCK COMPENSATION PLANS
	The Company accounts for cash-settled awards as liability awards and records compensation expense based on the fair value of the award at the end of each reporting period. The liability is re-measured at each reporting period based on the then current stock price and the effects of the stock price changes are recognized as compensation expense. The Company accounts for equity awards based on the grant date fair value. The Company records compensation expense and credits common stock within stockholders’ equity based on the fair value of the award at the grant date, which is recognized over the vesting period of the stock. At June 30, 2007, the majority of the Company’s stock compensation expense was included in selling, general and administrative expense in the Company’s Consolidated Statements of Income.
	During the six months ended June 30, 2007 and 2006, respectively, the Company granted 238,992 and 88,496 unrestricted and nonvested shares, of which 198,709 and 56,902 were nonvested shares, respectively, under the Amended and Restated 2001 Stock Incentive Plan (“Stock Incentive Plan”) to participants with a weighted-average fair value of $24 and $13, respectively, measured at the grant-date fair value. At June 30, 2007, there were 242,583 nonvested shares outstanding. The Company accounts for the unrestricted and nonvested share awards as equity awards in accordance with SFAS No. 123R. At June 30, 2007, unrecognized compensation expense related to nonvested shares was $3.7 million, which will be recognized over a weighted-average period of 2.4 years. For the three months ended June 30, 2007, the Company recognized stock compensation expense and related tax benefits of $2.0 million and $0.8 million, respectively, compared to $1.3 million and $0.5 million, respectively, for the same period in 2006. For the six months ended June 30, 2007, the Company recognized stock compensation expense and related tax benefits of $3.2 million and $1.3 million, respectively, compared to $2.0 million and $0.8 million, respectively, for the same period in 2006.
	Prior to August 10, 2005, the Company granted stock options under the Stock Incentive Plan. These options were granted by the Board of Directors, at prices determined by the closing price on the date of grant, and expire 10 years from the date of grant. Beginning in August 2005, the Company changed its compensation philosophy to eliminate future stock option grants. The Company accounts for its stock options as equity awards in accordance with SFAS No. 123R. The total intrinsic value of stock options exercised during the three and six months ended June 30, 2007 was $0.3 million and $0.4 million, respectively, compared to $1.7 million and $2.2 million for the three and six months ended June 30, 2006, respectively. There were no stock options granted during the six months ended June 30, 2007 and 2006, respectively.
	The Company adopted the provisions of FASB Staff Position (“FSP”) No. FAS 123R-3 “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards”, on January 1, 2006. Accordingly, the Company reported the entire amount of excess tax benefits of $0.4 million and $0.9 million for the six months ended June 30,

12

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

2007 and 2006, respectively, in additional paid-in capital resulting from its stock compensation plans in cash flows from financing activities in its Consolidated Statements of Cash Flows.

Activity under the Company’s stock option plans for the six months ended June 30, 2007 was as follows:

						Weighted-
				Weighted-		Average		Aggregate
				Average		Remaining		Intrinsic
	Number			Exercise		Contractual		Value
	of Options			Price		Term		(in thousands)
Options outstanding and exercisable at December 31, 2006		578,183		$	16
Options exercised		(31,650	)		15
Options forfeited		(5,988	)		28
Options outstanding and exercisable at June 30, 2007		540,545		$	15		5.93	$	8,155

Nonvested share activity for the six months ended June 30, 2007 was as follows:

				Weighted-
				Average
	Number			Grant-Date
	of Shares			Value
Nonvested shares at December 31, 2006		99,353		$	12
Shares granted		198,709			24
Shares vested		(55,479	)		11
Nonvested shares at June 30, 2007		242,583		$	22

	The fair value of shares vested during the six months ended June 30, 2007 was approximately $0.6 million.
8.	INVESTMENTS
(a)	Investments in Unconsolidated Companies
	The Company recognized income of less than $0.1 million and $0.3 million for the three months ended June 30, 2007 and 2006, respectively, and less than $0.1 million and $90.1 million for the six months ended June 30, 2007 and 2006, respectively, as its share of earnings from unconsolidated companies accounted for under the equity method. Palmetto is a partnership that held a 50% interest in 10 cellular rural service areas (“RSAs”) in North and South Carolina. On March 15, 2006, Palmetto sold its ownership interests in the 10 RSAs to Alltel Corporation for approximately $455 million. As a result of this transaction, the Company recorded equity in income of unconsolidated companies of $89.2 million, which included $10.3 million from the recognition of the difference in the Company’s carrying value of Palmetto and the Company’s percentage share of the underlying assets, and received a pre-tax cash distribution from Palmetto of $97.4 million as proceeds from the sale. In August 2006, the Company sold its remaining investment in Palmetto for $4.2 million, which resulted in a gain of $0.8 million.

13

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Investments in unconsolidated companies consisted of the following (in thousands):

	Ownership
	Percentage at			June 30,		December 31,
	June 30, 2007			2007		2006
Equity Method:
Access/On Multimedia, Inc.		20.1	%	$	48	$	35
Cost Method:
Magnolia Holding Company, L.L.C.		4.6	%		1,111		1,111
InComm Holdings, Inc.		0.2	%		1,239		1,304
Other	Various				1,846		2,039
Total				$	4,244	$	4,489

The Company did not recognize any impairment charges in the six months ended June 30, 2007. During the six months ended June 30, 2006, the Company recognized impairment charges of $0.4 million and $0.3 million on InComm Holdings, Inc., formerly PRE Holdings, Inc., and Magnolia, a shareholder of PRE Holdings, Inc. respectively. The impairment losses were determined based upon fair value resulting from a transaction whereby InComm Holdings, Inc. purchased PRE Holdings, Inc. These impairment losses are included in the caption “Impairment of investments” in the Condensed Consolidated Statements of Income.

(b) Investment Securities

The book value, gross unrealized holding gains and losses and fair value for the Company’s investments at June 30, 2007 and December 31, 2006, were as follows (in thousands):

Investment Securities	Book		Gross Unrealized		Gross Unrealized
Available-for-Sale	Value		Holding Gains		Holding Losses			Fair Value
June 30, 2007	$	1,024	$	115	$	(8	)	$	1,131
December 31, 2006	$	4,015	$	417	$	(46	)	$	4,386

During the first six months of 2007, the Company sold investment securities for proceeds of $4.0 million and realized a gain of approximately $1.0 million, compared to proceeds of $1.3 million of investment securities for a realized gain of $0.9 million during the same 2006 period.

The Company did not recognize any impairment charges in the six months ended June 30, 2007. During the six months ended June 30, 2006, the Company recognized impairment losses of $0.2 million on equity investment securities due to declines in the fair value of those securities that, in the opinion of management, were considered to be other than temporary. The impairment losses are included in the caption “Impairment of investments” in the Condensed Consolidated Statements of Income.

At June 30, 2007, the Company held $92.6 million of tax-exempt auction-rate securities that are classified as short-term, available-for-sale securities. Auction-rate securities are long-term variable rate bonds tied to short-term interest rates that trade or mature on a shorter term than the underlying instrument based on a “dutch auction” process, which occurs every 7 to 35 days. The underlying investments are in municipal bonds. The Company receives tax-exempt interest income on these auction-rate securities when the interest rates reset or semiannually. The carrying value of these auction-rate securities approximates the fair value due to the short-term nature of the securities. There were no unrealized gains or losses on these securities at June 30, 2007.

14

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(c) Other Investments

	Other investments represent the Company’s investment in CoBank, ACB (“CoBank”), and Rural Telephone Finance Cooperative (“RTFC”), which are organized as cooperatives for federal income tax purposes. Distributions from CoBank include both cash distributions of CoBank’s earnings and equity participation certificates. These equity participation certificates are included in the Company’s carrying value of the investment and are recognized as other income in the period earned. Other investments totaled $2.1 million and $1.9 million at June 30, 2007 and December 31, 2006, respectively.
9.	PROPERTY AND EQUIPMENT
	Property and equipment was composed of the following (in thousands):

	June 30,			December 31,
	2007			2006
Land, buildings and general equipment	$	93,435		$	92,971
Central office equipment		214,435			203,118
Poles, wires, cables and conduit		185,064			174,875
Construction in progress		16,127			20,043
		509,061			491,007
Accumulated depreciation		(294,209	)		(281,099	)
Property and equipment, net	$	214,852		$	209,908

	The Company’s construction in progress decreased $3.9 million to $16.1 million at June 30, 2007, primarily related to the completion of projects associated with the Company’s strategic initiative to deploy fiber optic facilities and related equipment for the deployment of video and data services. Included in central office equipment at June 30, 2007, was approximately $1.0 million of assets purchased with vendor credits and free-of-charge services related to the replacement of certain wireless cell site equipment.
10.	COMMON STOCK
	During the six months ended June 30, 2007 and 2006, the Company issued common stock under its Amended and Restated 2001 Stock Incentive Plan and as a result of the exercise of stock options.
	The following table provides a reconciliation of the denominator used in computing basic earnings per share to the denominator used in computing diluted earnings per share for the three and six months ended June 30, 2007 and 2006 (in thousands):

	Three Months ended June 30,				Six Months ended June 30,
	2007		2006		2007		2006
Basic weighted-average shares outstanding		20,033		19,165		19,997		19,034
Effect of dilutive stock options and nonvested stock		218		287		243		325
Total diluted weighted-average shares outstanding		20,251		19,452		20,240		19,359

Anti-dilutive shares of common stock totaling approximately 117,881 and 252,000 for the three months ended June 30, 2007 and 2006, respectively, and 117,881 and 367,000 for the six months ended June 30, 2007 and 2006, respectively, were not included in the computation of diluted earnings per share and diluted weighted-average shares outstanding because the exercise prices of these options were greater than the average market price of the common stock during the respective periods. At June 30, 2007 and 2006, the Company had total options outstanding of approximately 541,000 and 1,185,000, respectively, and nonvested shares outstanding of approximately 243,000 and 100,000, respectively.

