As filed with the Securities and Exchange Commission on February 25, 2005

Registration No. 333-121602

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

AMENDMENT NO. 2

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

Madison River Communications Corp.

(Exact name of registrant as specified in its charter)

Delaware

4813

20-0511398

(State or other jurisdiction of

incorporation or organization)

(Primary Standard Industrial

Classification Code Number)

(I.R.S. Employer Identification Number)

103 South Fifth Street

Mebane, North Carolina 27302

(919) 563-1500

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Paul H. Sunu

Chief Financial Officer and Secretary

Madison River Communications Corp.

103 South Fifth Street

Mebane, North Carolina 27302

(919) 563-1500

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Gary P. Cullen

Skadden, Arps, Slate, Meagher & Flom LLP

333 West Wacker Drive

Chicago, Illinois 60606

(312) 407-0700

Robert Evans III

Shearman & Sterling LLP

599 Lexington Avenue

New York, New York 10022

(212) 848-4000

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. ¨

CALCULATION OF REGISTRATION FEE

Title of Each Class of Securities to be Registered

Proposed Maximum Aggregate

Offering Price(1)(2)

Amount of Registration Fee(3)

Common stock, par value $0.01 per share

$345,000,000

$40,607

(1)

Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.

(2)

Includes shares that may be sold, if any, pursuant to the underwriters’ overallotment option.

(3)

Previously paid.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is declared effective. This prospectus is not an offer to sell these securities and is not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED FEBRUARY 25, 2005

PROSPECTUS

LOGO

Madison River Communications Corp.

Common Stock

This is the initial public offering of common stock of Madison River Communications Corp. Of the shares of common stock to be sold in the offering, shares are being sold by us and shares are being sold by the selling stockholders identified in this prospectus, some of whom are affiliates of Goldman, Sachs & Co., an underwriter participating in the offering. We will not receive any of the proceeds from the sale of shares by the selling stockholders. We anticipate that the public offering price will be between $ and $ per share.

We have applied to list our common stock on the Nasdaq National Market under the symbol “MRCC.”

Investing in our common stock involves risks. See “ Risk Factors” beginning on page 12.


	Per Share	Total
Public offering price	$	$
Underwriting discount	$	$
Proceeds, before expenses, to Madison River Communications Corp.	$	$
Proceeds, before expenses, to the selling stockholders	$	$

We and the selling stockholders have granted the underwriters an option to purchase up to additional shares of common stock at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to purchasers on or about , 2005.


Lehman Brothers		Merrill Lynch & Co.

Goldman, Sachs & Co.


JPMorgan		Wachovia Securities

Deutsche Bank Securities

Jefferies & Company, Inc.

Legg Mason Wood Walker

Incorporated

The date of this prospectus is , 2005

TABLE OF CONTENTS


Summary		1
Risk Factors		12
Cautionary Note Regarding Forward-Looking Statements		26
The Transactions		27
Use of Proceeds		30
Dividend Policy and Restrictions		31
Capitalization		40
Dilution		41
Selected Historical Financial and Operating Data		42
Management’s Discussion and Analysis of Financial Condition and Results of Operations		44
Industry Overview		70
Business		71
Regulation		82
Management		94
Security Ownership of Certain Beneficial Owners and Management		101
Certain Relationships and Related Transactions		103
Description of New Credit Facilities		106
Description of Capital Stock		111
Shares Eligible for Future Sale		115
Material U.S. Federal Income Tax Considerations		117
Underwriting		121
Legal Matters		125
Experts		125
Where You Can Find More Information		125
Index to Financial Statements		F-1

SUMMARY

The following is a summary of some of the information contained in this prospectus. In addition to this summary, we urge you to read the more detailed information, including the financial statements and related notes and the “Risk Factors” section, included elsewhere in this prospectus.

Our Company

We operate rural telephone companies that serve business and residential customers primarily in Alabama, Georgia, Illinois and North Carolina. A rural telephone company is a local telephone company that provides basic telephone service in rural areas throughout the United States. Our four rural telephone companies provide a variety of telecommunications services to business and residential customers in their franchised territories, including local and long distance voice services, broadband digital subscriber line, or DSL, and dial-up Internet services as well as telephone directory and other miscellaneous services. We also provide local and long distance voice services and high-speed data services to medium and large businesses in the markets near our franchised territories.

We were founded with the goal of acquiring, integrating and improving operations at rural telephone companies. Since 1998, we have acquired four rural telephone companies, and we believe our disciplined approach to operations has allowed us to improve the operations at each of them.

At December 31, 2004, we had 233,307 connections in service, comprising 193,092 voice access lines and 40,215 DSL and high-speed data connections. For the year ended December 31, 2004, we had total revenues of $194.4 million, operating income of $54.1 million, and net income of $6.3 million. As of December 31, 2004, we had an accumulated deficit of $204.9 million and working capital of $8.5 million. We currently have a substantial amount of indebtedness. Following consummation of this offering and the other transactions described under “The Transactions,” we expect to have approximately $455.6 million of outstanding indebtedness.

Our Strengths

We believe we are distinguished by the following strengths, each of which we believe will contribute to the production of stable cash flows:

Long-standing local operations with limited competition. Active in our markets for over 50 years, we believe our thorough knowledge of the markets we operate in, our established operations and our reputation for a high standard of service give us a competitive advantage.

Technologically advanced and scalable network infrastructure. We have substantially completed our investment in a technologically advanced network capable of delivering a full suite of telecommunications services to our customers.

Successful track record of acquisitions and integration. We have acquired four rural telephone companies since 1998 and have successfully integrated them within our organization and have improved their business and operations.

Experienced and proven management team. Our top five officers average over 30 years experience in the telecommunications industry and have managed us through the integration of our four acquisitions.

Geographically diversified markets. We principally operate in four states, limiting our exposure to regulatory or operating risk in any one state.

Our Strategy

Our objective is to maintain and strengthen our position as a leading provider of telecommunications services in our target markets in the Southeast and Midwest. The key elements of our strategy include:

Continuing to improve operating efficiencies by providing centrally managed resources and sharing best practices across our operations.

Taking a disciplined approach to capital expenditures.

Improving on our competitive position through superior service offerings by continuing to add new services and providing bundled offerings.

Expanding market position through knowledge of local markets and strong customer retention.

Growing through selective acquisitions.

The Transactions

As used in this prospectus, the “transactions” collectively refer to the following transactions:

The Reorganization Transactions. Immediately prior to the offering, the outstanding membership units in Madison River Telephone Company LLC, or Madison River Telephone, will be converted pursuant to one or more mergers into 100% of the outstanding shares of common stock of Madison River Communications Corp., or Madison River Communications.

This Offering. The proceeds from this offering of common stock by Madison River Communications, together with the proceeds from borrowings under the new credit facilities described below and cash on hand, will be used to finance the debt repayment and refinancing and minority interest redemption described below and to pay the bonuses, fees and expenses relating to the transactions. The proceeds of this offering will not be used for our ongoing business operations. This offering is conditioned on the closing of the new credit facilities.

New Credit Facilities. Concurrently with the closing of this offering, Madison River Capital, LLC, one of our subsidiaries, will enter into new senior secured credit facilities, referred to as the “new credit facilities,” with a syndicate of lenders. The new credit facilities will consist of seven-year term loan facilities providing for senior secured term loans in an aggregate principal amount of $455.6 million and a seven-year revolving credit facility providing for up to $75.0 million in revolving loans. See “Description of New Credit Facilities” for a more detailed description of the new credit facilities.

Debt Repayment and Refinancing. We will repay or refinance $ million aggregate principal amount of our existing debt, and pay accrued and unpaid interest thereon together with applicable premiums.

Redemption of Minority Interest in Coastal Communications, Inc. At the closing of this offering, we will repurchase the minority interest in our subsidiary, Coastal Communications, Inc., for an aggregate purchase price of $3.0 million.

Each of the transactions is described more fully under “The Transactions,” “Use of Proceeds” and “Description of New Credit Facilities.”

Pre-Transactions Ownership and Corporate Structure

The chart below illustrates our ownership and corporate structure prior to consummation of the transactions.

LOGO

(1)

The existing equity investors of Madison River Telephone are (1) affiliates of each of Madison Dearborn Partners, Goldman, Sachs & Co. and Providence Equity Partners, referred to collectively as the “existing sponsors,” (2) the former stockholders of Coastal Utilities, Inc., a rural telephone company we acquired in March 2000, referred to as the “Coastal shareholders” and (3) certain members of our management, referred to as the “existing management investors.” Goldman, Sachs & Co. is one of the underwriters participating in this offering and some of its affiliates are some of our existing sponsors, are participating in this offering as selling stockholders and will continue to own shares in Madison River Communications following the transactions. See “Security Ownership of Certain Beneficial Owners and Management.”

Post-Transactions Ownership and Corporate Structure

The chart below illustrates our ownership and corporate structure following the transactions.

LOGO

(1)

Affiliates of Goldman, Sachs & Co., one of the underwriters participating in this offering, are some of our existing sponsors, are participating in this offering as selling stockholders and will continue to own shares in Madison River Communications following the transactions. See “Security Ownership of Certain Beneficial Owners and Management.”

(2)

Reflects shares of common stock of Madison River Communications to be held by Madison River Telephone to fund its obligations under its long-term incentive plan. See “The Transactions.”

The Offering

Shares of common stock offered by Madison River Communications Corp.

shares ( shares if the underwriters’ over-allotment option is exercised in full).

Shares of common stock offered by the selling stockholders

shares ( shares if the underwriters’ over-allotment option is exercised in full).

Shares of common stock to be outstanding following the offering

shares ( shares if the underwriters’ over-allotment option is exercised in full).

The total number of shares being offered by this prospectus represents % of the number of shares to be outstanding following the offering (or % if the underwriters’ over-allotment option is exercised in full).

Pro rata distribution of shares sold in the offering

Any shares sold in the offering (including shares sold as a result of the exercise of the underwriters’ over-allotment option) generally will include a pro rata component of shares offered by Madison River Communications and shares offered by the selling stockholders.

Dividends

In accordance with our dividend policy, we currently intend to pay an initial dividend of $ per share on or about , 2005 and to continue to pay quarterly dividends at an annual rate of $ per share for the first full year following the closing of this offering, but only if and to the extent dividends are declared by our board of directors and permitted by applicable law and the terms of our new credit facilities. Dividend payments are not guaranteed, and our board of directors may decide, in its absolute discretion, at any time and for any reason, not to pay dividends. Dividends on our common stock are not cumulative. See “Dividend Policy and Restrictions.”

Our new credit facilities will generally restrict the amount of dividends we may pay at any time to the “Restricted Payments Basket Amount,” which is equal to the sum of “Available Cash” plus $50 million minus dividends paid to date, and will suspend our ability to pay dividends if our “total leverage ratio” for the most recently ended

four fiscal quarter period exceeds 5.10 to 1.00. In addition, our new credit facilities will prohibit the payment of dividends if an event of default thereunder shall have occurred and be continuing or would occur as a result thereof. See “Dividend Policy and Restrictions” and “Description of New Credit Facilities” for a definition of the above terms as well as a more detailed discussion of the restrictions on our ability to pay dividends.

Dividends paid by us, to the extent paid out of our earnings and profits, or E&P, as computed for U.S. federal income tax purposes, will be taxable as dividend income. Under current law, dividend income of U.S. individuals is generally taxable at long-term capital gains rates. Dividends paid by us in excess of our E&P will be treated first as a non-taxable return of capital and then as a gain from the sale of common stock. For a more complete description, see “Material U.S. Federal Income Tax Considerations.”

Use of Proceeds

We expect to receive gross proceeds from this offering of approximately $ million, assuming a public offering price of $ per share, the mid-point of the range shown on the cover of this prospectus (or $ million if the underwriters’ over-allotment option is exercised in full). We will not receive any proceeds from the sale of shares by the selling stockholders, some of which are affiliates of Goldman, Sachs & Co., an underwriter participating in this offering. We will use our proceeds from this offering, together with borrowings under our new credit facilities and cash on hand, for the repayment and refinancing of existing debt, to finance the other transactions and to pay related bonuses, fees and expenses, and not for our ongoing business operations. See “The Transactions” and “Use of Proceeds.”

Listing

We have applied to list our common stock on the Nasdaq National Market under the symbol “MRCC.”

General Information About This Prospectus

Unless we specifically state otherwise, all information in this prospectus:

assumes no exercise of the over-allotment option granted to the underwriters; and

excludes shares reserved and available for future grant or issuance under our Omnibus Stock Plan.