15

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

	The Company adopted the provisions of FSP No. FAS 123R-3 on January 1, 2006. Accordingly, the Company included the entire amount of excess tax benefits that would be credited to additional paid-in capital upon the exercise of its dilutive stock options in its diluted weighted-average share calculation.
	Cash dividends per share of common stock were $0.12 and $0.10 for the three months ended June 30, 2007 and 2006, respectively, and $0.24 and $0.20 for the six months ended June 30, 2007 and 2006, respectively.
11.	DEBT INSTRUMENTS
	Long-term debt consists of the following (in thousands):

	June 30,		December 31,
	2007		2006
Term loan with interest at 7.32%	$	37,500	$	40,000
Less: Current portion of long-term debt		5,000		5,000
Long-term debt	$	32,500	$	35,000

	On April 18, 2006, the Company entered into a Master Loan Agreement (“MLA”), which provides a revolving loan commitment of $40.0 million and incorporated the Company’s existing 7.32% fixed rate $50.0 million term loan. The revolving loan commitment expires on June 30, 2011. The proceeds of borrowings under the revolving loan commitment will be used by the Company for working capital, capital expenditures, and other general corporate purposes. The unpaid principal balance of each advance under the revolving loan commitment will accrue interest, in the Company’s discretion, at a (i) variable base rate option, (ii) quoted rate option or (iii) LIBOR-based option. Subject to exceptions relating to loans accruing interest at the LIBOR-based option, interest will be payable on the last day of each calendar quarter. Under the MLA, the Company’s term loan matures on December 31, 2014. The term loan will accrue interest at a fixed annual interest rate of 7.32% with principal repayments of $1.25 million due quarterly. At June 30, 2007, $37.5 million was outstanding.
12.	PENSION AND POSTRETIREMENT PLANS
	Components of net periodic benefit cost for the three months ended June 30 (in thousands):

	Pension Benefits						Postretirement Benefits
	2007			2006			2007			2006
Service cost	$	629		$	612		$	13		$	12
Interest cost		788			724			126			115
Expected return on plan assets		(969	)		(899	)		—			—
Amortization of prior service cost		1			—			(7	)		(2	)
Amortization of the net gain		—			—			(15	)		(31	)
Net periodic benefit cost	$	449		$	437		$	117		$	94

16

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Components of net periodic benefit cost for the six months ended June 30 (in thousands):

	Pension Benefits						Postretirement Benefits
	2007			2006			2007			2006
Service cost	$	1,222		$	1,224		$	26		$	24
Interest cost		1,575			1,448			252			230
Expected return on plan assets		(1,937	)		(1,799	)		—			—
Amortization of prior service cost		1			1			(14	)		(4	)
Amortization of the net gain		—			—			(30	)		(62	)
Net periodic benefit cost	$	861		$	874		$	234		$	188

The Company does not expect to contribute to the pension plan in 2007.

At June 30, 2007, the Company’s pension and postretirement liabilities were $3.5 million and $8.4 million, respectively. The current portion of the Company’s pension and postretirement liabilities at June 30, 2007 was $2.4 million and $0.8 million, respectively.

In December 2003, the Medicare Act was signed into law. The Medicare Act introduced a prescription drug benefit under Medicare (Medicare Part D) and a federal subsidy to sponsors of retirement health care plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In May 2004, the FASB issued FSP No. 106-2 “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003”, providing final guidance on accounting for the Medicare Act. In accordance with FSP No. 106-2, the Company determined that the net periodic benefit costs do not reflect any amount associated with the subsidy since insurance is not provided; rather the plan provides a reimbursement of premiums paid by the retiree.

Under new plan provisions, which were effective January 1, 2006, the Company pays a fixed annual amount towards each eligible post-65 retiree’s health care coverage. Retirees are required to pay all future premium increases in excess of the Company’s current contribution. As future increases are passed on to these retirees, the trend (which is the rate at which premiums and claims are projected to increase in the future) will not affect the cost of the plan.

17

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Introduction

CT Communications, Inc. (the Company), and its subsidiaries provide a broad range of telecommunications and related services to residential and business customers located primarily in North Carolina. The Company’s primary services include local and long distance telephone service, Internet and data services and wireless products and services.

The Company announced on May 25, 2007 that it has entered into an Agreement and Plan of Merger, (the “Merger Agreement”), with Windstream Corporation, a Delaware corporation (“Windstream”), pursuant to which Windstream Marlin, Inc., a wholly owned subsidiary of Windstream (“Merger Sub”) will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation. Pursuant to the Merger Agreement, at the effective time of the Merger, each outstanding share of common stock of the Company (the “Shares”), other than any Shares owned by the Company or any subsidiary of the Company, Merger Sub or any direct or indirect wholly owned subsidiary of Windstream, will be canceled and converted automatically into the right to receive $31.50 in cash, without interest. The Merger is conditioned, on certain customary conditions, including the approval of the Merger Agreement by the shareholders of the Company, the approval of the Federal Communications Commission and other regulatory approvals.

On July 9, 2007, the Federal Trade Commission notified the Company that its request for early termination of the waiting period had been granted. On or about July 6, 2007, the Company distributed to all shareholders of record as of June 28, 2007, a definitive proxy statement related to a special meeting of shareholders to be held on August 23, 2007. At the special meeting, the shareholders will consider and vote on the proposal to approve the Merger Agreement with Windstream. The acquisition is expected to close during the third quarter of 2007. However, factors outside of management’s control could delay or prevent completion of the proposed Merger. A change in control of the Company could trigger modification of terms of certain plans or agreements including contracts and certain employee benefit arrangements. The Merger Agreement provides that the Company may be required to pay Windstream a termination fee of $19 million in certain circumstances. For the six months ended June 30, 2007, the Company recorded $1.8 million of transaction related costs in operating expense associated with the proposed Merger.

During the second quarter of 2007, operating revenue increased 5.2% to $46.3 million, while operating income decreased 1.8% to $4.7 million compared to the same period in 2006. For the six months ended June 30, 2007, operating revenue increased 5.3% to $91.7 million, while operating income increased 9.7% to $10.9 million compared to the same period in 2006. The Company’s incumbent local exchange carrier (“ILEC”) operating revenue increased 4.1% to $27.2 million for the first quarter of 2007 compared to the same 2006 period and 4.4% to $54.3 million for the six months ended June 30, 2007 compared to the same 2006 period. ILEC’s operating revenue included a $1.0 million increase in universal service revenue based on the final 2006 cost study. Wireless operating revenue increased 9.2% to $10.6 million for the three months ended June 30, 2007 compared to the same 2006 period and 7.9% to $20.3 million for the six months ended June 30, 2007 compared to the same 2006 period, with a 4.9% increase in subscribers.

Net income for the Company was $4.0 million and $8.6 million for the three and six months ended June 30, 2007, respectively, compared to $3.9 million and $61.3 million for the three and six months ended June 30, 2006, respectively. Diluted earnings per share were $0.20 and $0.42 for the three and six months ended June 30, 2007, respectively, compared to $0.20 and $3.17 for the three and six months ended June 30, 2006, respectively. For the six months ended June 30, 2007, the Company recorded $1.8 million of transaction related costs in operating expense associated with the proposed Merger. Net income and diluted earnings per share for the six months ended June 30, 2006 included $89.2 million of equity income of unconsolidated companies as a result of the Palmetto MobileNet, L.P. (“Palmetto”) transaction.

On March 15, 2006, Palmetto sold its ownership interests in 10 cellular rural service areas (“RSAs”) to Alltel Corporation for approximately $455 million. As a result of this transaction, the Company recorded equity in income of unconsolidated companies of $89.2 million and received a pre-tax cash distribution from Palmetto of $97.4 million as proceeds from the sale. In August 2006, the Company sold its remaining investment in Palmetto for $4.2 million and recorded a gain of $0.8 million as a result of this transaction. Proceeds from this transaction were invested in federal and state tax-exempt auction-rate securities, of which the Company had $92.6 million invested at June 30, 2007.

18

Industry and Operating Trends

The telecommunications industry is highly competitive and characterized by regulatory uncertainty and high capital investment in technology. Industry participants are faced with the challenge of adapting their organizations, services, processes and systems to this environment.

The Company has expanded its core businesses through the development of integrated product and service offerings, investment in growth initiatives and targeted marketing efforts to efficiently identify and obtain customers. The Company continues to focus on maximizing its wireline businesses by investing to enhance its broadband network capabilities, cross-selling bundled products and packages and growing its customer base.

The Company’s ILEC is facing more competitive pressure than at any other time in its history. Wireless providers and competitive local exchange carriers (“CLECs”) have targeted the Company’s customers and will continue to promote low cost, flexible communications alternatives. Some customers are choosing to substitute their landline service with wireless service. The Company believes this has contributed to the access line decrease in the ILEC over the past several years, although the Company’s Wireless business has likely benefited from such substitution.

Access line losses in recent years have also been impacted by the adoption of broadband services by customers that had traditionally subscribed to dial-up Internet service. As customers switch to broadband services, they no longer need a second landline for use with their dial-up Internet service. If such a landline is replaced with a Company broadband connection, then the Company can offset, at least partially, the lost landline revenue through revenues from broadband services provided to the customer.

Cable telephony and Voice over Internet Protocol (“VoIP”) providers are significant threats to the Company’s business. Service providers utilizing these technologies are capable of delivering a competitive voice service to the Company’s customers. These service providers are not subject to certain regulatory constraints that have impacted the Company’s business model.

Time Warner Cable offers cable television, cable telephone and Internet service in most of the Company’s service territories and launched cable telephone service in the Company’s ILEC territory in July 2006. The Company has taken, and will continue to take, several steps to position it to address competition from cable telephone services and to better position the Company in the markets in which it operates. Prior to the introduction of cable telephone service, and through the second quarter of 2007, the Company continued its aggressive marketing campaigns and product development designed to further position the Company as a leading broadband provider in the marketplace. The Company has adopted a strategy based on delivering superior broadband service capabilities to capture and retain the broadband relationship with customers. The Company’s plan involves leveraging that relationship by bundling multiple products and services with attractive value pricing to expand the revenue opportunity with each customer.

The Company began implementing this strategy in 2004, and in 2005 completed its initial plan to enhance the broadband capabilities in its ILEC territory. The Company now offers broadband speeds of up to 10 Mbps throughout much of its ILEC service area, a higher rate than offered by the ILEC’s competitors. Broadband customer growth has continued to accelerate in the ILEC with the availability of higher bandwidth services.

Broadband customers increased by 5,886 or 24.9% from June 30, 2006, to end the second quarter of 2007 at 29,547. Broadband penetration was 24.1% of ILEC lines and 23.5% of Greenfield lines at June 30, 2007. Maintaining superior broadband service capabilities has and will continue to be central to the Company’s competitive strategy.

The Company has also been working to develop the next evolution of its network architecture and the services that will be delivered over its network. The plan will define the voice, data, video and entertainment products and services to be delivered to the Company’s customers, as well as the network design and bandwidth necessary to provide those products and services. A majority of the Company’s ILEC customers can be served with aerial fiber optic facilities that can be deployed at a lower capital cost than buried fiber facilities. In addition, the Company has begun placing fiber to the home in select new developments. On May 11, 2006, the Company executed a franchise agreement with the City of Concord, the largest city in the Company’s ILEC territory, permitting the Company to offer video services within the city. In July 2006, the State of North Carolina passed legislation that will significantly aid the Company in its efforts to provide video services by allowing the Company to avoid lengthy video franchise procurement processes and uneconomic build-out requirements.

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The Company launched a video trial to select customers in the ILEC service territory at the end of the first quarter of 2007. The trial participants receive video, broadband, and voice services delivered through fiber optic facilities, which are part of the Company’s fiber initiative that passed over approximately 18,000 ILEC homes at the end of the second quarter of 2007. The video service offered to customers participating in this trial includes a fully competitive channel line-up and high definition programming and digital video recording (“DVR”) capabilities. Initial broadband service download speeds for customers in this trial are up to 15 Mbps.

The initial investment in video head-end and signal processing equipment was substantially complete by March 31, 2007. The Company has continued to deploy aerial fiber optic cable in 2007 to support the delivery of voice, video and data products to select ILEC customers.

The Company’s capital expenditures for the six months ended June 30, 2007, were $21.1 million compared to $13.1 million for the same 2006 period. The Company was required to move forward with the replacement of certain wireless cell site equipment as mandated by Cingular Wireless (“Cingular”) and expects to spend a total of approximately $4 million to complete this project.

In 2001, the Company entered into a Joint Operating Agreement (“JOA”) with Cingular. Under the JOA, the Company purchases pre-defined services from Cingular, such as switching, and remains subject to certain conditions including technology, branding and service offering requirements. Products and services are co-branded with Cingular. The Company has the ability to bundle wireless services with wireline products and services and can customize pricing plans for bundled services based on its customers’ needs. Additionally, the JOA with Cingular allows the Company to benefit from their nationally recognized brand and nationwide network, provides access to favorable purchasing discounts for cell site electronics, handsets and equipment, and enables the Company to participate in shared market advertising.

The JOA may at times require the Company to implement technical changes to make its network consistent with Cingular’s technical standards. As a result, the Company may be required to implement certain technical changes that, while appropriate for Cingular’s network, may not provide attractive returns on capital investment for the Company. The Company is currently exploring with Cingular the implementation of several new technical standards. The next generation wireless data technology, Universal Mobile Telecommunications System (“UMTS”), a technology that may ultimately support higher data transfer speeds, is under development and may be deployed beginning in 2008. In addition, Cingular has required the Company to replace certain wireless cell site equipment to comply with Cingular’s plans to migrate North Carolina wireless cell site equipment to another vendor. This project, which is now underway, is expected to be completed in the third quarter of 2007 at a total net cash outlay of approximately $4 million. During the second quarter of 2007, the Company recognized a loss of $0.3 million related to this project. AT&T, through its acquisition of Bell South Corporation in December 2006, acquired control of Cingular. The Company does not believe this event will have a material impact on the Company’s wireless business.

Although the wireless telecommunications industry continues to grow, a high degree of competition exists among carriers. This competition will continue to put pressure on pricing and margins as carriers compete for customers. Future carrier revenue growth is highly dependent upon the number of net customer additions a carrier can achieve and the average revenue rates derived from its customers. Wireless industry competition and high customer penetration rates have caused and will likely continue to cause the Company’s subscriber growth rate to moderate in comparison to historical growth rates.

Regulatory requirements have grown in certain areas of the Company’s business and have added complexity and expense to its business model. The Company’s telecommunications services are regulated by the FCC at the federal level, and state utility commissions, principally the North Carolina Utilities Commission (“NCUC”).

The ILEC must provide basic telephone service as well as most tariffed services to all customers in its regulated service area, regardless of the cost to provide those services. Although the Company does benefit from certain universal service fund (“USF”) payments intended to offset certain costs to provide service, such reimbursements are increasingly at risk while the service obligations remain unchanged.

The Company’s ILEC derives a material portion of its revenue from USF mechanisms administered by the National Exchange Carrier Association (“NECA”). NECA administers the funding through revenue pooling arrangements in which

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local exchange carriers participate. The Company’s ILEC participates in the NECA common line and traffic sensitive interstate access pools and received Interstate Common Line Support (“ICLS”) funds. The Company currently does not qualify for USF local switching support or USF high cost loop support.

Effective July 1, 2005, the Company’s ILEC expanded its participation in the NECA pool by joining the NECA traffic sensitive pool. The Company had previously filed its own traffic sensitive tariff with rates based on its projected cost and demand. As a participant in the NECA traffic sensitive pool, the Company charges NECA tariff rates that are determined by averaging projected costs and demand among all pool members. The ILEC’s expected interstate access revenues from the traffic sensitive pool are based on expenses plus a return on investment. The Company shares the risk of reductions or increases in demand for its services with hundreds of other telephone companies in a number of different markets.

NECA’s pooling arrangements are based on nationwide average costs that are applied to certain projected demand quantities, and therefore revenues are initially recorded based on estimates. These estimates involve a variety of complex calculations, and the ultimate amount realized from the pools may differ from the Company’s estimates. Management periodically reviews these estimates and makes adjustments as applicable.

The Company’s ILEC, CLEC, and Greenfield businesses also receive “intercarrier compensation” for the use of their facilities for origination and termination of interexchange and local calls from other telecommunications providers, including long distance companies, wireless carriers, and other local exchange carriers, through access and reciprocal compensation charges established in accordance with state laws. Such intercarrier compensation constitutes a material portion of the Company’s revenues and is increasingly subject to regulatory uncertainty and carrier efforts to avoid payment through the use of alternative technologies such as VoIP.