Our Corporate Information

Madison River Communications was formed as a holding company under Delaware law in December 2003 and has not conducted any independent operations. Madison River Communications will not have direct operations but, following the reorganization transactions, it will directly or indirectly, through one or more wholly-owned subsidiaries, be primarily engaged in the provision of communication services and solutions to business and residential customers. In this prospectus, “we,” “our” and “us” refer to Madison River Communications Corp. and its direct and indirect subsidiaries after giving effect to the reorganization transactions, unless the context otherwise requires.

Our principal executive offices are located at 103 South Fifth Street, Mebane, North Carolina 27302, and our telephone number at that address is (919) 563-1500. Our Internet address is www.madisonriver.net. www.madisonriver.net is a textual reference only, meaning that the information contained on the website is not part of this prospectus and is not incorporated in this prospectus by reference.

Summary Historical Financial and Operating Data

The following table presents summary historical financial and operating data about us. Madison River Communications was formed in December 2003 to serve as a holding company for our business. Madison River Communications has not commenced operations and has no assets or liabilities. In order to facilitate this offering, we will consummate the reorganization transactions pursuant to which Madison River Communications will become the successor to Madison River Telephone. See “The Transactions.” Since Madison River Communications has not commenced operations, Madison River Telephone is considered the predecessor to Madison River Communications for accounting purposes.

The following summary historical financial data for Madison River Telephone for the three years ended and as of December 31, 2004 have been derived from Madison River Telephone’s audited consolidated financial statements and related notes included in the back of this prospectus. The following summary as adjusted balance sheet data gives effect to the transactions as described under “The Transactions” and “Use of Proceeds,” as if the transactions had been consummated on December 31, 2004.

This summary historical financial and operating data should be read in conjunction with the information contained in “Selected Historical Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Madison River Telephone’s audited consolidated financial statements and related notes included elsewhere in this prospectus.


	Year Ended December 31,
	2004			2003			2002
	(dollars in thousands)
Statement of Operations Data:
Revenues	$	194,374		$	186,460		$	184,201
Operating income		54,095			42,472			28,858
Net income (loss)		6,325			(16,465	)		(40,683	)

Other Financial Data:
Capital expenditures	$	14,643		$	12,223		$	12,344
Net cash provided by operating activities		38,793			43,665			32,092
Net cash used in investing activities		(12,460	)		(10,019	)		(10,714	)
Net cash used in financing activities		(19,917	)		(25,457	)		(23,030	)
EBITDA(a)		106,492			98,184			76,775
Adjusted EBITDA(b)		105,690			103,286			88,553


	As of December 31, 2004
	Actual			As Adjusted
				(Unaudited)
	(dollars in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	34,559
Total assets		782,686
Long-term debt, including current portion		639,269		455,556
Redeemable members’ capital		213,749		—
Total members’ capital(c)		(189,562	)	—
Stockholders’ equity		—

(footnotes on following page)


	As of December 31,
	2004	2003	2002
Connections In Service: (Unaudited)
Voice access lines(d)	193,092	200,365	206,597
DSL and high-speed data connections(e)	40,215	24,863	17,128

Total connections in service	233,307	225,228	223,725

(a)

EBITDA consists of our net income (loss) before income tax (expense) benefit, interest expense and depreciation and amortization. We believe that net cash provided by operating activities is the most directly comparable financial measure to EBITDA under generally accepted accounting principles. EBITDA is presented because we believe it is a useful indicator of our ability to service our long-term debt, capital expenditures and working capital requirements as well as pay dividends. EBITDA should not be considered in isolation. EBITDA is not a measurement of financial performance under generally accepted accounting principles and should not be considered as an alternative to cash flows from operating activities as a measure of our liquidity or as an alternative to net income (loss) as an indicator of our operating performance or any other measure of performance derived in accordance with generally accepted accounting principles. EBITDA is not a complete measure of our profitability as it does not include costs and expenses for depreciation and amortization, interest expense and income taxes; nor is EBITDA a complete net cash flow measure as it does not include uses of cash to fund our long-term debt, capital expenditure and working capital requirements or to pay dividends. Other companies in our industry may present EBITDA differently than we do.

Set forth below is a reconciliation of our net cash provided by operating activities to EBITDA:


	Year Ended December 31,
	2004			2003			2002
	(dollars in thousands)
Net cash provided by operating activities	$	38,793		$	43,665		$	32,092
Adjustments:
Depreciation and amortization		(45,003	)		(52,054	)		(50,649	)
Deferred long-term compensation		(2,921	)		(5,429	)		(5,284	)
Deferred income taxes		6,269			4,117			(6,771	)
Losses on investments carried on the equity method		(156	)		(193	)		(3,338	)
Realized gain on extinguishment of debt		3,184			—			—
Realized losses on marketable equity securities		—			(343	)		(3,985	)
Other non-cash items		462			657			(315	)
Changes in operating assets and liabilities		5,697			(6,885	)		(2,433	)

Net income (loss)		6,325			(16,465	)		(40,683	)
Income tax (benefit) expense		(6,418	)		(1,846	)		1,584
Interest expense		61,582			64,441			65,225
Depreciation and amortization		45,003			52,054			50,649

EBITDA	$	106,492		$	98,184		$	76,775

(footnotes continued on following page)

(b)

Adjusted EBITDA refers to the defined term in our new credit facilities that will be an important determinant in our ability to pay dividends under our new credit facilities. In addition, covenants in our new credit facilities will contain ratios based on Adjusted EBITDA. Adjusted EBITDA differs from EBITDA as defined above. Adjusted EBITDA will be defined in our new credit facilities as: (1) consolidated net income, as determined in accordance with U.S. generally accepted accounting principles, or GAAP; plus (2) the following items, to the extent deducted in determining consolidated net income: (a) Consolidated Interest Expense (as defined under “Description of New Credit Facilities”); (b) provision for income taxes; (c) depreciation and amortization expense; (d) costs and expenses related to this offering and the other transactions described under the caption “The Transactions,” including any related bonuses; (e) unrealized losses on financial derivatives recognized in accordance with SFAS No. 133; (f) noncash, stock-based compensation expense; (g) extraordinary or unusual losses (including extraordinary or unusual losses on permitted sales of assets and casualty events); (h) losses on sales of assets other than in the ordinary course of business; (i) other non-recurring or unusual costs, expenses or losses, including, without limitation, costs, expenses or losses relating to securities offerings, investments or acquisitions, incurred after the closing date of the new credit facilities to the extent not exceeding, in the aggregate, $10.0 million; (j) compensation expense arising from deemed dividends, the payment of dividends or the equivalent on shares of Madison River Communications common stock issued under its Omnibus Stock Plan, any other incentive stock plans or Madison River Telephone’s long-term incentive plans; and (k) all other non-cash items that reduce such consolidated net income for which no cash is expected to be paid in the twelve months following the date of determination; minus (3) the following items, to the extent included in determining consolidated net income: (a) unrealized gains on financial derivatives recognized in accordance with SFAS No. 133; (b) extraordinary or unusual gains (including extraordinary or unusual gains on permitted sales of assets and casualty events); (c) gains on sales of assets other than in the ordinary course of business; and (d) all other non-cash income, other than the accrual of revenue in the ordinary course (including the non-cash portion of any Rural Telephone Bank or RTFC patronage capital allocation). If our Adjusted EBITDA were to decline below certain levels, covenants in our new credit facilities that are based on Adjusted EBITDA, including our fixed charge coverage and total leverage ratio covenants, may be violated and could cause, among other things, a default under our new credit facilities, or result in our inability to pay dividends under the restricted payment covenant contained in our new credit facilities. These covenants are summarized under “Description of New Credit Facilities.”

(footnotes continued on following page)

The following table sets forth a reconciliation of our net cash provided by operating activities to Adjusted EBITDA:


	Year Ended December 31,
	2004			2003			2002
	(dollars in thousands)
Net cash provided by operating activities	$	38,793		$	43,665		$	32,092
Adjustments:
Depreciation and amortization		(45,003	)		(52,054	)		(50,649	)
Deferred long-term compensation		(2,921	)		(5,429	)		(5,284	)
Deferred income taxes		6,269			4,117			(6,771	)
Losses on investments carried on the equity method		(156	)		(193	)		(3,338	)
Realized gain on extinguishment of debt		3,184			—			—
Net realized losses on marketable equity securities		—			(343	)		(3,985	)
Other non-cash items		462			657			(315	)
Changes in operating assets and liabilities		5,697			(6,885	)		(2,433	)

Consolidated net income (loss)		6,325			(16,465	)		(40,683	)
plus:
Consolidated interest expense		61,582			64,441			65,225
Provision for income taxes		(6,418	)		(1,846	)		1,584
Depreciation and amortization		45,003			52,054			50,649
Non-cash stock-based compensation expense—long-term incentive plan		2,921			5,429			5,284
Non-cash stock-based compensation expense—other		183			36			—
Other non-cash items:
Share of losses in unconsolidated company accounted for using the equity method		156			193			1,240
Impairment charges on investments in unconsolidated subsidiaries		—			—			2,098
Net realized losses on marketable equity securities		—			343			3,985
minus:
Realized gain on retirement of debt		(3,184	)		—			—
Non-cash income—non-cash portion of RTFC patronage capital allocation		(878	)		(899	)		(829	)

Adjusted EBITDA	$	105,690		$	103,286		$	88,553

(c)

Includes members’ interest, accumulated deficit and accumulated other comprehensive income (loss).

(d)

Voice access lines refer to each line of local telephone service provided to residential and business customers.

(e)

DSL and high-speed data connections are the high-speed connections provided to end users for purposes of accessing the Internet.

RISK FACTORS

An investment in our common stock involves a number of risks. In addition to the other information contained in this prospectus, prospective investors should give careful consideration to the following factors.

Risks Relating to Our Common Stock and Our New Credit Facilities

Our dividend policy may limit our ability to pursue growth opportunities.

Upon completion of this offering, our board of directors will adopt a dividend policy that reflects an intention to distribute a substantial portion of the cash generated by our business in excess of operating needs, interest and principal payments on our indebtedness, capital expenditures, taxes and future reserves, if any, as regular quarterly dividends to our stockholders. As a result, we may not retain a sufficient amount of cash to finance a material expansion of our business or to fund our operations consistent with past levels of funding in the event of a significant business downturn. In addition, because a significant portion of cash available to pay dividends will be distributed to holders of our common stock under our dividend policy, our ability to pursue any material expansion of our business, including through acquisitions or increased capital spending, will depend more than it otherwise would on our ability to obtain third party financing, which may not be available to us at acceptable pricing levels or with acceptable terms, or at all.

You may not receive the level of dividends provided for in the dividend policy our board of directors will adopt upon the closing of this offering or any dividends at all.

We are not obligated to pay dividends, and our board may amend or revoke our dividend policy at any time. Dividend payments are not guaranteed and are within the absolute discretion of our board of directors. Future dividends with respect to shares of our common stock, if any, will depend on, among other things, our results of operations, working capital requirements, financial condition, contractual restrictions, business opportunities, anticipated cash needs, provisions of applicable law and other factors that our board of directors may deem relevant.

We may not have cash in the future to pay dividends. We might not generate sufficient cash from operations in the future to pay dividends on our common stock in the intended amounts or at all. Our dividend policy is based upon our current assessment of our business and the environment in which we operate, our cash needs and our investment opportunities, and that assessment could change based on operational, regulatory, competitive or technological developments (which could, for example, increase our need for capital expenditures), new growth opportunities or other factors. If our cash flows from operations for future periods were to fall below our minimum expectations, we would need either to reduce or eliminate dividends or, to the extent permitted under the terms of our new credit facilities, raise cash from other sources. We will not be able to borrow under our new credit facilities to fund dividends. If we were to use working capital or permanent borrowings to fund dividends, we would have less cash and/or borrowing capacity available for future dividends and other purposes, which could negatively affect our financial condition, results of operations or liquidity and our ability to maintain or expand our business.

Delaware law restricts our ability to pay dividends. Under Delaware law, Madison River Communications’ board of directors and the board of directors for our corporate subsidiaries may declare and pay dividends only to the extent of “surplus,” which is defined as total assets at fair market value minus total liabilities, minus statutory capital, or if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Also, under Delaware law, our limited liability company subsidiaries generally may only make distributions to us to the extent that at the time of the distribution, after giving effect to such distribution, all liabilities do not exceed the fair market value of the assets of such limited liability companies.

The reduction or elimination of dividends may negatively affect the market price of our common stock.

We are a holding company, with no revenue generating operations of our own. We depend on the performance of our subsidiaries and their ability to make distributions to us.

Madison River Communications is a holding company with no business operations, sources of income or assets of its own other than the 100% ownership interest in Madison River Telephone, which itself is a holding company, it will have upon consummation of the reorganization transactions. Because all of our operations are conducted by our subsidiaries, our cash flow and our ability to repay our debt and other obligations and to pay dividends to our stockholders are dependent upon cash dividends and distributions or other transfers from our subsidiaries.