The FCC, and possibly Congress, is expected to continue to devote resources to the consideration of USF and intercarrier compensation reform in 2007 and future years, and it is possible that action taken by those governmental entities would result in a reduction in the amount of revenue the ILEC receives from those sources. On February 10, 2005, the FCC announced adoption of a Further Notice of Proposed Rule Making for Intercarrier Compensation Reform. The text of the FCC’s notice was released on March 3, 2005. On July 24, 2006, the National Association of Regulatory Utility Commissioners’ Task Force on Intercarrier Compensation filed a proposed reform plan with the FCC. This proposal, commonly called the Missoula Plan, proposed to eliminate distinctions between traffic types for a majority of the lines in the U.S., establish default interconnection architecture, increase subscriber line charges, and replace lost revenue with direct payments from the USF or a similar fund. The Company is generally supportive of the Missoula Plan in its current form and is currently participating in industry associations that are working to further evaluate the proposal, develop recommended modifications and file comments with the FCC.

The federal universal service program is under increasing scrutiny from legislators, regulators and service providers due to the growth in the demands on the fund and changes in the telecommunications industry. As a result of the growth in the demands on the fund, the FCC has increased the USF customer surcharge from the 9.7% charge applicable to the first quarter of 2007 to 11.3% for the third quarter of 2007. Although it is generally contemplated that companies subject to this charge will pass it on to their customers, the Company in the case of certain service offerings or customer groups elects not to do so because competitors’ offerings are not subject to the charge. Accordingly, increases in the rate imposed by the FCC will generally result in a decrease in the Company’s operating margins on those services where charges are not passed on to customers. In addition, the rate increase creates additional pressure on regulators and legislators to reform the universal service system.

The FCC is also considering the appropriate regulatory treatment of VoIP services. Despite providing voice services similar to those offered by the Company, VoIP providers have to date avoided many regulatory requirements that currently apply to the Company in the provision of those services. This disparate regulatory treatment provides VoIP providers with a competitive advantage, although the FCC has recently attempted to address some of the regulatory disparities. In 2004, the FCC issued an order requiring VoIP providers to provide 911 service to their customers, but have not yet addressed other issues raised in that proceeding, such as access for the disabled and intercarrier compensation.

In June 2006, the FCC released a Report and Order and Notice of Proposed Rulemaking, which addressed USF obligations for VoIP and wireless carriers. The FCC ordered VoIP carriers to pay into USF and established a “safe harbor” of 64.9% that those carriers could apply to determine the interstate portion of their revenues that were subject to the funding obligations. The order eliminates one competitive advantage enjoyed by many VoIP providers over traditional telephone service providers, as many such VoIP providers were not contributing to USF at the levels mandated by the FCC.

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Since September 1997, the ILEC’s rates for local exchange services have been established under a price regulation plan approved by the NCUC. Under the price regulation plan, the Company’s charges are no longer subject to rate-base, rate-of-return regulation. The Company’s price regulation plan allows the Company to increase rates annually for basic local exchange services up to 12% and for more competitive services by up to 20% annually. The Company’s plan also permits annual, total revenue increases of up to 2.5 times the change in inflation. The plan further allows the Company to increase or decrease prices on an annual basis, and to make additional price changes in certain circumstances to meet competitive offerings. The plan imposes certain financial penalties if the Company fails to meet service quality standards established by the NCUC.

In May 2006, the Company executed a franchise agreement with the City of Concord permitting the Company to offer video services within the city. In January 2007, new legislation in North Carolina took effect that established a statewide franchise structure. Under the new law, the North Carolina Secretary of State replaces North Carolina counties and cities as the exclusive franchising authority for video services. To obtain a franchise from the Secretary of State, the Company must file a notice designating the areas within which it desires to provide video services. To maintain the authority granted by the notice filing, the Company must pass one or more homes with its service no later than 120 days after the notice is filed. No build-out requirements are mandated in the franchise law. The Company believes that the new law will significantly aid its efforts to provide video services over its network by allowing the Company to avoid lengthy franchise procurement processes with various local governments and uneconomic build-out requirements that are frequently imposed by those local governments. The Company has now filed for and received authorization to provide services in Cornelius, North Carolina.

In March 2007, the Company petitioned the FCC for a waiver from a requirement that all video set-top boxes deployed after July 1, 2007 have security functions that are separate from navigation functions. The Company’s petition requests an 18 month extension of the current deadline, during which time the Company would explore downloadable security systems and provide boxes with separate integration, to the extent available, upon customer request. The Company also provided the FCC with alternative relief options in the event the FCC found the primary request unacceptable. On June 29, 2007, the FCC granted temporary relief to the Company for basic set top boxes, but not for boxes providing high definition or digital video recorder capabilities. The Company is currently evaluating the impact of the FCC’s order on the Company’s video services offerings, but the Company does not believe the order will not have a material impact on the overall financial results of the Company.

The Company’s CLEC and Greenfield businesses rely in part on unbundled network elements obtained from the applicable incumbent local exchange carrier. FCC rules changes over the past several years have resulted in increases in the cost of some of those unbundled network elements, including high capacity transport elements and unbundled network element platform (“UNE-P”). The Company continues to utilize alternative and more cost-effective transport elements where available to minimize the Company’s transport costs. The Company has executed a new interconnection agreement with BellSouth that addresses those elements that remain subject to the federal interconnection rules. The Company also executed commercial agreements with certain incumbent local exchange carriers that permit the Company to maintain and lease additional UNE-P lines from those carriers at negotiated rates. To lower expenses and improve service levels, the Company primarily targets new customers that can be served by owned or co-located facilities and continues to pursue opportunities to bring existing customers served with leased elements on to the Company’s network.

In April 2007, the FCC released an order strengthening existing rules regarding the use and disclosure of Customer Proprietary Network Information (“CPNI”). The rules require customers to use passwords when requesting call detail records from their telecommunications carrier. In addition, the new rules require telecommunications carriers to notify customers if their confidential information was breached. The new rules are expected to be effective beginning December 8, 2007.

Results of Operations

Statements of Financial Accounting Standards (“SFAS”) No. 131 “Disclosures about Segments of an Enterprise and Related Information”, establishes standards for reporting information about operating segments, which requires segmentation based on internal organization and reporting of revenue and operating income based on internal accounting methods. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.

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Historically, the Company has reported its results of operations in six separate operating segments as defined by SFAS No. 131. These six segments were ILEC, CLEC, Wireless, Greenfield, Internet, and Palmetto. During 2006, the Company sold its investment in Palmetto and as a result no longer reports results for that segment after December 31, 2006. During the first quarter of 2007, the Company launched its video product to trial customers located within the ILEC service territory, and as a result, the Company evaluated whether video should be accounted for as a separate operating segment or as a product within the Company’s existing operating segments. This in turn led the Company to reassess how it manages the business and its assumptions, methodologies and reporting classifications associated with all of its reporting segments. In response to the increased focus on integrated telecommunications bundled offerings and the addition of new product offerings, the Company has modified its financial reporting processes to present revenues and expenses by defined customer groups. This method of presentation will report revenues and expenses by customer relationship to aid in decision-making. As a result of the restructuring of the Company’s financial reporting process and the assessment performed, the Company modified its segment reporting to report four operating segments: ILEC, CLEC, Greenfield, and Wireless, effective January 1, 2007. As a result, the former Internet segment results have been included in the ILEC, CLEC, and Greenfield segment results for all periods presented. All other business units, investments and operations of the Company that do not fall under these segments and do not meet reporting guidelines and thresholds are reported under “Other”.

Accounting policies of the segments are the same as those described in the summary of significant accounting policies included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. The Company’s management evaluates performance based on certain operating metrics, including operating revenues and operating income. Intersegment transactions are eliminated. All segments reported below provide services primarily within North Carolina. Amounts as of and for the three and six months ended June 30, 2006 have been recast to conform to the current period presentation.

In September 2006, the Securities and Exchange Commission (“SEC”) issued SAB No. 108 to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. The Company adopted SAB No. 108 on December 31, 2006 and recorded related adjustments using the cumulative effect transition method as of January 1, 2006. The Company has recast its first and second quarter 2006 financial results to reflect the impact of the SAB No. 108 items.

The following discussion reviews the results of the Company’s consolidated operations and specific results within each reportable segment.