We may be unable to access the cash flow of our subsidiaries. A number of our subsidiaries will be a party to or subject to our new credit facilities and are or may in the future be a party to other borrowing agreements that restrict the payment of dividends to us, and such subsidiaries are likely to continue to be subject to such restrictions and prohibitions for the foreseeable future. In addition, the ability of our subsidiaries to pay interest and dividends or make other payments or distributions will depend on their respective operating results and may be subject to further restrictions under, among other things, the laws of their jurisdiction of organization.

In addition, the assets of our subsidiaries will be subject to the prior claims of all creditors, including trade creditors, of those subsidiaries. In the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding of any of our subsidiaries, holders of their indebtedness and their trade creditors will generally be entitled to payment of their claims from assets of those subsidiaries before any assets are made available for distribution to us. As of December 31, 2004, after giving effect to the transactions as if they had been consummated as of such date, our subsidiaries would have had $ million of outstanding liabilities, including trade payables.

As a result of the foregoing, we may be unable to receive cash through distributions or other payments from Madison River Telephone in sufficient amounts to pay dividends on our common stock.

Our significant amount of long-term indebtedness could restrict our ability to pay dividends on our common stock, limit our operational flexibility or otherwise affect our financial condition.

We have now and, following the consummation of the transactions, will continue to have a significant amount of long-term indebtedness. After giving effect to the transactions, we estimate that we will have total indebtedness of $455.6 million and that $75.0 million will be available for borrowing under our new credit facilities.

Our substantial level of indebtedness could have important consequences to the holders of our common stock, including the following:

a significant portion of our cash flow from operations is likely to be dedicated to the payment of the principal of and interest on our indebtedness, thereby reducing funds available for working capital, capital expenditures, future operations and business opportunities, dividends on our common stock and/or other general corporate purposes;

we may have limited flexibility to plan for, or react to, changes in our business, market conditions and the industry in which we operate;

our ability to withstand competitive pressures may be reduced and we may be more vulnerable to general adverse economic and industry conditions;

our ability in the future to obtain additional financing for working capital, capital expenditures, future business opportunities and other general corporate requirements may be limited; and

our ability to refinance our indebtedness could be limited.

We may be able to incur substantially more indebtedness, which would increase the risks described above associated with our substantial indebtedness.

We may be able to incur substantial amounts of additional indebtedness in the future. While the terms of the new credit facilities will limit our ability to incur additional indebtedness, such terms do not and will not prohibit

us from incurring substantial amounts of additional indebtedness for specific purposes or under certain circumstances. Any additional indebtedness incurred by us could increase the risks associated with our substantial indebtedness.

We have experienced net losses for most of our history, and if we experience losses in the future, we may not be able to generate sufficient cash flow to meet our obligations or pay dividends on our common stock.

Although we generated net income of $6.3 million for the year ended December 31, 2004, we have incurred losses for several prior fiscal years, and we may incur losses in the future. For example, we incurred net losses of $16.5 million and $40.7 million for the fiscal years ended December 31, 2003 and 2002, respectively. We may not sustain profitability in the future or be able to generate cash flow sufficient to meet our interest and principal payment obligations, pay dividends on our common stock and fund our other capital needs such as working capital for future growth and capital expenditures.

We are subject to restrictive debt covenants and other requirements related to our new credit facilities that may limit our business flexibility by imposing operating and financial restrictions on our business.

Covenants in our new credit facilities will impose significant operating and financial restrictions on us. These restrictions will include, among other things, a limitation on:

indebtedness and guarantees;

liens and negative pledges;

investments;

certain restricted payments;

mergers, acquisitions and asset sales;

transactions with affiliates;

changes in business conducted; and

prepayment of or repurchase of subordinated indebtedness.

These restrictions could limit our ability to obtain future financing, make acquisitions, fund capital expenditures, withstand downturns in our business or take advantage of business opportunities. Furthermore, the new credit facilities will also require us to maintain specified total leverage and fixed charge coverage ratios, and will require us to make annual mandatory prepayments with 50% of our excess cash flow as well as under other circumstances. Our ability to comply with the ratios or tests may be affected by events beyond our control, including prevailing economic, financial and industry conditions.

A breach of any of these covenants, ratios or tests could result in a default under the new credit facilities. Upon the occurrence of an event of default under the new credit facilities, the lenders could elect to declare all amounts outstanding under the new credit facilities to be immediately due and payable. If the lenders accelerate the payment of the indebtedness under the new credit facilities, our assets may not be sufficient to repay in full this indebtedness and our other indebtedness.

If we are not able to refinance our new credit facilities at maturity on favorable terms or at all, our ability to pay dividends will be impaired and we will be in default under the new credit facilities.

Our new credit facilities will mature in full in 2012. We may not be able to renew or refinance the new credit facility, or any renewal or refinancing may occur on less favorable terms. If we are unable to refinance or renew our new credit facilities, our failure to repay all amounts due on the maturity date would cause a default

under the new credit facilities. In addition, our interest expense may increase significantly if we refinance our new credit facilities on terms that are less favorable to us than the terms of our new credit facilities. Either of these events would impair our ability to pay dividends.

We will require a significant amount of cash, which may not be available to us, to service our debt, including our new credit facilities, fund our liquidity needs and pay dividends on our common stock.

Our ability to make payments on, or to refinance or repay our debt, to fund planned capital expenditures and expand our business will depend largely upon our future operating performance. Our future operating performance is subject to general economic, financial, competitive, legislative and regulatory factors, as well as other factors that are beyond our control. Our business may not generate cash flow in an amount sufficient to enable us to pay our debt service obligations or fund our other liquidity and capital needs as a result of any of these factors. We estimate that we will need approximately $40.0 million to meet our debt service obligations and planned capital expenditure needs in 2005. If we do not generate enough cash flow for such purposes, we will not be able to pay dividends on our common stock. If we are unable to generate sufficient cash to service our debt requirements, we will be required to refinance our existing indebtedness. We may not be able to refinance any of our debt, including our new credit facilities, under such circumstances on commercially reasonable terms or at all. If we are unable to refinance our debt or obtain new financing under these circumstances, we would have to consider other options, including:

sales of certain assets to meet our debt service requirements;

sales of equity; and

negotiations with our lenders to restructure the applicable debt.

Our new credit facilities could restrict our ability to do some of these things. If we are forced to pursue any of the above options under distressed conditions, our business and/or the value of our common stock could be adversely affected.

Before this offering, there has been no public market for our common stock. This may cause volatility in the trading price of the common stock, which could negatively affect the value of your investment.

Prior to this offering, there has been no public market for our common stock. The initial public offering price of the common stock will be determined by negotiations between us and the underwriters and may not be indicative of the market price for our common stock in the future. It is possible that an active trading market for our common stock will not develop or be sustained after the offering. Even if a trading market develops, the market price of our common stock may fluctuate widely as a result of various factors, such as period-to-period fluctuations in our operating results, sales of our common stock by principal stockholders, developments in the telecommunications industry, the failure of securities analysts to cover our common stock after this offering or changes in financial estimates by analysts, competitive factors, regulatory developments, economic and other external factors, general market conditions and market conditions affecting the stock of telecommunications companies in particular. In addition, if we do not pay dividends, either in accordance with our dividend policy or at all, your shares of common stock could become less liquid and the market price of our common stock could decline. Telecommunications companies have in the past experienced extreme volatility in the trading prices and volumes of their securities, which has often been unrelated to operating performance. Any such market volatility may have a significant adverse effect on the market price of our common stock.

Future sales, or the possibility of future sales, of a substantial amount of our common stock may depress the price of the shares of our common stock.

Future sales, or the availability for sale in the public market, of substantial amounts of our common stock could adversely affect the prevailing market price of our common stock, and could impair our ability to raise capital through future sales of equity securities.

Upon consummation of this offering, there will be shares of common stock outstanding, and we will have reserved shares of common stock for issuance under our Omnibus Stock Plan. The shares of common stock sold in this offering will be freely transferable without restriction or further registration under the Securities Act. The remaining shares of common stock outstanding, including the shares owned by our existing equity investors, will be restricted securities within the meaning of Rule 144 under the Securities Act, but will be eligible for resale subject to applicable volume, manner of sale, holding period and other limitations of Rule 144.

We, our executive officers and directors and our existing equity investors have agreed to a “lock-up,” meaning that, subject to specified exceptions, neither we nor they will sell any shares without the prior consent of the representatives of the underwriters for 180 days after the date of this prospectus. Following this offering, shares of common stock held by those persons will be subject to the lock-up. Following the expiration of this 180-day lock-up period, all of the shares of Madison River Communications’ common stock owned by these persons will be eligible for future sale, subject to the applicable volume, manner of sale, holding period and other limitations of Rule 144. Finally, our existing equity investors and some members of management, who collectively will hold shares of common stock immediately following the consummation of this offering, have registration rights with respect to the common stock that they will retain, or may acquire upon the exercise of options, following this offering.

We may issue shares of Madison River Communications’ common stock, or other securities, from time to time as consideration for future acquisitions and investments. In the event any such acquisition or investment is significant, the number of shares of Madison River Communications’ common stock, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be significant. We may also grant registration rights covering those shares or other securities in connection with any such acquisitions and investments.

As a new investor, you will experience immediate and substantial dilution.

Investors purchasing common stock in the offering will experience immediate and substantial dilution in the net tangible book value of their shares. At an initial public offering price of $ per share, the mid-point of the range set forth on the cover page of this prospectus, dilution to new investors is $ per share. If we seek additional capital in the future, the issuance of shares of common stock or securities convertible into shares of common stock in order to obtain such capital may lead to further dilution of your equity investment.

Our existing equity investors will collectively have the power to exercise substantial influence over all matters submitted to our stockholders for approval. As a result, the influence of our public stockholders over significant corporate actions will be limited.

Upon the completion of the reorganization transactions and the consummation of this offering, our existing equity investors will hold approximately % of the outstanding shares of Madison River Communications’ common stock (or % if the underwriters’ over-allotment option is exercised in full). As a result, after this offering, our existing equity investors will collectively have the power to exercise substantial influence over all matters submitted to stockholders for approval, including the election of directors, amendments to our certificate of incorporation and any transaction that requires the approval of stockholders. So long as the existing equity investors continue to own a significant amount of the outstanding shares of Madison River Communications’ common stock, they will continue to be able to strongly influence our decisions. This concentration of ownership could have the effect of delaying, deferring or preventing a change in control, merger or tender offer, which would deprive you of an opportunity to receive a premium for your shares and may negatively affect the market price of the common stock. Moreover, our existing equity investors could effectively receive a premium for transferring ownership to third parties that would not inure to your benefit.

Conflicts of interests between our existing sponsors and us or you could have an adverse affect on our business and your investment.

Conflicts of interests between our existing sponsors and us or you could arise in the future, and these conflicts may not be resolved in our or your favor. For instance, our existing sponsors have and may, in the future, make significant investments in other telecommunications companies, including investments in cable companies, competitive local exchange carriers and other rural telephone companies. Affiliates of Providence Equity Partners, one of our existing sponsors, have a significant investment in Consolidated Communications Holdings, Inc., which is a rural telephone company that competes with us for acquisitions from time to time. Affiliates of Goldman, Sachs & Co., another of our existing sponsors, have investments in a number of telecommunications companies, including significant investments in New Edge Networks, which may compete with us as a competitive local exchange carrier in each of our franchised territories, and Cebridge Connections, which offers Internet services which may compete with our Internet services in Illinois and Louisiana. None of our existing sponsors are obligated to advise us of any investment or business opportunities of which they are aware, and they are not contractually restricted or prohibited from competing with us. In addition, through their significant ownership interest in us, our existing sponsors may seek to influence us to take courses of action that, in their judgment, could enhance their investment in us, but which might involve risks to, or otherwise adversely affect, us or you.

Our organizational documents and Delaware law could limit another party’s ability to acquire us and deprive our investors of the opportunity to obtain a takeover premium for their securities.

A number of provisions in Madison River Communications’ certificate of incorporation and bylaws and certain provisions of Delaware law will make it difficult for another company to acquire us and for you to receive any related takeover premium for your securities. For example, Madison River Communications’ organizational documents provide that stockholders generally may not act by written consent and only stockholders representing at least 50% in voting power may request that Madison River Communications’ board of directors call a special meeting. Madison River Communications’ organizational documents also authorize the issuance of common stock and preferred stock without stockholder approval and upon such terms as the board of directors may determine. The rights of the holders of shares of Madison River Communications’ common stock will be subject to, and may be adversely affected by, the rights of holders of shares of preferred stock that may be issued in the future.