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Consolidated Operating Results(in thousands, except lines and customers)

	Three months ended June 30,									Six months ended June 30,
	2007			2006			Change			2007			2006			Change
Operating revenue:
Customer recurring:
Wireline	$	18,355		$	18,832		$	(477	)	$	36,936		$	37,594		$	(658	)
Wireless		6,673			5,930			743			13,032			11,583			1,449
Broadband & dial-up		3,891			3,408			483			7,787			6,589			1,198
Total customer recurring		28,919			28,170			749			57,755			55,766			1,989
Universal service		2,376			1,169			1,207			3,790			2,299			1,491
Access & interconnection		6,989			7,000			(11	)		14,073			13,793			280
Wireless roaming/settlement		3,381			3,259			122			6,390			6,176			214
Other		4,641			4,426			215			9,710			9,085			625
Total operating revenue		46,306			44,024			2,282			91,718			87,119			4,599
Operating expense:
Cost of service		15,454			14,673			781			30,736			29,658			1,078
Selling, general & administrative		18,217			16,547			1,670			34,316			31,462			2,854
Depreciation		7,893			7,973			(80	)		15,801			16,093			(292	)
Total operating expense		41,564			39,193			2,371			80,853			77,213			3,640
Operating income		4,742			4,831			(89	)		10,865			9,906			959
Other income		1,516			1,370			146			2,225			90,113			(87,888	)
Income before taxes		6,258			6,201			57			13,090			100,019			(86,929	)
Income taxes		2,286			2,258			28			4,492			38,710			(34,218	)
Net income	$	3,972		$	3,943		$	29		$	8,598		$	61,309		$	(52,711	)
Operating margin		10.2	%		11.0	%					11.8	%		11.4	%
Capital expenditures	$	10,579		$	6,064		$	4,515		$	21,082		$	13,051		$	8,031
Total assets											388,008			383,583			4,425
Wired access lines											156,270			159,623			(3,353	)
Wireless subscribers											50,297			47,932			2,365
Broadband and dial-up customers											33,459			29,255			4,204

Three Months Ended June 30

Operating revenue for the three months ended June 30, 2007 increased 5.2% to $46.3 million compared to $44.0 million for the three months ended June 30, 2006. The increase in revenue was largely attributable to a $1.2 million increase in universal service revenue primarily related to a true-up of the 2006 cost study and higher 2007 recoveries based on current cost study projections, and a $0.7 million increase in customer recurring revenue. The increase in customer recurring revenue was driven by a $0.7 million increase in wireless revenue and a $0.5 million increase in broadband revenue, which were partially offset by a decrease of $0.5 million in wireline revenue due to access line losses. Broadband customers increased 24.9%, CLEC customers increased 7.1%, Greenfield customers increased 5.8% and wireless subscribers increased 4.9%, compared to the end of the second quarter of 2006.

Operating expense for the three months ended June 30, 2007 increased 6.0% to $41.6 million compared to the three months ended June 30, 2006. The increase in operating expense was attributable to a $1.7 million increase in selling,

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general and administrative (“SG&A”) expense and a $0.8 million increase in cost of service. The increase in SG&A expense was largely due to $1.7 million of transaction related costs associated with the proposed Merger, of which $0.8 million was stock compensation expense related to fair market value adjustments for the Company’s stock units held in its nonqualified deferred compensation plan and $0.9 million was related to professional fees. The increase in cost of service was largely due to a loss of $0.3 million related to the replacement of certain wireless cell site equipment, a $0.3 million increase in personnel expense and an increase in USAC contribution rates.

Other income was $1.5 million for the three months ended June 30, 2007 compared to $1.4 million for the same 2006 period. Included in other income were gains on sales of investments of $1.0 million and $0.8 million for the three months ended June 30, 2007 and 2006, respectively.

Income tax expense was $2.3 million for both the three months ended June 30, 2007 and 2006, for effective tax rates of 36.5% and 36.4%, respectively.

The Company will incur expenditures necessary to facilitate the proposed Merger of the Company with Windstream in accordance with the Merger Agreement executed on May 25, 2007. The Company expects that these expenditures could be significant. Certain of these costs may be non-deductible for income tax purposes if the Merger is completed. During the three months ended June 30, 2007, $0.7 million of the transaction-related expenses incurred may be non-deductible if the transaction closes and could result in a potential future tax liability of $0.3 million.

Six Months Ended June 30

Operating revenue for the six months ended June 30, 2007 increased to $91.7 million compared to $87.1 million for the prior year. The increase in revenue was largely attributable to a $2.0 million increase in customer recurring revenue, a $1.5 million increase in universal service revenue, and a $0.6 million increase in other revenue. The increase in customer recurring revenue resulted from an increase in wireless revenue of $1.4 million driven by a 4.9% increase in subscribers and an increase in the average revenue generated per subscriber, and a $1.4 million increase in broadband revenue driven by a 24.9% increase in broadband customers. The increase in universal service revenue was primarily due to a true-up of the 2006 cost study and higher 2007 recoveries based on current cost study projections received in the second quarter of 2007. Other revenue increased due to higher telephone system sales and directory revenue.

Operating expense for the six months ended June 30, 2007 increased 4.7% to $80.9 million compared to the six months ended June 30, 2006. The increase in operating expense was attributable to a $2.9 million increase in SG&A expense and an $1.1 million increase in cost of service. The increase in SG&A expense was largely due to $1.8 million of transaction related costs associated with the proposed Merger, of which $0.8 million was stock compensation expense related to fair market value adjustments for the Company’s stock units held in its nonqualified deferred compensation plan and $1.0 million was associated with professional fees. The increase in cost of service was largely due to an increase of $0.5 million in network expense, a loss of $0.3 million related to the replacement of certain wireless cell site equipment and year over year increases in USAC contribution rates.

Other income was $2.2 million for the six months ended June 30, 2007 compared to $90.1 million for the same 2006 period. During the first six months of 2006, the Company recognized $89.2 million, its portion of the gain on the sale of Palmetto’s assets, in equity income in unconsolidated companies. Included in other income were gains on sales of investments of $1.0 million and $0.9 million for the six months ended June 30, 2007 and 2006, respectively.

Income tax expense decreased to $4.5 million for the six months ended June 30, 2007, compared to income tax expense of $38.7 million for the six months ended June 30, 2006. In addition, the effective rate decreased to 34.3% for the first six months of 2007 compared to 38.7% for the same prior period in 2006 due to higher tax-exempt interest income from the Company’s increased investment in federal and state tax-exempt auction-rate securities.

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ILEC(in thousands, except lines)

	Three months ended June 30,									Six months ended June 30,
	2007			2006			Change			2007			2006			Change
Operating revenue:
Customer recurring:
Wireline	$	12,825		$	13,270		$	(445	)	$	25,859		$	26,502		$	(643	)
Broadband & dial-up		2,839			2,490			349			5,578			4,792			786
Total customer recurring		15,664			15,760			(96	)		31,437			31,294			143
Universal service		2,376			1,169			1,207			3,790			2,299			1,491
Access & interconnection		5,141			5,351			(210	)		10,527			10,679			(152	)
Other		4,001			3,825			176			8,550			7,756			794
Total operating revenue		27,182			26,105			1,077			54,304			52,028			2,276
Operating expense:
Cost of service		5,769			5,279			490			11,417			10,601			816
Selling, general & administrative		10,693			9,895			798			20,614			18,458			2,156
Depreciation		5,145			5,347			(202	)		10,300			10,825			(525	)
Total operating expense		21,607			20,521			1,086			42,331			39,884			2,447
Operating income	$	5,575		$	5,584		$	(9	)	$	11,973		$	12,144		$	(171	)
Operating margin		20.5	%		21.4	%					22.0	%		23.3	%
Capital expenditures	$	5,858		$	3,298		$	2,560		$	13,410		$	7,041		$	6,369
Total assets											272,908			262,648			10,260
Business access lines											28,129			28,404			(275	)
Residential access lines											74,512			80,952			(6,440	)
Total access lines											102,641			109,356			(6,715	)
Broadband DSL customers											24,684			19,978			4,706
Broadband high-speed customers											91			75			16
Total broadband customers											24,775			20,053			4,722
Dial-up customers											3,912			5,594			(1,682	)

Three Months Ended June 30

Operating revenue for the three months ended June 30, 2007 increased 4.1% to $27.2 million compared to the three months ended June 30, 2006. The increase in operating revenue was mainly due to a $1.2 million increase in universal service revenue from a true-up of the 2006 cost study and higher 2007 recoveries based on current cost study projections, and a $0.2 million increase in other revenue. These increases were partially offset by a $0.2 million decrease in access and interconnection revenue and a $0.1 million decrease in customer recurring revenue. The decrease in customer recurring revenue was due to a $0.5 million decrease in wireline customer revenue related to access line losses, which was partially offset by a $0.4 million increase in broadband revenue driven by a 23.5% increase in broadband customers.

Operating expense for the three months ended June 30, 2007 increased 5.3% to $21.6 million compared to the three months ended June 30, 2006. The increase in operating expense was attributable to a $0.8 million increase in SG&A expense and a $0.5 million increase in cost of service. The increase in SG&A expense was driven by transaction related costs associated with the proposed Merger and a $0.3 million increase in general administrative expense. These increases in operating expense were partially offset by a $0.2 million decrease in depreciation expense. Operating margin for the three months ended June 30, 2007 decreased to 20.5% from 21.4% during the three months ended June 30, 2006.