Risks Relating to Our Business and Industry

If we are not able to sustain our revenues, our earnings and cash flow from operations will decrease.

We may not be able to stabilize the recent decline in our voice access lines. Beginning with the second quarter of 2002, we have seen the number of voice access lines we serve in certain of our established markets decline due to a number of factors affecting our markets, including but not limited to, competition and recession. We may not be able to maintain our current number of voice access lines or stabilize the decline in the number of such lines even if we were to expand the markets we serve.

Consumers may not continue to purchase our services. In order to maintain our customer base and revenues from our services, we must continue to provide attractive service offerings and compete effectively with other service providers, including wireless service providers and cable companies on, among other things, price, quality and variety of services. Although bundled service offerings have successfully resulted in our customers using additional services in the past, we cannot ensure that we will be able to continue to provide additional services to our customers.

Prices may decline. The prices that we can charge our customers for services, including voice communications, high-speed data and Internet access and egress services, could decline due to the following factors, among others:

lower prices offered by our competitors for similar services or bundled services that include voice, data, Internet access or other services we offer;

changes in the federal or state regulations that encourage competition have the impact of reducing the prices we may charge for our services;

efforts by long distance carriers and others to lower the fees paid to us for use of our network in offering their services;

reduction of the universal support fund established by the Federal Communications Commission, or FCC, due to an increased number of participants accessing the fund or changes in the regulation that determines the amounts we receive under, and contribute to, the fund;

the creation of excess capacity resulting from the installation by us and our competitors, some of whom are expanding capacity on their existing networks or developing new networks, of fiber and related equipment; and

technological advances that permit substantial increases in, or better usage of, the capacity of our transmission media.

We operate in local regions and, as a result, are highly dependent on economic conditions in the local markets we serve.

We are sensitive to, and our success will be substantially affected by, local economic and other factors affecting the local communities that we serve. In recent months, we have seen declines in the number of voice access lines we serve in our established markets due to a number of factors. At December 31, 2004, our RLEC operations served 181,212 voice access lines, which is a decrease of 4,691 voice access lines from 185,903 voice access lines in service at December 31, 2003. The predominant share of voice access line losses have occurred as a result of storm-related damages from Hurricane Ivan in September 2004 at our rural telephone company in Alabama, Gulf Telephone Company. As of December 31, 2004, approximately 2,840 voice access lines were disconnected as a result of damages from the hurricane. In addition, we have experienced voice access line losses in our Illinois operations, Gallatin River, due to a persistent weakness in the local economies that Gallatin River serves. We are not certain of the trend for voice access lines or other connections in this market in the near future. Furthermore, military officials at Fort Stewart in Hinesville, Georgia, announced that the 3rd Infantry Division stationed there has fully deployed as of February 2005 and that the deployment could last up to fourteen months. One of our rural telephone companies, Coastal Utilities, Inc., serves the Hinesville area, including the military base. The full extent of the impact on our operations is difficult to predict and will vary depending on, among other factors, the duration of the troop deployment. Therefore, we are unable at this time to project the range of the impact of this deployment on Coastal Utilities, Inc. or on our operations as a whole. These factors, which are beyond our control, could adversely affect our business or results of operations.

Significant and growing competition may adversely affect our revenues and profitability.

The telecommunications industry is highly competitive. As characteristics of our markets change, regulatory barriers are removed and entry costs decrease, the likelihood of local competitors entering our markets may increase. Significant and potentially larger competitors could enter our markets at almost any time.

We face competition from wireless telecommunications providers, which may increase as wireless technology improves. We also face competition from other current and future market entrants, including cable television companies, competitive local exchange carriers, voice-over-Internet protocol, or VOIP, providers, electric utilities, microwave carriers, Internet service providers and private networks built by large end users and municipalities. For example, we face competition for high-speed access to the Internet from cable TV companies in each of our markets, and we expect that competition will intensify. Many potential competitors for our services have, and some potential competitors are likely to enjoy, substantial competitive advantages, including name recognition and financial, technical, marketing and other resources that are greater than ours. Increased competition could lead to loss of revenues and profitability as a result of numerous factors, including continued declines in our voice access lines, price reductions, fewer sales, reduced operating margins and the loss of market share.

Rapidly changing communications technology and other factors may have a material adverse effect on our business and our cash flows.

The telecommunications industry is subject to rapid and significant changes in technology. The effect of these technological changes on our business is difficult to predict and plan for in advance. These changes could require us to incur significant capital expenditures to maintain or improve our competitive position. We may not be able to obtain timely access to new technology on satisfactory terms or incorporate new technology into our systems in a cost effective manner, or at all. Further, new technologies and products may not be compatible with our existing technologies and systems. New technologies and products may reduce the prices for our services or be superior to, and render obsolete, the products and technologies we use. If we do not replace or upgrade our technology and equipment that becomes obsolete, we will not be able to compete effectively. Technological changes in the communications industry may have a material adverse effect on our business and may affect our ability to achieve sufficient cash flow to provide adequate working capital, to service our indebtedness or pay dividends on our common stock.

We rely primarily on Nortel Switching equipment for our telephone switching equipment, use fiber for connections between network node locations and use twisted copper pair cable to connect end users to our network. Network node locations include host and remote switching points and digital transmission equipment located in the field.

Alternative technologies for our switching equipment include small computers known as “soft switches,” which perform central office switching functions and other forms of digital switching devices. Such devices are generally less expensive and have more flexible software capabilities. Such devices also may interact more easily with digital devices, compared to our legacy network which is primarily analog.

Alternative technologies for inter-nodal optic fiber include high capacity point-to-point microwave radio systems. Such systems require additional FCC licenses and are generally not competitive with the use of fiber due to lack of capacity and the ability to increase capacity with equipment upgrades.

Alternative technologies for our twisted pair copper distribution cable include coaxial cable, wireless transmission, and optic fiber. These alternative technologies may be capable of higher transmission rates and of interacting with digital devices. For example, coaxial cable and fiber are all capable of transmissions in excess of 20 megabits per second.

In addition to technological advances, other factors could require us to further expand or adapt our network, including an increasing number of customers, demand for greater data transmission capacity, failure of our technology and equipment to support operating results anticipated in our business plan and changes in our customers’ service requirements. Expanding or adapting our network could require substantial additional financial, operational and managerial resources, any of which may not be available to us.

The transmission speed for services across our network is a significant factor in the demand for some of our services. While we are capable of providing multi-megabit transmission speeds across our network between a central office and the end user, the actual data transmission speed over our network may fluctuate due to various factors. Such factors include the diameter of the copper strands, the distance between the network nodes and the user location, and interference from high speed transmissions on adjoining copper pair. If our network is unable to provide services to our customers at speeds that are competitive, we may lose our customers to competitors, which would adversely affect our results of operations.

We may have difficulty sustaining revenue growth if the market for DSL-based services fails to develop, grows more slowly than anticipated or becomes saturated with competitors.

We expect that an increasing amount of our revenues will come from providing DSL-based services. For the years ended December 31, 2004 and December 31, 2003, DSL-based services represented 9.3% and 6.6%, respectively, of our total revenues. The market for business and residential high-speed Internet access is in the

early stages of development and is highly competitive. Because we offer and expect to expand our offering of services to a new and evolving market and because current and future competitors are likely to introduce competing services, it is difficult for us to predict the rate at which this market will grow. Various providers of high-speed digital communications services are testing products from a number of suppliers for various applications, and it is unclear if DSL will offer the same or more attractive price-performance characteristics. The markets for our DSL-based services could fail to develop, grow more slowly than anticipated or become saturated with competitors. This could have an adverse effect on our results of operations.

We may have difficulties executing our growth strategy and managing our growth effectively.

Currently, we operate our business and provide our services primarily as an incumbent local exchange carrier in our franchised territories. We also provide edge-out services as a competitive local exchange carrier in territories that are in close proximity to our franchised territories. Our business plan is to expand our business by adding new customers for both our incumbent local exchange carrier operations and, to a limited degree, our edge-out services. In addition, we are providing new services to our existing customers. Demand and market acceptance for any new products and services we introduce, whether in existing or new markets, are subject to a high level of uncertainty. Our inability to expand our services or to enter new markets effectively could have a material adverse effect on our business or results of operations, including our ability to service our indebtedness or pay dividends on our common stock.

Our business plan will, if successfully implemented, result in growth of our operations, which may place a significant strain on our management, financial and other resources. To achieve and sustain growth we must, among other things, monitor operations, meet competitive challenges, control costs, maintain regulatory compliance, maintain effective quality controls and significantly expand our internal management, technical, provisioning, information, billing, customer service and accounting systems. We cannot guarantee that we will successfully obtain, integrate and use the employee, management, operational and financial resources necessary to manage a developing and expanding business in an evolving, regulated and increasingly competitive industry.

Our growth depends in part on our ability to find suitable businesses to acquire. In addition, the risks associated with acquisitions may result in operating difficulties and may have other harmful consequences.

Our business plan focuses on growing our business in part through acquisitions. Any future acquisitions will depend on our ability to identify suitable acquisition candidates, to negotiate acceptable terms for their acquisition and to finance those acquisitions. We will also face competition for suitable acquisition candidates that may increase our costs and limit the number of suitable acquisition candidates available. In addition, future acquisitions by us could result in the incurrence of additional indebtedness and contingent liabilities, which could have a material adverse effect on our ability to generate cash flow, provide adequate working capital, service our indebtedness or pay dividends on our common stock. Any future acquisitions could also expose us to increased risks, including, among others:

the difficulty of integrating the acquired operations, personnel, network and other support systems;

the potential disruption of our ongoing business and diversion of resources and management time;

the inability to generate revenues from acquired businesses sufficient to offset acquisition costs;

the risks of entering markets in which we have little or no direct prior experience;

the risk that federal or state regulators may condition approval of a proposed acquisition on our acceptance of conditions that may adversely affect our overall financial results;

difficulties in the integration of departments, systems, including accounting systems, technologies, books and records and procedures, as well as in maintaining uniform standards and controls, including internal accounting controls, procedures and policies;

expenses of any undisclosed or potential legal liabilities;

the impairment of relationships with employees, unions or customers as a result of changes in management; and

the impairment of supplier relationships.

As a result, we cannot guarantee that we will be able to consummate any acquisitions in the future or that any acquisitions, if completed, would be successfully integrated into our existing operations.

To date, we have grown in large part through the acquisition of local telephone companies and other operating assets. Our future operations depend largely upon our ability to manage our business successfully. If we are successful in making additional acquisitions, our management team will have to manage a more complex organization and a larger number of operations than we have previously operated. We may not be successful in integrating the various acquisitions. In addition, we may discover information in the course of the integration of these acquisitions that may have an adverse effect on our business or results of operations.

We may not be able to grow or sustain our current positive cash flow from our edge-out services or our business plan for our edge-out services may not result in a viable, sustainable line of business capable of funding its own operations in future years in our edge-out markets as a whole.

In 2002, our edge-out operating results reflected a significant decrease in the utilization of cash. In 2004 and 2003, our edge-out services generated positive cash flow from operations and for the year ended December 31, 2004, our edge-out operations had a net operating loss of approximately $9.8 million. Growth and profitability in our edge-out services line of business may require interconnection and resale terms and pricing which depend, in part, on federal and state regulatory decisions and court interpretations of legislation, all of which are outside of our control and subject to change in ways that are difficult to predict. As a result, we may not be able to grow or sustain our current positive cash flow from operations from this line of business or our business plan may not result in a viable, sustainable line of business capable of funding its own operations in future years in our edge-out markets as a whole. Our inability to execute our business plan for our edge-out services could have a material adverse effect on our financial position, results of operations or cash flows.

Network disruptions could adversely affect our ability to provide service to our customers.

The success of our operations will require that our network provide competitive reliability and adequate capacity and security. Some of the risks to our network and infrastructure include:

physical damage;

power loss from, among other things, adverse weather conditions, which occurred during Hurricane Ivan;

capacity limitations;

software and hardware defects;

breaches of security, including sabotage, tampering, computer viruses and break-ins; and

other disruptions that are beyond our control.

Disruptions or system failures may cause interruptions in service or reduced capacity for customers. For example, storm-related damages from Hurricane Ivan in September 2004 resulted in approximately 2,840 voice access lines being disconnected as of December 31, 2004 at our rural telephone company in Alabama, Gulf Telephone Company. As a result of the disconnections, our revenues from end user customers decreased by approximately $0.5 million in 2004. We accrued approximately $1.7 million in operating expenses in the third quarter of 2004 for storm-related damages, and we made approximately $2.6 million in capital expenditures in the fourth quarter of 2004 primarily to replace damaged and destroyed transmission and distribution facilities. As a result of the additional expenses, we recognized approximately $0.8 million in revenues from settlements with the National Exchange Carrier Association, or NECA, carrier common line pool. If service is not restored in a timely manner, agreements with our customers may obligate us to provide credits or other remedies to them, and this would reduce our revenues. Service disruptions could also damage our reputation with customers, causing us

to lose existing customers or have difficulty attracting new ones. Many of our customers’ communications needs are extremely time sensitive, and delays in signal delivery may cause significant losses to a customer using our network.