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The Company launched a video trial to select customers in the ILEC service territory at the end of the first quarter of 2007. The trial participants receive video, data and voice services delivered through fiber optic facilities, which are part of the Company’s fiber initiative that passed over approximately 18,000 ILEC homes at the end of the second quarter of 2007. The video service offered to customers participating in this trial includes a fully competitive channel line-up and high definition programming and DVR capabilities. Initial broadband service download speeds for customers in this trial are up to 15 Mbps.

Capital expenditures for the three months ended June 30, 2007 were 21.6% of ILEC operating revenue compared to 12.6% of revenue for the three months ended June 30, 2006. The increase in capital expenditures primarily related to the Company’s strategic initiative to deploy fiber optic facilities and related equipment and software for the deployment of video and data services.

Six Months Ended June 30

Operating revenue for the six months ended June 30, 2007 increased 4.4% to $54.3 million compared to the six months ended June 30, 2006. The increase in operating revenue was mainly due to a $1.5 million increase in universal service revenue resulting from a true-up of the 2006 cost study and higher 2007 recoveries based on current cost study projections, an $0.8 million increase in other revenue, and a $0.1 million increase in customer recurring. Partially offsetting these increases in operating revenue was a $0.2 million reduction in access and interconnection revenue. The increase in other revenue for the six months ended June 30, 2007 related primarily to increased telephone systems sales and higher directory revenue. The $0.1 million increase in customer recurring revenue was due to a $0.8 million increase in broadband revenue driven by a 23.5% increase in broadband customers, partially offset by a $0.6 million decrease in wireline revenue attributable to a 6.1% decline in access lines and a $0.2 million decrease in dial-up revenue. The decline in access lines was due in part to increased competition from wireless and other competitive providers, and an increase in broadband Internet adoption by customers that have cancelled second lines previously used for dial-up Internet service.

Operating expense for the six months ended June 30, 2007 increased 6.1% to $42.3 million compared to the six months ended June 30, 2006. The increase in operating expense was due to a $2.2 million increase in SG&A expense and an $0.8 million increase in cost of service. The increase in SG&A expense was comprised of a $1.2 million increase in personnel expense primarily attributable to transaction related costs associated with the proposed Merger, a $0.8 million increase in general administrative expense and a $0.2 million increase in selling expense. The increase in administrative expense was partially due to video administrative expense, which was included in the Company’s “Other” operating segment prior to the launch of video services in the first quarter of 2007. The increase in selling expense was largely attributable to an increase in commission expense in the first six months of 2007 compared to the same 2006 period. Operating margin for the six months ended June 30, 2007 decreased to 22.0% from 23.3% during the six months ended June 30, 2006.

Capital expenditures for the six months ended June 30, 2007 were 24.7% of ILEC operating revenue compared to 13.5% of revenue for the six months ended June 30, 2006. The increase in capital expenditures primarily related to the Company’s strategic initiative to deploy fiber optic facilities and related equipment and software for the deployment of video and data services.

27

CLEC(in thousands, except lines)

	Three months ended June 30,									Six months ended June 30,
	2007			2006			Change			2007			2006			Change
Operating revenue:
Customer recurring:
Wireline	$	3,458		$	3,589		$	(131	)	$	6,917		$	7,179		$	(262	)
Broadband		593			595			(2	)		1,330			1,189			141
Total customer recurring		4,051			4,184			(133	)		8,247			8,368			(121	)
Access & interconnection		1,274			1,127			147			2,381			2,082			299
Other		52			43			9			114			123			(9	)
Total operating revenue		5,377			5,354			23			10,742			10,573			169
Operating expense:
Cost of service		2,888			2,808			80			5,748			5,918			(170	)
Selling, general & administrative		2,195			2,180			15			4,264			4,216			48
Depreciation		700			728			(28	)		1,421			1,443			(22	)
Total operating expense		5,783			5,716			67			11,433			11,577			(144	)
Operating income	$	(406	)	$	(362	)	$	(44	)	$	(691	)	$	(1,004	)	$	313
Operating margin		(7.6	%)		(6.8	%)					(6.4	%)		(9.5	%)
Capital expenditures	$	423		$	493		$	(70	)	$	768		$	1,773		$	(1,005	)
Total assets											15,792			16,714			(922	)
Access lines											36,811			34,372			2,439
Broadband high-speed customers											817			679			138

Three Months Ended June 30

Operating revenue and operating expense remained relatively flat for the three months ended June 30, 2007 compared to the same 2006 period.

Capital expenditures were 7.9% of operating revenue for the three months ended June 30, 2007 compared to 9.2% for the same period in 2006.

Six Months Ended June 30

Operating revenue for the six months ended June 30, 2007 increased $0.2 million to $10.7 million compared to the six months ended June 30, 2006. The increase in operating revenue was driven by a $0.3 million increase in access and interconnection revenue due to growth in customer access lines and an increase in access rates. Customer recurring revenue decreased $0.1 million from the prior year primarily attributable to lower average rates for wireline customer contract renewals, partially offset by an increase in broadband revenue from new broadband customers.

Operating expense for the six months ended June 30, 2007 decreased 1.2% to $11.4 million compared to the same period last year primarily due to a decrease in cost of service. Operating margin for the six months ended June 30, 2007 improved to (6.4%), compared to (9.5%) for the six months ended June 30, 2006.

Capital expenditures for the six months ended June 30, 2007 were 7.1% of CLEC operating revenue compared to 16.8% of operating revenue for the six months ended June 30, 2006. Capital expenditures during the six months ended June 30, 2006 related to infrastructure components required for the Company’s migration of its switching networks to an IP-packet based design.

28

Greenfield(in thousands, except lines and projects)

	Three months ended June 30,									Six months ended June 30,
	2007			2006			Change			2007			2006			Change
Operating revenue:
Customer recurring:
Wireline	$	2,072		$	1,973		$	99		$	4,160		$	3,913		$	247
Broadband		459			323			136			879			608			271
Total customer recurring		2,531			2,296			235			5,039			4,521			518
Access & interconnection		574			522			52			1,165			1,032			133
Other		70			64			6			135			125			10
Total operating revenue		3,175			2,882			293			6,339			5,678			661
Operating expense:
Cost of service		1,288			1,327			(39	)		2,525			2,710			(185	)
Selling, general & administrative		1,223			1,216			7			2,349			2,325			24
Depreciation		1,129			1,032			97			2,243			2,046			197
Total operating expense		3,640			3,575			65			7,117			7,081			36
Operating income	$	(465	)	$	(693	)	$	228		$	(778	)	$	(1,403	)	$	625
Operating margin		(14.6	%)		(24.0	%)					(12.3	%)		(24.7	%)
Capital expenditures	$	1,222		$	1,376		$	(154	)	$	2,357		$	2,995		$	(638	)
Total assets											33,133			31,964			1,169
Access lines											16,818			15,895			923
Broadband DSL customers											3,955			2,929			1,026
Total projects											130			124			6

Three Months Ended June 30

Operating revenue for the three months ended June 30, 2007 increased 10.2% to $3.2 million compared to the three months ended June 30, 2006. The increase in operating revenue was due to a $0.2 million increase in customer recurring revenue driven by a 35.0% increase in broadband DSL customers and a 5.8% increase in access lines.

Operating expense for the three months ended June 30, 2007 was relatively flat compared to the same period in 2006. Operating margin for the three months ended June 30, 2007 improved to (14.6%), compared to (24.0%) for the three months ended June 30, 2006.

Capital expenditures for the three months ended June 30, 2007 were 38.5% of Greenfield operating revenue compared to 47.7% of operating revenue for the three months ended June 30, 2006.

Six Months Ended June 30

Operating revenue for the six months ended June 30, 2007 increased 11.6% to $6.3 million compared to the same period last year. The increase in operating revenue was due to a $0.5 million increase in customer recurring revenue, driven by a 35.0% increase in broadband DSL customers and a 5.8% increase in access lines.

Operating expense for the six months ended June 30, 2007 was relatively flat compared to the same period in 2006. Operating margin for the six months ended June 30, 2007 improved to (12.3%), compared to (24.7%) for the six months ended June 30, 2006.

29

During the six months ended June 30, 2007, the Greenfield business added four preferred provider projects, bringing the total number of projects to 130. These projects currently represent a potential of 58,000 access lines once these developments have been completely built-out. The residential/business line mix of these 130 projects is expected to be over 90% residential.

Capital expenditures for the first six months of 2007 were 37.2% of Greenfield operating revenue compared to 52.7% of operating revenue for the same period last year.

Wireless(in thousands, except subscribers)

	Three months ended June 30,								Six months ended June 30,
	2007			2006			Change		2007			2006			Change
Operating revenue:
Customer recurring	$	6,673		$	5,930		$	743	$	13,032		$	11,583		$	1,449
Wireless roaming/settlement		3,381			3,259			122		6,390			6,176			214
Other		518			494			24		911			1,081			(170	)
Total operating revenue		10,572			9,683			889		20,333			18,840			1,493
Operating expense:
Cost of service		5,509			5,259			250		11,046			10,429			617
Selling, general & administrative		3,074			2,970			104		5,939			5,771			168
Depreciation		693			641			52		1,386			1,276			110
Total operating expense		9,276			8,870			406		18,371			17,476			895
Operating income	$	1,296		$	813		$	483	$	1,962		$	1,364		$	598
Operating margin		12.3	%		8.4	%				9.6	%		7.2	%
Capital expenditures	$	2,363		$	491		$	1,872	$	2,627		$	687		$	1,940
Total assets										35,449			33,192			2,257
Wireless subscribers										50,297			47,932			2,365

Three Months Ended June 30

Operating revenue for the three months ended June 30, 2007 increased 9.2% to $10.6 million compared to the same period last year. The increase in operating revenue was driven by a $0.7 million increase in customer recurring revenue and $0.1 million increase in wireless roaming and settlement revenue. The increase in customer recurring revenue was driven by a 4.9% increase in subscribers and an increase in the average revenue generated per subscriber.

Operating expense for the three months ended June 30, 2007 increased 4.6% to $9.3 million compared to the same period last year. The increase in operating expense was primarily attributable to a $0.3 million increase in cost of service and a $0.1 million increase in SG&A expense. The increase in cost of service was primarily due increased switching costs associated with customer growth and a loss of $0.3 million related to the replacement of certain wireless cell site equipment. In addition, cost of service for the three months ended June 30, 2007 included a credit from a contractual true-up of switching rates of $0.5 million.

Capital expenditures for the second quarter of 2007 were 22.4% of operating revenue compared to 5.1% of operating revenue for the same period last year. The increase was primarily related to the replacement of certain wireless cell site equipment during the second quarter of 2007.

30

Six Months Ended June 30

Operating revenue for the six months ended June 30, 2007 increased 7.9% to $20.3 million compared to the six months ended June 30, 2006. The increase in operating revenue was driven by a $1.4 million increase in customer recurring revenue and a $0.2 million increase in roaming and settlement revenue. The increase customer recurring revenue was driven by a 4.9% increase in wireless subscribers, and an increase in the average revenue generated per customer.

Operating expense for the six months ended June 30, 2007 increased 5.1% to $18.4 million compared to the same period in 2006. The increase in operating expense primarily related to a $0.6 million increase in cost of service, a $0.2 million increase in SG&A expense and a $0.1 million increase in depreciation. The $0.6 million increase in cost of service was largely due to increased switching costs associated with customer growth and a loss of $0.3 million related to the replacement of certain wireless cell site equipment. In addition, cost of service for the six months ended June 30, 2007 included a credit from a contractual true-up of switching rates of $0.3 million.

Capital expenditures for the six months ended June 30, 2007 were 12.9% of operating revenue compared to 3.6% of operating revenue for the same period last year. The increase was primarily related to the replacement of certain wireless cell site equipment during the second quarter of 2007.

Other(in thousands)

	Three months ended June 30,						Six months ended June 30,
	2007		2006		Change		2007		2006		Change
Operating expense:
Selling, general & administrative	$	1,032	$	286	$	746	$	1,150	$	692	$	458
Depreciation		226		225		1		451		503		(52	)
Total operating expense	$	1,258	$	511	$	747	$	1,601	$	1,195	$	406
Capital expenditures	$	713	$	406	$	307	$	1,920	$	555	$	1,365
Total assets								30,726		39,065		(8,339	)

Three Months Ended June 30

Operating expense for the Company’s Other business segment increased $0.7 million to $1.3 million for the three months ended June 30, 2007 compared to the same period in 2006. The increase in operating expense was primarily due to transaction related costs of $0.8 million associated with the proposed Merger.

Capital expenditures for the three months ended June 30, 2007 increased $0.3 million to $0.7 million from the same period in 2006.

Six Months Ended June 30

Operating expense for the Company’s Other business segment increased $0.4 million to $1.6 million for the six months ended June 30, 2007 compared to the same period in 2006. The increase in operating expense was primarily due to transaction related costs of $0.9 million associated with the proposed Merger that were partially offset by decreases in professional services related to the development of the Company’s video service offering which was launched during the first quarter of 2007 within the ILEC service territory. Accordingly, expenses related to the Company’s video products and services for the six months ended June 30, 2007 are included in the Company’s ILEC business segment.

Capital expenditures for the six months ended June 30, 2007 increased $1.4 million to $1.9 million from the same period in 2006. The increase was primarily related to investments in IT systems infrastructure necessary to support the Company’s future product and service design and associated customer experience.

31

Liquidity and Capital Resources

Net cash provided by/used in operating activities

Cash provided by operating activities was $22.2 million for the six months ended June 30, 2007 compared to cash used in operating activities of $2.5 million for the six months ended June 30, 2006. The change was primarily attributable to estimated tax payments of approximately $26.1 million during the six months ended June 30, 2006, partially offset by an increase in operating income for the six months ended June 30, 2007 compared to the same 2006 period.

Net cash provided by/used in investing activities

Cash used in investing activities was $22.5 million for the six months ended June 30, 2007 compared to cash provided by investing activities of $7.0 million during the first six months of 2006. During the first quarter of 2006, as a result of the Palmetto transaction, the Company received a pre-tax cash distribution from Palmetto of $97.4 million as proceeds from the sale of Palmetto assets to Alltel. During the first half of 2006, the Company invested $94.9 million of these proceeds in short-term investments, which are accounted for as available-for-sale securities. During 2007 the Company purchased an additional $32.7 million of these securities, and sold $26.9 million. In addition, the Company received $15.6 million in net proceeds from the sale of wireless spectrum during the six months ended June 30, 2006. Capital expenditures increased $8.0 million to $21.1 million during the first half of 2007 related to the Company’s strategic initiative to deploy fiber optic facilities and related equipment and software for the deployment of video and broadband services. During the first six months of 2007, the Company received net proceeds of $4.0 million from sales of investment securities compared to $1.4 million for the same 2006 period.

Net cash used in financing activities

Cash used in financing activities totaled $6.3 million in the first six months of 2007 compared to $10.6 million for the first six months of 2006. During the first six months of 2007, the Company repaid $2.5 million of debt compared to $12.5 million for the same 2006 period. On March 30, 2006, the Company paid in full the $10.0 million outstanding under the revolving credit facility. In the fourth quarter of 2006, the Company increased its quarterly cash dividend to $0.12 per share from $0.10 per share. As a result, during the first six months of 2007, dividends paid were $1.0 million higher than the same 2006 period. During the first quarter of 2007, proceeds from common stock issuances resulting from stock option exercises was $0.6 million compared to $4.8 million for the same 2006 period.

Anticipated sources and uses of funds

At June 30, 2007, the fair market value of the Company’s short-term investments and investment securities was $93.8 million, all of which could be pledged to secure additional borrowing, or sold, if needed for liquidity purposes.

On April 18, 2006, the Company entered into a Master Loan Agreement, which provides a revolving loan commitment of $40.0 million and incorporates the Company’s existing term loan. The commitment expires on June 30, 2011. The proceeds of borrowings under the revolving loan commitment could be used by the Company for working capital, capital expenditures, and other general corporate purposes. The unpaid principal balance of each advance under the revolving loan commitment will accrue interest, in the Company’s discretion, at a (i) variable base rate option, (ii) quoted rate option or (iii) LIBOR-based option. Subject to exceptions relating to loans accruing interest at the LIBOR-based option, interest will be payable on the last day of each calendar quarter.

The Company’s 7.32% fixed rate term loan matures on December 31, 2014. At June 30, 2007, $37.5 million was outstanding on the term loan. The term loan requires quarterly payments of interest until maturity on December 31, 2014. Payments of principal are due quarterly through December 31, 2014 in equal amounts of $1.25 million.

The Company has no off-balance sheet transactions, arrangements, obligations, guarantees or other relationships with unconsolidated entities or other persons that have, or are reasonably likely to have a material effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

The Company anticipates that it has access to adequate resources to meet its currently foreseeable obligations and capital requirements associated with continued investment and operations in the ILEC, CLEC, Greenfield, and Wireless units, payments associated with long-term debt and contractual obligations.

32

Cautionary Note Regarding Forward-Looking Statements

This report, including the foregoing discussion, contains “forward-looking statements,” as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), that are based on the beliefs of management, as well as assumptions made by, and information currently available to, management. Management has based these forward-looking statements on its current expectations and projections about future events and trends affecting the financial condition and operations of the Company’s business. These forward-looking statements are subject to certain risks, uncertainties and assumptions about us that could cause actual results to differ materially from those reflected in the forward-looking statements.