We may not be successful in obtaining and maintaining the necessary rights-of-way for our network, which could adversely affect our ability to continue to provide service to our customers and may result in an event of default under our new credit facilities.

We may need to obtain supplemental rights-of-way and other permits from railroads, utilities, state highway authorities, local governments and transit authorities to install conduit and related telecom equipment for any expansion of our network in our markets. We may not be successful in obtaining and maintaining these right-of-way agreements or obtaining these agreements on acceptable terms, whether in new markets or in our existing markets. Although as of December 31, 2004, we had acquired all material, necessary nonexclusive right-of-way agreements covering our current operations, some of these agreements may be short-term or revocable at will, and we cannot be certain that we will continue to have access to existing rights-of-way after they have expired or terminated. Although we believe that alternative supplemental rights-of-way will be available, if any of these agreements were terminated or could not be renewed, we may be forced to remove our fiber optic cable from under the streets or abandon our networks.

Our utility right-of-way agreements are subject to certain conditions and limitations on access and use and are subject to termination upon customary default provisions. In some cases, these agreements require our fiber network to be moved or removed in the event that the utility needs its right-of-way for public utility purposes or no longer owns its right-of-way. We may not be able to maintain all of our existing rights and permits or obtain and maintain the additional rights and permits needed to implement our business plan. In addition, we expect that our failure to maintain the necessary rights-of-way, franchises, easements, licenses and permits may result in an event of default under our new credit facilities.

Our relationships with other companies in the telecommunications industry are material to our operations and their financial difficulties may adversely affect our business, including our ability to provide services to our customers.

We generate a significant portion of our local service revenues from originating and terminating phone calls for interexchange carriers. We originate and terminate long distance phone calls for other interexchange carriers over our networks and for that service we receive revenues from the interexchange carriers, some of which are our largest customers in terms of revenues. As of December 31, 2004, revenues from such interexchange carriers comprised 18.8% of our total revenues. Some of these interexchange carriers have declared bankruptcy in recent years or are experiencing substantial financial difficulties, which negatively impacted our financial results and cash flows. Additional bankruptcies or disruptions in the businesses for these interexchange carriers and others could further adversely effect our financial results and cash flows. In addition, we are aware that certain interexchange carriers are or are seeking to bypass or avoid access charges by originating traffic on and routing traffic through unregulated Internet facilities.

We also depend on many telecommunications vendors and suppliers to conduct our business. We use many vendors and suppliers that derive significant amounts of business from customers in the telecommunications business. Associated with the difficulties facing many companies in the telecommunications industry, some of these third party vendors and suppliers have experienced substantial financial difficulties in recent years, in some cases leading to bankruptcies and liquidations. Any disruptions that these third party companies experience as a result of their financial difficulties that impact the delivery of products or services that we purchase from them could have an adverse affect on our business.

We may not be able to compete effectively with the regional Bell operating companies in the provision of long distance services.

Regional Bell operating companies have received authorization to provide certain types of long distance telephone service in each of the states in which we operate. Regional Bell operating companies have succeeded

in capturing substantial market shares in long distance services in several states where they are authorized to provide such services, including New York and Texas. By obtaining such authorizations, a major incentive that the regional Bell operating companies have to cooperate with businesses such as our edge-out operations to foster competition within their service areas has been removed. When regional Bell operating companies offer both long distance and local exchange services, they reduce a competitive advantage which businesses like our edge-out operations currently have in those regions.

Failure to attract and retain qualified management and other personnel could adversely affect our business.

Our business is dependent upon a small number of key executive officers. We have entered into employment, confidentiality and noncompetition agreements with Messrs. J. Stephen Vanderwoude, Paul H. Sunu, Kenneth W. Amburn, Michael T. Skrivan and Bruce J. Becker providing for employment of each executive for specified periods of time ranging up to three years. The agreements are subject to termination by either party (with or without cause) at any time subject to applicable notice provisions. Additionally, the agreements prohibit the executives from competing with us for a maximum period of up to 15 months following termination for cause or voluntary termination of employment. We have not entered into employment agreements with any other key executives.

We may not be able to attract or retain other skilled management personnel in the future. The loss of the services of key personnel, or the inability to attract additional qualified personnel, could have a material adverse effect on our business or results of operations.

Our inability to raise more capital to fund our obligations could have a material adverse effect on our business.

We may need to raise more capital in the future to:

provide adequate working capital to fund our working capital deficit, continuing operations, capital expenditures and acquisitions;

provide resources to service or refinance our existing and future indebtedness; and

provide liquidity to fund any unexpected expenses or obligations.

Based on our business plan and anticipated future capital requirements, we believe that the available borrowings under our new credit facilities, cash and investments on hand and our cash flow from operations will be adequate to meet our foreseeable operational liquidity needs for at least the next 12 months. However, we may need additional capital sooner than planned. While possible sources of additional capital include commercial bank borrowings, sales of assets, vendor financing or the sale or issuance of equity and debt securities to one or more investors, our ability to arrange additional capital and the terms and cost of that financing will depend upon many factors, some of which are beyond our control. We may be unable to raise additional capital, and such failure to do so could have a material adverse effect on our business.

Risks Related to Our Regulatory Environment

We are subject to extensive government regulation that could change in a manner adverse to us.

We are subject to varying degrees of federal, state and local regulation. A majority of our revenues come from the provision of services regulated by the FCC and various state regulatory bodies. Many aspects of our services and operations are subject to federal and state regulation, including the introduction and pricing of new services, compliance with demands from law enforcement and national security agencies, privacy of customers’ information and our use of radio frequencies. The impact of future developments or changes to the regulatory environment or the impact such developments or changes would have on our operations are unpredictable. Any

such changes could materially increase our compliance costs, require redesign of rate structures or prevent us from implementing our business plan. Regulation of the telecommunications industry is changing rapidly, which affects our business opportunities, competitive position and other aspects of our business. The regulatory environment varies substantially from state to state. In the states in which we provide services, we are generally required to obtain and maintain certificates of authority from regulatory bodies and file tariffs where we offer intrastate services.

A reduction in universal service fund support would adversely affect our business, results of operations and cash flow.

We benefit from requirements that rates in rural areas be reasonably comparable to rates in urban areas, which results in state and federal universal service funding support payments in high cost rural areas. For the years ended December 31, 2004 and December 31, 2003, revenues attributable to such support payments represented 6.6% and 6.2%, respectively, of our total revenues. Under the current regulatory scheme, as the number of access lines that we have in any given state increases, the rate at which we can recover certain support payments decreases. Therefore, as we implement our growth strategy, our eligibility for such support payments may decrease.

There are a number of factors which impact universal service. The recent history of declining interstate long distance revenues reduces the assessment base for universal service. The increase in payments to wireless carriers designated as eligible telecommunications carriers has resulted in increased funding requirements. The increased number of subscribers to VOIP services may reduce the number of wireline local services which constitute a portion of the assessment base for universal service. The continued scrutiny of federal universal service funding could trigger regulatory or legislative changes in how assessments are made for contributions to the fund, how support is calculated for rural local exchange carriers such as our rural telephone companies and what companies will be eligible for such support. In addition, there are a number of appeals challenging several aspects of the FCC’s universal service rules. We cannot predict with certainty whether regulatory or legislative changes will occur or when such changes would occur. If we are unable to receive support from the universal service fund, or if such support is reduced, our business, results of operations and cash flow would be negatively affected.

As the incumbent local exchange carrier in our service areas, we are subject to regulation that is not applicable to our competitors.

Existing federal and state rules impose obligations and limitations on us as the incumbent local exchange carrier in some of our markets that are not imposed on our competitors. Federal obligations to share facilities, justify tariffs, maintain certain types of accounts and file certain types of reports are all examples of disparate regulation. While our edge-out and long distance businesses are also subject to government regulation, our incumbent local exchange carrier operations, in particular, are highly regulated at both the federal and state levels.

Regulatory decisions relating to unbundling, interconnection with competitors and pricing of network services may increase our costs of providing services to our edge-out customers and/or reduce the rates that we are permitted to charge customers for our services.

The Telecom Act requires incumbent local exchange carriers to enter into agreements to interconnect with, sell unbundled network elements to and sell services for resale to competitive local exchange carriers. Our ability to compete in the local exchange market as a competitive local exchange carrier may be adversely affected by the incumbent local exchange carrier’s pricing of such offerings and related terms, such as the availability of operation support systems and local number portability, and would be adversely affected if such requirements of the Telecom Act were repealed. Furthermore, the FCC’s recent Triennial Review Order and subsequent related decisions reduce certain of the incumbent local exchange carrier’s obligations, and may result in the elimination of additional obligations, to provide competitive local exchange carriers like ours with access to their network elements. This may increase the costs of providing services to our edge-out customers, require us to make extensive investments in new network equipment to serve edge-out customers or delay or otherwise limit or affect our ability to expand our

edge-out operations. The general uncertainty regarding proposed changes to the unbundling rules results in additional instability for our operations, which may possibly lead to further reductions in revenues.

In addition, depending on the implementation of the Telecom Act, our incumbent local exchange carrier operations may be forced to interconnect with, and sell such services and elements to, competitors at prices that do not fully recover our costs of providing such services. If we continue to be unable to charge rates that fairly compensate us for providing unbundled network services, our operating results could be adversely affected. In addition, it is possible that in each state in which we have incumbent local exchange carrier operations, interexchange carriers that pay our incumbent local exchange carriers intrastate access charges may initiate proceedings to reduce our intrastate access charge rates. The outcome of any such proceedings could further adversely affect our financial results.

The rates we charge our local telephone customers are based, in part, on a rate of return authorized by regulators. These authorized rates, as well as allowable investment and expenses, are subject to review and change by those regulators at any time. To the extent that any business is over-earning, the state regulators may issue an order requiring us to reduce our rates. While we have not been required to reduce our rates in the past, if regulators order us to reduce our rates, our competitive position and our results of operations will be adversely affected.

FCC regulations also affect rates that are charged to our customers. The FCC approves tariffs for interstate access and subscriber line charges, both of which contribute to our revenue. If the FCC lowers interstate access charges, we may be required to recover more revenue through subscriber line charges or forego this revenue altogether. This could reduce our revenue and impair our competitive position.

Judicial review and FCC decisions pursuant to the Telecom Act may adversely affect our business.

With the passage of the Telecom Act, the regulation of our services has been subject to numerous administrative proceedings at the federal and state level, litigation in federal and state courts and legislation in federal and state legislatures. The outcome of the various proceedings, litigation and legislation and the extent to which they may adversely affect our business or results of operations is difficult to predict and plan for in advance. Any unfavorable outcomes may affect our financial position, results of operations or cash flows, including our ability to service our indebtedness or pay dividends on our common stock.

Changes to existing laws and regulations to which we are subject, and the introduction of new technologies, including VOIP, may result in loss or reduction of revenues from network access charges.

Access and interconnection charges, which consist of revenues from end users for interstate subscriber line charges, from wireless carriers for termination of local wireless calls and from interexchange carriers for originating, terminating and transporting long distance and high speed data services on our local network, accounted for 29.9% of our revenues for the year ended December 31, 2004.

Large long distance providers have advocated in the past, and continue to advocate, that access charges they are required to pay should be reduced and the revenues replaced, perhaps only in part, by raising the fees charged to business and residential customers or by receipts from a universal service fund. Large long distance providers have also argued and continue to argue that access charges do not apply to specific types of traffic. The combined or individual results of these long distance carrier efforts could be to reduce the amount of access charge revenue we receive. Access charge reform is a key element of the universal service issues under review by state and federal regulators and legislators. Any action taken on any of these issues may have an adverse effect on our revenues and costs.