Factors that may cause actual results to differ materially from these forward-looking statements include:

• the risk that required closing conditions for the Company’s proposed Merger with Windstream, including necessary regulatory and shareholder approvals, will not be obtained and the proposed Merger will not be consummated as anticipated,

• the Company’s ability to respond effectively to the issues surrounding the telecommunications industry caused by state and federal legislation and regulations,

• the impact of economic conditions related to the financial performance of customers, business partners, competitors and peers within the telecommunications industry,

• the Company’s ability to achieve acceptable returns on investments in connection with the expansion into new businesses, products and services,

• the Company’s ability to attract and retain key personnel,

• the Company’s ability to retain its existing customer base against wireless, cable telephone and other competition in all areas of the business including local and long distance and broadband services,

• the Company’s ability to maintain its margins in a highly competitive industry,

• the performance of the Company’s investments,

• the Company’s ability to effectively manage rapid changes in technology and control capital expenditures related to those technologies, and

• the impact of economic and political events on the Company’s business, operating regions and customers, including terrorist attacks.

In some cases, these forward-looking statements can be identified by the use of words such as “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project” or “potential” or the negative of these words or other comparable words.

In making forward-looking statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are also directed to consider the risks, uncertainties and other factors discussed in documents filed by us with the SEC, including those matters summarized under the caption “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. All forward-looking statements should be viewed with caution.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

On April 18, 2006, the Company entered into a Master Loan Agreement (“MLA”), which provides a revolving loan commitment of $40.0 million and incorporated the Company’s existing 7.32% fixed rate $50.0 million term loan. The revolving loan commitment expires on June 30, 2011. The unpaid principal balance of each advance under the revolving loan commitment will accrue interest, in the Company’s discretion, at a (i) variable base rate option, (ii) quoted rate option or (iii) LIBOR-based option. Subject to exceptions relating to loans accruing interest at the LIBOR-based option, interest will be payable on the last day of each calendar quarter. Under the MLA, the Company’s term loan matures on December 31, 2014. The term loan will accrue interest at a fixed annual interest rate of 7.32% with principal repayments of $1.25 million due quarterly. At June 30, 2007, $37.5 million was outstanding.

At June 30, 2007, the Company had $92.6 million in tax-exempt auction-rate securities, which are classified as short-term, available-for-sale securities. Auction-rate securities are long-term variable rate bonds tied to short-term interest rates that trade or mature on a shorter term than the underlying instrument based on a “dutch auction” process which occurs every 7 to 35 days. The underlying investments are in municipal bonds, which have low market risk. In addition, the Company

33

had $1.1 million in investment securities, which are classified as available-for-sale.

Management believes that reasonably foreseeable movements in interest rates will not have a material adverse effect on the Company’s financial condition or operations.

The Company has no off-balance sheet transactions, arrangements, obligations, guarantees or other relationships with unconsolidated entities or other persons that have, or are reasonably likely to have, a material effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Item 4. Controls and Procedures.

(a)	Disclosure Controls and Procedures
	The Company has evaluated, under the supervision and with the participation of its management, including the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in the Exchange Act Rules 13a-15(e) and 15(d)-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2007, in providing reasonable assurance that information required to be disclosed by the Company in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management (including our Chief Executive Officer and Chief Financial Officer) to allow for timely decisions regarding required disclosures.
(b)	Changes in Internal Control Over Financial Reporting
	There have been no significant changes in the Company’s internal control over financial reporting during the second fiscal quarter of 2007 that have materially affected, or that are reasonably likely to materially affect, the Company’s internal control over financial reporting.

34

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

None

Item 1A. Risk Factors.

In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, set forth below are cautionary statements identifying important factors in addition to the risk factors previously disclosed in Item 1A to Part I of the Company’s Form 10-K for the year ended December 31, 2006, that could cause actual events or results to differ materially from any forward-looking statements made by or on behalf of the Company, whether oral or written. The Company wishes to ensure that any forward-looking statements are accompanied by meaningful cautionary statements in order to maximize to the fullest extent possible the protections of the safe harbor provisions established in the Private Securities Litigation Reform Act of 1995. Accordingly, any such statements are qualified in their entirety by reference to, and are accompanied by, the following important factors that could cause actual events or results to differ materially from the Company’s forward-looking statements. For additional information regarding forward-looking statements, please read the “Cautionary Note Regarding Forward-Looking Statements” section included elsewhere in this report.

In addition to the other information contained or incorporated by reference into this Form 10-Q and the risk factors previously disclosed in Item 1A to Part I of the Company’s Form 10-K for the year ended December 31, 2006, prospective investors should consider carefully the following risk factors before investing in the Company’s securities. The risks described below and in Item 1A to Part I of the Company’s Form 10-K for the year ended December 31, 2006, may not be the only risks the Company faces. Additional risks that the Company does not yet perceive or that the Company currently believes are immaterial may also adversely affect the Company’s business and the trading price of the Company’s securities.

Risks relating to the proposed Merger with Windstream

The Company’s proposed Merger with Windstream may be delayed or may not occur at all, which could negatively affect the market price of our common stock and our business and financial results.

Completion of the Company’s Merger with Windstream is conditioned upon the receipt of certain governmental consents and approvals and shareholders’ approval. These consents and approvals may impose conditions on or require divestitures relating to the divisions, operations or assets of Windstream or the Company. Such conditions or divestitures may jeopardize or delay completion of the proposed Merger or may reduce the anticipated benefits of the proposed Merger. Further, no assurance can be given that the required consents and approvals will be obtained or that the required conditions to closing will be satisfied. If the proposed Merger is not consummated, it could adversely affect the market price of the Company’s common stock and its business and financial results. The Company’s Merger Agreement with Windstream provides that the Company may be required to pay Windstream a termination fee of $19 million in certain circumstances.

Whether or not the proposed Merger is completed, the uncertainty of the transaction could cause disruptions in the business of the Company, which could have an adverse effect on the Company’s businesses and financial results.

These disruptions could include the following:

• current and prospective employees may experience uncertainty about their future roles with the combined company, which might adversely affect the Company’s ability to retain or attract key managers and other employees;

• current and prospective customers of the Company may experience variations in levels of services as the companies prepare for integration and may, as a result, choose to discontinue their service with us or choose another provider; and

• the attention of management of the Company may be diverted from the operation of the businesses toward the completion of the proposed Merger.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None

35

Item 3. Defaults Upon Senior Securities.

None

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

An Annual Meeting of Shareholders was held on April 26, 2007.

Proxies were solicited for the following matters:

(1)	To elect to the Board of Directors for the terms set forth below:
	Three Directors for a three-year term expiring in 2010:

	Votes		Votes
	For		Withheld
William A. Coley		16,855,698		354,113
Barry W. Eveland		16,633,603		576,208
Tom E. Smith		16,899,390		310,421

The names of each of the other directors whose terms of office continued after the Annual Meeting of Shareholders are as follows: O. Charlie Chewning, Jr., Michael R. Coltrane, Linda M. Farthing, Raymond C. Groth, James L. Moore Jr., and Cynthia L. Mynatt.

(2) To ratify the appointment of Ernst & Young LLP as independent public accountants of the Company for the 2007 fiscal year.

Votes	Votes		Broker
For	Against	Abstentions	Non-Votes
17,175,224	4,437	30,148	—

Item 5. Other Information.

None

Item 6. Exhibits.

(a) Exhibits

Exhibit No.	Description of Exhibit
10.1	Agreement and Plan of Merger, dated as of May 25, 2007, by and among CT Communications, Inc., Windstream Marlin, Inc. and Windstream Corporation. (Incorporated by Reference to Exhibit 2.1 to CT Communications’ Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 31, 2007.)
10.2	Amendment No. 1 to Amended and Restated Rights Agreement, dated May 25, 2007, between CT Communications, Inc. and American Stock Transfer & Trust Company, as Rights Agent. (Incorporated by Reference to Exhibit 4.1 to CT Communications’ Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 31, 2007.)
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. 1350.

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SIGNATURES

Pursuant to the requirements 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.

CT COMMUNICATIONS, INC.

(Registrant)

/s/ Ronald A. Marino

Ronald A. Marino

Vice President Finance and

Chief Accounting Officer

August 3, 2007

Date

(The above signatory has dual responsibility as a duly authorized officer and chief accounting officer of the Registrant.)

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EXHIBIT INDEX

Exhibit No.	Description of Exhibit
10.1	Agreement and Plan of Merger, dated as of May 25, 2007, by and among CT Communications, Inc., Windstream Marlin, Inc. and Windstream Corporation. (Incorporated by Reference to Exhibit 2.1 to CT Communications’ Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 31, 2007.)
10.2	Amendment No. 1 to Amended and Restated Rights Agreement, dated May 25, 2007, between CT Communications, Inc. and American Stock Transfer & Trust Company, as Rights Agent. (Incorporated by Reference to Exhibit 4.1 to CT Communications’ Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 31, 2007.)
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. 1350.

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