The emerging technology known as VOIP can be used to carry user-to-user voice communications over broadband or dial-up service. The FCC has ruled that some VOIP arrangements are not regulated as telecommunications services, but that a conventional telephone service that uses Internet protocol in its backbone is a telecommunications service. The FCC has initiated a proceeding to review the regulatory status of VOIP services and the possible application of various regulatory requirements to VOIP providers, including the payment of access charges. Expanded use of VOIP technology instead of traditional wireline communications could reduce the access revenues received by local exchange carriers like us.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

The statements, other than statements of historical fact, included in this prospectus are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “plan,” “seek” or “believe,” or by discussion of strategy that involves risks and uncertainties. We believe that the expectations reflected in such forward-looking statements are accurate. However, we cannot assure you that such expectations will occur. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to:

our dividend policy and expectations regarding dividend payments;

our ability to service our significant amount of indebtedness;

our ability to sustain our revenues;

our dependence on economic conditions in the local markets we serve;

our ability to achieve profitability;

significant and growing competition in the telecommunications industry;

the advent of new technology that may force us to expand or adapt our network in the future;

our dependence on the development of a DSL-based services market;

our regulatory environment;

the success of efforts to expand our service offerings and grow our business;

our ability to execute our acquisition strategy, including successfully integrating acquired businesses;

our ability to implement our business plan for our edge-out services successfully;

a reduction in universal service fund support;

network disruptions;

our ability to obtain and maintain the necessary rights-of-way for our networks;

the financial difficulties of other companies in the telecommunications industry with which we have material relationships;

our ability to compete effectively with regional Bell operating companies;

our dependence on our key personnel; and

our ability to raise additional capital on acceptable terms and on a timely basis.

You should not unduly rely on these forward-looking statements, which speak only as of the date of this prospectus. Except as required by law, we are not obligated to publicly release any revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this prospectus or to reflect the occurrence of unanticipated events. Important factors that could cause our actual results to differ materially from our expectations are discussed under “Risk Factors” and elsewhere in this prospectus. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the statements in those sections.

THE TRANSACTIONS

As used in this prospectus, the “transactions” collectively refer to the following transactions:

the reorganization transactions;

Madison River Communications’ offering of common stock pursuant to this prospectus;

the entering into, and the borrowings under, our new credit facilities to finance the transactions;

the repayment and refinancing of certain of our existing debt;

the redemption of the minority interest in Coastal Communications, Inc. held by the Coastal shareholders; and

the payment of related bonuses, fees and expenses.

Each of the transactions is described more fully below and under “Use of Proceeds” and “Description of New Credit Facilities.”

The Reorganization Transactions

Prior to closing this offering, we will consummate the reorganization transactions described herein, which are designed to facilitate this offering by converting the holding company for our business from a limited liability company to a corporation, which is more familiar to public investors. The reorganization transactions will not affect our operations, which we will continue to conduct through our operating subsidiaries. As part of the reorganization transactions, certain direct and indirect holders of membership units in Madison River Telephone will receive shares of common stock in Madison River Communications in direct or indirect exchange for their outstanding membership units in Madison River Telephone.

We expect that a note payable in a principal amount of $392,610 held by Madison Dearborn Capital Partners, L.P., one of our existing sponsors, will be converted into 392,610 Class A units in Madison River Telephone, which will be exchanged for common stock of Madison River Communications pursuant to the reorganization transactions. Except for affiliates of Madison Dearborn Capital Partners, L.P., who will receive shares of common stock upon conversion of the note payable held by them, none of our existing sponsors will increase their percentage ownership in Madison River Communications in connection with the reorganization transactions.

As part of the reorganization transactions, the direct or indirect interests of Class A, B and D unitholders in Madison River Telephone will be converted into , and shares of Madison River Communications common stock, respectively. The holders of Class C units in Madison River Telephone will not be entitled to receive shares in the reorganization transactions, and the Class C units will be cancelled without consideration as part of the reorganization transactions. A portion of the Class D units in Madison River Telephone are held by certain of our existing management investors and are subject to vesting pursuant to an incentive grant agreement. The remaining Class D units are held by Madison River Telephone and, at the discretion of its board, may be used to fund its long-term incentive plan. As part of the reorganization transactions, those existing management investors will exchange their Class D member units for shares of Madison River Communications common stock, 62.5% of which will be vested. The remaining shares will vest ratably over the next three years. The number of shares to be issued in the reorganization transactions was determined by negotiations among the outstanding holders of Madison River Telephone member units in consultation with our financial advisors. None of our existing equity investors will receive any premiums in the reorganization transactions.

Following the consummation of the transactions, affiliates of each of Madison Dearborn Partners, Goldman, Sachs & Co. and Providence Equity Partners will own approximately %, % and %, respectively, of Madison River Communications’ outstanding shares of common stock (or %, % and %, respectively, if the underwriters’ over-allotment option is exercised in full). Following the consummation of the transactions, the Coastal shareholders will own approximately % of Madison River Communications’

outstanding shares of common stock (or % if the underwriters’ over-allotment option is exercised in full), our existing management investors will own approximately % of Madison River Communications’ outstanding shares of common stock (or % if the underwriters’ over-allotment option is exercised in full) and Madison River Telephone will hold % of Madison River Communications’ outstanding shares of common stock (or % if the underwriters’ over-allotment option is exercised in full) to fund its obligations under its long-term incentive plan. See “Post-Transactions Ownership and Corporate Structure.” Prior to the consummation of this offering, we will enter into a stockholders’ agreement with the existing sponsors pursuant to which each existing sponsor will have the right to designate: two individuals who will be among the slate of nominees for election to the board of directors of Madison River Communications, so long as such existing sponsor owns at least 12.5% of the total outstanding shares of common stock of Madison River Communications on a fully diluted basis and one individual, so long as such existing sponsor owns at least (i) 50% of the shares of common stock of Madison River Communications which such existing sponsor owned immediately following the consummation of this offering (or immediately following the closing of any sale pursuant to the exercise of the underwriters’ over-allotment option) or (ii) 5.0% of the total outstanding shares of common stock of Madison River Communications on a fully diluted basis. As a result, we anticipate that affiliates of each of Madison Dearborn Partners, Goldman, Sachs & Co. and Providence Equity Partners will have the right to designate one nominee to Madison River Communications’ board at closing, with the affiliates of Providence Equity Partners opting initially not to include a designee on the board.

The Financings

This Offering. The proceeds from this offering of common stock by Madison River Communications, together with the proceeds from borrowings under the new credit facilities and cash on hand, will be used to finance the debt repayment and refinancing and minority interest redemption described below and the bonuses, premiums, fees and expenses relating to the transactions. This offering is conditioned on the closing of the new credit facilities.

New Credit Facilities. Concurrently with the closing of this offering, Madison River Capital, LLC, one of our subsidiaries, will enter into new senior secured credit facilities referred to as the “new credit facilities” with a syndicate of lenders to be led by Merrill Lynch & Co., Goldman, Sachs & Co. and Lehman Brothers Inc. and/or one or more of their affiliates. The new credit facilities will consist of seven-year term loan facilities providing for senior secured term loans in an aggregate principal amount of $455.6 million and a seven-year revolving credit facility providing for up to $75.0 million in revolving loans. Borrowings under the new credit facilities will bear interest at either a base rate or LIBOR plus an applicable margin. Madison River Communications, Madison River Telephone and certain of Madison River Capital, LLC’s domestic subsidiaries will guarantee Madison River Capital, LLC’s obligations under the new credit facilities. The new credit facilities will be secured by liens on, and security interests in, certain capital stock and equity interests in our subsidiaries and the tangible and intangible assets and properties of Madison River Capital, LLC and the guarantors of the new credit facilities. See “Description of New Credit Facilities” for a more detailed description of the new credit facilities.

Debt Repayment and Refinancing

Existing Notes. Madison River Capital, LLC has outstanding $198.0 million in publicly traded 13.25% senior notes due March 2010, referred to herein as the “existing notes.” The existing notes are callable beginning March 1, 2005 at a redemption price of 106.625% of the principal amount of the notes redeemed, plus accrued and unpaid interest thereon. At the closing of this offering, we will satisfy and discharge the obligations of Madison River Capital, LLC under the existing notes, including the accrued and unpaid interest and redemption premiums thereon, out of the proceeds of this offering and borrowings under the new credit facilities and cash on hand. Following the closing of this offering, we will redeem the existing notes in full in accordance with the provisions of the indenture governing the existing notes.

Existing Credit Facilities. Madison River LTD Funding Corp., or MRLTDF, one of our indirect wholly-owned subsidiaries, is the borrower under existing loan agreements with the Rural Telephone Finance Cooperative, or the RTFC, referred to herein as the “existing credit facilities.” As of February 21, 2005,

MRLTDF had approximately $421.9 million in term loans outstanding with the RTFC. Of this amount, $188.3 million in term loans bear fixed interest rates that range between 5.65% and 9.0%, with a weighted average rate approximating 7.4%. The fixed interest rates expire at various times. The remaining $233.6 million term loan had a variable interest rate of 6.85% at December 31, 2004. In total, as of December 31, 2004, our weighted average interest rate on all RTFC term debt was 7.1%. Our term loan agreement with the RTFC matures in November 2016. In addition to the term loans, we also have two secured revolving lines of credit with the RTFC. We currently have no borrowings under the revolving lines of credit.

At the closing of this offering, we will repay the obligations of MRLTDF under the existing credit facilities, including accrued and unpaid interest and prepayment premiums, out of the proceeds of this offering and the new credit facilities and cash on hand.

Coastal Facility. Madison River Telephone is party to a credit agreement with Merrill Lynch Capital Corporation, an affiliate of one of the underwriters participating in this offering, as administrative agent and sole lender, referred to herein as the “Coastal facility.” The Coastal facility is in a principal amount of $20.8 million, matures on May 22, 2010 and accrues interest at 8.4257% per annum through June 30, 2005, increasing retroactively to 13% per annum if not repaid by such time. Madison River Telephone has the option of paying accrued interest under the Coastal facility in cash or having it capitalized and added to the principal amount of the loans outstanding under the facility. As of December 31, 2004, the accrued and unpaid interest on the Coastal facility was approximately $39,000. We will repay the outstanding borrowings plus accrued and unpaid interest under the Coastal facility out of the proceeds of this offering and the new credit facilities and cash on hand.

Redemption of Minority Interest in Coastal Communications, Inc.

As part of the consideration paid in the acquisition of Coastal Utilities, Inc., we issued to the Coastal shareholders shares of Series A stock of Coastal Communications, Inc. As of February 1, 2005, 90 shares of Series A stock remained outstanding. Under the terms of an amended shareholders’ agreement with the Coastal shareholders, we may at any time require the Coastal shareholders to sell their shares of Series A stock to us for a purchase price of $33,333.33 per share or $3.0 million in the aggregate. At the closing of this offering, we will repurchase all of the shares of Series A stock held by the Coastal shareholders out of the proceeds of this offering and the new credit facilities and cash on hand.

Cash Bonuses

In September 2002, we agreed to pay Mr. Paul H. Sunu, our Managing of Director—Chief Financial Officer and Secretary, a bonus in the amount of $435,000 in connection with his efforts in consummating certain transactions with the Coastal shareholders in April 2002 described under “Certain Relationships and Related Transactions—Coastal Shareholders.” The bonus is only payable in the event that a liquidity event with respect to Madison River Telephone occurs and the existing sponsors receive a return of their capital contribution with respect to their Class A units in Madison River Telephone plus an 8% rate of return. We expect that the consummation of this offering will satisfy the conditions to the payment of the bonus.

On February 2, 2005, we agreed to pay a cash bonus in the amount of $665,000 on the date of consummation of this offering to Mr. Sunu. The payment is intended to reward Mr. Sunu for his efforts in connection with the completion of the transactions and his prior service to us, including his efforts in negotiating various debt refinancings which led to a substantial increase in our liquidity.

USE OF PROCEEDS

We expect to receive $ million of gross proceeds from this offering, based on an assumed initial public offering price of $ per share, the mid-point of the range set forth on the cover page of this prospectus. If the underwriters’ over-allotment option is exercised in full, our gross proceeds from the offering will be approximately $ million. We will not receive any proceeds from the sale of shares by the selling stockholders, some of which are affiliates of Goldman, Sachs & Co., one of the underwriters participating in this offering.

The table below sets forth our estimate of the sources and uses of funds for the transactions. See “The Transactions.”


	Amount
	($ in millions)
*Sources*
Cash on hand	$
Gross proceeds from common stock offered by Madison River Communications in this offering(1)
New credit facilities:
Revolving credit facilities(2)		—
Term loan facilities		455.6

Total sources of funds	$

*Uses*
Repayment of existing notes	$	198.0
Redemption premium on existing notes		13.1
Repayment of existing credit facilities(3)
Prepayment premium on existing credit facilities
Repayment of Coastal facility(4)		20.8
Payment of accrued and unpaid interest on existing notes, existing credit facilities and Coastal facility
Purchase of subordinated capital certificates from RTFC(5)		5.6
Redemption of minority interest in Coastal Communications, Inc.		3.0
Cash bonuses(6)		1.1
Estimated fees and expenses related to the transactions(7)

Total uses of funds	$

(1)

Assumes an initial public offering price of $ per share, the mid-point of the range shown on the cover of this prospectus. If the underwriters’ over-allotment option is exercised in full, the gross proceeds from the shares of common stock offered by Madison River Communications in this offering will be $ .

(2)

$75.0 million will be available under the revolving credit facilities portion of the new credit facilities.

(3)

Amount is net of $ million of subordinated capital certificates previously issued to MRLTDF by the RTFC which will be redeemed upon repayment of the existing credit facilities.

(4)

The Coastal facility was provided by an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, one of the underwriters participating in this offering.

(5)

Reflects the subordinated capital certificates to be purchased by us in connection with our borrowings under the term loan C and D facilities of our new credit facilities.

(6)

Consists of the cash bonuses we expect to pay to Paul H. Sunu, our Managing Director—Chief Financial Officer and Secretary, on the date of consummation of this offering.

(7)

Consists of SEC registration fee, NASD filing fee, Nasdaq listing fee, accounting and legal fees and expenses, transfer agent’s fees and expenses, printing and engraving expenses and other miscellaneous fees and expenses.

The interest rate, maturity and certain other terms of the existing notes, the existing credit facilities and the Coastal facility are described under “The Transactions.”

DIVIDEND POLICY AND RESTRICTIONS

General

However, as described more fully below, you may not receive any dividends, as a result of the following factors:

we may not have enough cash to pay dividends due to changes in our operating income, working capital requirements and anticipated cash needs;

nothing requires us to pay dividends;

while the dividend policy adopted by our board of directors contemplates the distribution of a substantial portion of our cash available to pay dividends, our board could modify or revoke this policy at any time;

even if our dividend policy is not modified or revoked, the actual amount of dividends distributed under the policy and the decision to make any distribution will remain at all times entirely at the discretion of our board of directors;

the amount of dividends that we may distribute is limited by negative covenants in our new credit facilities and, potentially, the terms of any future indebtedness that we may incur;

the amount of dividends that we may distribute is subject to restrictions under Delaware law; and

our stockholders have no contractual or other legal right to dividends.

We have no history of paying dividends out of our cash flow. Dividends on our common stock are not cumulative.

We believe that our dividend policy will significantly limit, but not preclude, our ability to pursue growth out of cash generated by operations. If we pay dividends at the level currently anticipated under our dividend policy, we expect that we would need additional financing to fund significant acquisitions or to pursue growth opportunities requiring capital expenditures significantly beyond our current anticipated capital expenditure requirements. However, we intend to retain sufficient cash after the distribution of dividends to permit the pursuit of growth opportunities that do not require material capital investment. For further discussion of the relationship of our dividend policy to our ability to pursue potential growth opportunities, see “—Assumptions and Considerations” below.

In determining our initial dividend level, we reviewed and analyzed numerous factors, including the following, which we considered material in making such determination:

our operating and financial results in recent years, including in particular the fact that our Adjusted EBITDA (as described below) was $88.6 million in 2002; $103.3 million in 2003; and $105.7 million in 2004;

the effect on our net income (loss) and Adjusted EBITDA of the reduction in our receipt of patronage capital dividends from the RTFC that will occur as a result of repaying our existing credit facilities;

our anticipated capital expenditure requirements;

our expected other cash needs, primarily related to working capital requirements;

the terms of our debt instruments, including our new credit facilities;

applicable provisions of Delaware law; and

other potential sources of liquidity, including working capital, access to credit and the possibility of asset sales.

Minimum Adjusted EBITDA

We do not as a matter of course make public projections as to future revenues, operating income or other results. However, our management has prepared the estimated financial information set forth below to present the estimated cash available to pay dividends based on estimated minimum Adjusted EBITDA. The accompanying estimated financial information was not prepared with a view toward complying with the Public Company Accounting Oversight Board guidelines with respect to prospective financial information, but, in the view of our management, was prepared on a reasonable basis, reflects our best currently available estimates and judgments, and presents, to the best of management’s knowledge and belief, our expected course of action and our expected future financial performance. However, this information is not fact and should not be relied upon as being necessarily indicative of future results, and readers of this prospectus are cautioned not to place undue reliance on the estimated financial information.

Neither our independent registered public accounting firm nor any other independent registered public accounting firm has compiled, examined or performed any procedures with respect to the estimated financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the estimated financial information.

The assumptions and estimates underlying the estimated financial information below are inherently uncertain and, though considered reasonable by our management as of the date of its preparation, are subject to a wide variety of significant business, economic and competitive risks and uncertainties, including those described under “Risk Factors.” Accordingly, there can be no assurance that the estimated financial information is indicative of our future performance or that the actual results will not differ materially from the estimated financial information presented below.

We believe that, in order to fund dividends on our common stock for the year following this offering at the level described above solely from cash generated by our business, our Adjusted EBITDA for the year following the offering would need to be at least $ million. Adjusted EBITDA refers to the defined term that will be contained in our new credit facilities and which will be an important determinant in our ability to pay dividends under the terms of our new credit facilities. See “—Restrictions on Payment of Dividends—New Credit Facilities” for a description of the restrictions on our ability to pay dividends to be contained in our new credit facilities. Generally, Adjusted EBITDA as defined under our new credit facilities will represent our consolidated net income, plus consolidated interest expense, income taxes, depreciation and amortization, costs and expenses related to the transactions, extraordinary or unusual losses, losses on the sale of assets other than in the ordinary course of business, up to $10 million of non-recurring or unusual costs and expenses and certain non-cash items decreasing consolidated net income, minus extraordinary or unusual gains, gains on the sale of assets other than in the ordinary course of business and certain non-cash items increasing consolidated net income. See “Summary—Summary Historical Financial and Operating Data” and “Description of New Credit Facilities” for a detailed definition of Adjusted EBITDA. We refer to the minimum amount of Adjusted EBITDA we expect to need to pay dividends in the first year following this offering according to our dividend

policy as minimum Adjusted EBITDA. Based on numerous factors, assumptions and considerations described under “—Assumptions and Considerations” below, we believe that our minimum Adjusted EBITDA for the year following the closing of this offering will be at least $ million. We have also determined that if our Adjusted EBITDA for such period is at or above this level, we would be permitted to pay dividends at the level described above under the expected fixed charge coverage and total leverage ratio covenants in our new credit facilities. We will not be able to borrow under our new credit facilities to fund dividend payments.

The following table sets forth our calculation illustrating that $ million of Adjusted EBITDA would be sufficient to fund dividends at the above level for the first full year following the closing of the transactions and would permit us to pay dividends under all relevant covenants and restrictions that will be contained in our new credit facilities, including satisfaction of the fixed charge coverage and total leverage ratio covenants under our new credit facilities.


	Amount
	($ in thousands)
Estimated Cash Available to Pay Dividends on Common Stock Based On Minimum Adjusted EBITDA
Minimum Adjusted EBITDA(1)	$
Less:
Estimated cash interest expense on new credit facilities(2)		26,246
Estimated cash capital expenditures(3)		12,800
Estimated cash income taxes(4)		11,500

Estimated cash available to pay dividends on outstanding common stock(5)	$
Estimated total leverage ratio derived from the above(6)
Estimated fixed charge coverage ratio derived from the above(7)

The following table illustrates, for our fiscal years ended December 31, 2004 and December 31, 2003, the amount of cash that would have been available for distribution to our common stockholders, assuming that the transactions had been consummated at the beginning of such period, subject to the assumptions described in the table.


	Years Ended December 31,
	2004(8)			2003(8)
	($ in thousands)
As Adjusted Cash Available to Pay Dividends
Net cash provided by operating activities	$	38,793		$	43,665
Adjustments:
Depreciation and amortization		(45,003	)		(52,054	)
Deferred long-term compensation		(2,921	)		(5,429	)
Deferred income taxes		6,269			4,117
Losses on investments carried on the equity method		(156	)		(193	)
Realized losses on marketable equity securities		—			(343	)
Realized gain on extinguishment of debt		3,184			—
Other non-cash items		462			657
Changes in operating assets and liabilities		5,697			(6,885	)

Consolidated net income (loss)		6,325			(16,465	)
plus:
Consolidated interest expense		61,582			64,441
Provision for income taxes		(6,418	)		(1,846	)
Depreciation and amortization		45,003			52,054
Non-cash compensation expense—long-term incentive plan		2,921			5,429
Non-cash stock-based compensation expense—other		183			36
Other non-cash items:
Share of losses in unconsolidated company accounted for using the equity method		156			193
Realized losses on marketable equity securities		—			343
minus:
Realized gain on extinguishment of debt		(3,184	)		—
Non-cash income—non-cash portion of RTFC patronage capital allocation		(878	)		(899	)

Adjusted EBITDA	$	105,690		$	103,286
Estimated cash interest expense on new credit facilities(9)		(26,246	)		(26,700	)
Cash capital expenditures(10)		(14,643	)		(12,223	)
Estimated additional public company costs(11)		(1,000	)		(1,000	)
Cash income taxes		(11,500	)(4)		(6,814	)

Cash that would have been available to pay dividends	$	52,301		$	56,549

Cash required to pay dividends on common stock in accordance with our dividend policy(5)	$			$

(1)

In comparing our estimated minimum Adjusted EBITDA to our historical Adjusted EBITDA, our historical Adjusted EBITDA does not include approximately $1.0 million in incremental ongoing expenses associated with being an issuer of public equity, including estimated incremental audit fees, director and officer liability insurance premiums, expenses relating to stockholders’ meetings, printing expenses, investor relations expenses, additional filing fees, registrar and transfer agent fees, directors’ fees, additional legal fees, listing fees and miscellaneous fees.

(2)

Assumes interest at a weighted average rate of % on $455.6 million of outstanding borrowings under our new term loan facilities and a .50% commitment fee on an average unused balance of $75.0 million under our new revolving credit facilities. In addition, our new credit facilities will require us to enter into an interest rate swap agreement which will fix the interest rates on a minimum of 50% of the term loans outstanding under our new credit facilities for three years after the closing of the new credit facilities.

(3)

The majority of our capital expenditures relate to our telecommunications network. For the fiscal years ended December 31, 2004 and December 31, 2003, our capital expenditures were approximately $14.6

million and $12.2 million, respectively. We expect capital expenditures to be approximately $12.8 million in 2005. We do not expect that capital expenditures will vary significantly on an annual basis after 2005.

We will continue to make capital expenditures for the maintenance and growth of our telephone plant and network infrastructure and the maintenance, upgrade and integration of operating support systems and other automated back office systems.

For a more detailed discussion of our capital expenditures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Post-Transactions Liquidity, Capital Resources and Long-term Debt.”

(4)

Based on 2004 operating results, we expect cash taxes during the first full year following the closing of this offering to be approximately $ million, without giving effect to tax deductible transaction expenses of approximately $ million.

(5)

The table below sets forth the assumed number of outstanding shares of common stock upon the closing of this offering and the other transactions and the estimated per share and aggregate dividend amounts payable on such shares during the year following the closing of this offering.

(6)

Our new credit facilities will provide that under the restricted payments covenant, we may only pay dividends if our total leverage ratio as of the end of the most recently ended four fiscal quarter period is equal to or less than 5.10 to 1.00. In addition, it is an event of default under the new credit facilities if our total leverage ratio exceeds 5.50 to 1.00. We may not pay dividends under the new credit facilities if an event of default has occurred and is continuing. The total leverage ratio will be defined under our new credit facilities as our total net debt (defined as total debt minus cash) divided by Adjusted EBITDA.

(7)

It will be an event of default under the new credit facilities if our fixed charge coverage ratio for the four-quarter period ended on the last day of any fiscal quarter is less than 2.25 to 1.00 through the end of the third quarter of 2007 and thereafter less than 2.00 to 1.00. We may not pay dividends under the new credit facilities if an event of default has occurred and is continuing. The fixed charge coverage ratio under our new credit facilities will be defined as Adjusted EBITDA divided by the sum of our Consolidated Cash Interest Expense (as defined under “Description of New Credit Facilities”) and cash taxes (other than cash taxes in respect of the Coastal and Gulf Tax Disputes (as defined under “Description of New Credit Facilities”)).

(8)

Does not give effect to the reduction in patronage capital dividends to be received from the RTFC as a result of the repayment of our existing credit facilities. The estimated reduction of patronage dividends is $ million, of which $ million is the estimated non-cash portion and $ million is the estimated cash portion.

(9)

Reflects our anticipated cash interest expense under our new credit facilities. Accordingly, assumes interest at a weighted average rate of % on $455.6 million of outstanding borrowings under our new term facilities and a .50% commitment fee on an average unused balance of $75.0 million under our new revolving credit facility. See note (2) above.

(10)

Consists of capital expenditures of $14.6 million and $12.2 million for the years ended December 31, 2004 and December 31, 2003, respectively. The majority of our capital expenditures relate to our telecommunications network. For a more detailed discussion of our capital expenditures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Post-Transactions Liquidity, Capital Resources and Long-Term Debt.”

(11)

Consists of estimated incremental audit fees, director and officer liability insurance premiums, expenses relating to stockholders’ meetings, printing expenses, investor relations expenses, additional filing fees, registrar and transfer agent fees, directors’ fees, additional legal fees, listing fees and miscellaneous fees.

Assumptions and Considerations

Based on a review and analysis conducted by our management and our board of directors, we believe that our minimum Adjusted EBITDA for the first full year following the closing of this offering will be at least $ million, and we have determined that the assumptions in the above tables as to cash capital expenditures, cash interest expense, income taxes, working capital and availability of funds under our new credit facilities are reasonable. We considered numerous factors in establishing our belief concerning the minimum Adjusted EBITDA required to support our dividend policy and our belief that our minimum Adjusted EBITDA for the first full year following the offering will be $ million, including the following factors which we considered material in making such determination:

For fiscal years 2004, 2003 and 2002, our Adjusted EBITDA was $105.7 million, $103.3 million and $88.6 million, respectively.

For fiscal years 2004, 2003 and 2002, we incurred $14.6 million, $12.2 million and $12.3 million, respectively, in capital expenditures. We expect capital expenditures to be approximately $12.8 million in 2005. We do not expect that capital expenditures will vary significantly on an annual basis after 2005.

Our working capital balances have varied over the past three years, primarily due to an amendment to our existing credit facilities. Excluding the impact of the amendment to our existing credit facilities, there has not been a trend toward material working capital growth over the last three years.

Our analysis of the impact of our new capital structure (including the payment of dividends at the level described above) on our operations and performance over the past three years and our determination that our new revolving credit facility would have had sufficient capacity to finance any fluctuations in working capital and other cash needs. We will not be able to borrow under our new revolving credit facility to pay dividends.

We have also assumed:

that our general business climate, including such factors as consumer demand for our services, the level of competition we experience and our regulatory environment, will remain consistent with previous periods; and

the absence of extraordinary business events, such as new industry-altering technological developments or adverse regulatory developments, that may adversely affect our business, results of operations or anticipated capital expenditures.

If our Adjusted EBITDA for the first year following the closing were to fall below the $ million level (or if our assumptions as to capital expenditures or interest expense are too low, if our assumptions as to the sufficiency of our new credit facilities to finance our working capital needs prove incorrect or if other assumptions stated above were to prove incorrect), we may need to either reduce or eliminate dividends or, to the extent we were permitted to do so under the new credit facilities, to fund a portion of our dividends with borrowings or from other sources. We will not be able to borrow under the new revolving credit facility to pay dividends. If we were to use working capital or permanent borrowings to fund dividends, we would have less cash and/or borrowing capacity available for future dividends and other purposes, which could negatively impact our financial condition, results of operations, liquidity and our ability to maintain or expand our business. In addition, to the extent we finance capital expenditures with indebtedness, we will begin to incur incremental debt service obligations.

We cannot assure you that our Adjusted EBITDA will in fact equal or exceed the minimum level set forth above, and our belief that it will equal or exceed such level is subject to all of the risks, considerations and factors identified in other sections of this prospectus, including those identified in the section entitled “Risk Factors.”

As noted above, we have estimated our initial dividend level and the minimum Adjusted EBITDA required to pay dividends at that level only for the first full year following the closing of this offering. Moreover, we cannot assure you that we will pay dividends during or following such period at the level estimated above, or at all. Over time, our capital and other cash needs will invariably change and be subject to uncertainties, which could affect the level of any dividends we pay in the future.

We are not required to pay dividends, and our board may modify or revoke our dividend policy at any time. Dividend payments are within the sole discretion of our board and will depend upon, among other things, our results of operations, financial condition and future developments that could materially differ from our current expectations. In accordance with our dividend policy, we intend to distribute, as dividends to our stockholders, a substantial portion of the cash generated by our business in excess of operating needs, interest and principal payments on indebtedness, capital expenditures, taxes and future reserves, if any. Our intended policy is based upon our current assessment of our business and the environment in which we operate, our cash needs and our investment opportunities, and that assessment could change based on operational, regulatory, competitive or technological developments (which could, for example, increase our need for capital expenditures), acquisition or new investment opportunities or other factors. We believe that our dividend policy will significantly limit, but not preclude, our ability to pursue growth out of cash generated by operations. If we pay dividends at the level currently anticipated under our dividend policy, we expect that we would need additional financing to fund significant acquisitions or to pursue growth opportunities requiring capital expenditures significantly beyond our current anticipated capital expenditure requirements. Such additional financing could include, among other transactions, the issuance of additional shares of common stock. However, we intend to retain sufficient cash after the distribution of dividends to permit the pursuit of growth opportunities that do not require material capital investments. Such growth opportunities have included and may in the future include the acquisition of rural local exchange operations serving a small number of voice access lines and investments in new services such as DSL-based services and video offerings. We will evaluate potential growth opportunities as they arise and, if our board of directors determines that it is in our best interest to use cash that would otherwise be available for distribution as dividends to pursue an acquisition opportunity, to materially increase capital spending or for some other purpose, the board would be free to depart from or change our dividend policy at any time. We currently do not anticipate pursuing growth opportunities, including acquisitions, unless they are expected to be accretive to our ability to pay dividends to the holders of our common stock.

Borrowings under our new credit facilities will bear interest at variable interest rates. Our new credit facilities will require us to enter into an interest rate swap agreement which will fix the interest rates on a minimum of 50% of the term loans outstanding under our new credit facilities for a period of three years after the closing of the new credit facilities. After the interest rate swap agreement expires, our annual debt service obligations on such portion of the loans will vary from year to year unless we enter into a new interest rate swap or purchase an interest rate cap or other interest rate hedge. An increase of one percentage point in the annual interest rate applicable to borrowings under our new credit facilities which would be outstanding on the closing date of the transactions would result in an increase of approximately $ million in our annual cash interest expense, and a corresponding decrease in cash available to pay dividends on our common stock. If we choose to enter into a new interest rate swap or purchase an interest rate cap or other interest rate hedge in the future, the amount of cash available to pay dividends on our common stock may decrease. However, to the extent interest rates increase in the future, we may not be able to enter into a new interest rate swap or purchase an interest rate cap or other interest rate hedge on acceptable terms, or at all. In addition, our new credit facilities will need to be refinanced on or prior to , 2012. We may not be able to renew or refinance the new credit facilities, or, if renewed or refinanced, the renewal or refinancing may occur on less favorable terms, which may materially adversely affect our ability to pay dividends. If we are unable to refinance or renew our new credit facilities, our failure to repay all amounts due on the maturity date would cause a default under the new credit facilities.

Restrictions on Payment of Dividends

Delaware Law

Under Delaware law, Madison River Communications’ board of directors and the board of directors for our corporate subsidiaries may declare dividends only to the extent of “surplus,” which is defined as total assets at

fair market value minus total liabilities, minus statutory capital, or if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Also, under Delaware law, our limited liability company subsidiaries generally may only make distributions to us to the extent that at the time of the distribution, after giving effect to such distribution, all liabilities do not exceed the fair market value of the assets of such limited liability companies. Although we believe we will be permitted to pay dividends at the anticipated levels during the first year following this offering in compliance with Delaware law, our board will periodically seek to assure itself that the statutory requirements will be met before actually declaring dividends. In future years, the board may seek opinions from outside valuation firms to the effect that our solvency or assets are sufficient to allow payment of dividends, and such opinions may not be forthcoming. If we sought and were not able to obtain such an opinion, we likely would not be able to pay dividends.

New Credit Facilities

Under the new credit facilities, dividends will be restricted as follows:

The restricted payments covenant will generally restrict the amount of dividends we may pay at any time to the “Restricted Payments Basket Amount,” which shall be equal to (1) the sum of Available Cash for the Reference Period most recently ended plus $50 million minus (2) the aggregate amount of dividends paid by Madison River Communications on its common stock during the Reference Period, subject to suspension during any “Dividend Suspension Period.”

For our fiscal years ended December 31, 2004 and December 31, 2003, assuming, in each case, that the transactions had been consummated at the beginning of such period and subject to the assumptions described in the table above illustrating our calculation of as adjusted cash available to pay dividends, the Restricted Payments Basket Amount would have been $ million and $ million, respectively.

We may not pay any dividends if an event of default under the new credit facilities has occurred and is continuing.

In particular, it will be an event of default if:

as of the end of the most recently ended four fiscal quarter period, our total leverage ratio exceeds 5.50 to 1.00; or

for the four-quarter period ended on the last day of any fiscal quarter, our fixed charge coverage ratio is less than 2.25 to 1.00 through the end of the third fiscal quarter of 2007 and thereafter less than 2.00 to 1.00.

As of December 31, 2004, assuming that the transactions had been consummated as of such date and subject to the applicable assumptions described in the table above illustrating our calculation of as adjusted cash available to pay dividends, our total leverage ratio would have been to 1.00.

For the four quarter period ended December 31, 2004, assuming that the transactions had been consummated as of the beginning of such period and subject to the assumptions described in the table above illustrating our calculation of as adjusted cash available to pay dividends, our fixed charge coverage ratio would have been 2.80 to 1.00.

All or some of the underwriters participating in this offering will also act as lenders and in various other capacities in connection with the new credit facilities. Therefore, in certain circumstances, they will be able to enforce the restriction contained in the new credit facilities on our ability to pay dividends.

As used above, the following terms have the following meanings:

“Available Cash” means, on any date of determination, for any Reference Period, an amount equal to the sum (calculated on a consolidated basis for Madison River Communications and its subsidiaries) of:

(1) Adjusted EBITDA for such Reference Period minus

(2) to the extent not deducted in the determination of Adjusted EBITDA, the sum of the following:

(a) Consolidated Cash Interest Expense;

(b) Cash Capital Expenditures;

(c) all scheduled and voluntary (but not mandatory) principal repayments in respect of debt of Madison River Communications or its subsidiaries made during such Reference Period, excluding (A) debt repayments made with the proceeds of debt, equity, capital contributions, asset sales or exchanges or casualty (including insurance, eminent domain and condemnation) proceeds and (B) repayments of revolving debt; and

(d) cash taxes paid during such Reference Period, excluding any cash taxes paid in respect of the Coastal and Gulf Tax Disputes.

“Cash Capital Expenditures” means, for any Reference Period, the capital expenditures made by Madison River Communications and its subsidiaries during such Reference Period that are classified as capital expenditures in accordance with generally accepted accounting principles in effect from time to time, excluding (1) capital expenditures financed with the proceeds of debt, equity, capital contributions, asset sales or exchanges or casualty (including insurance, eminent domain and condemnation) proceeds and (2) acquisitions of equity interests or assets comprising a business or product line.

“Coastal and Gulf Tax Disputes” means the tax disputes arising from the lawsuits filed in June 2004 by the Department of Justice for the United States of America against Gulf Coast Services, Inc. and Coastal Utilities, Inc. relating to certain prior tax refunds.

“Consolidated Cash Interest Expense” means, for any Reference Period, Consolidated Interest Expense for such period, excluding:

(1) any amounts not payable or paid in cash in such period or any subsequent period;

(2) any fees, expenses, premiums or penalties payable on or before the closing date in connection with the transactions;

(3) any interest or premiums payable with respect to the existing notes; and

(4) any interest, fees or penalties payable in connection with the Coastal and Gulf Tax Disputes.

“Consolidated Interest Expense” means, for any Reference Period, total interest expense (including that portion attributable to capital leases in accordance with generally accepted accounting principles in effect from time to time and capitalized interest) of Madison River Communications and its subsidiaries on a consolidated basis with respect to all outstanding debt of Madison River Communications and its subsidiaries, including all commissions, discounts and other fees and charges owed with respect to letters of credit and net costs under interest rate hedging agreements.

“Dividend Suspension Period” means any period during which the “total leverage ratio” (as defined below) is greater than 5.10 to 1.00.

“Reference Period” means, at any date, the period commencing on the first day of the first full fiscal quarter that starts after the closing date for the new credit facilities and ending on the last day of the last fiscal quarter for which a quarterly compliance report has been delivered by Madison River Capital, LLC prior to such date.

See “Description of New Credit Facilities” for a more complete description of our new credit facilities.

CAPITALIZATION

The following table sets forth our cash and cash equivalents and consolidated capitalization as of December 31, 2004:

on an actual basis for Madison River Telephone; and

on an as adjusted basis to give effect to the transactions as described under “The Transactions” and “Use of Proceeds,” as if they had been consummated as of December 31, 2004.

This table should be read in conjunction with Madison River Telephone’s audited consolidated financial statements and related notes included in the back of this prospectus.


	As of December 31, 2004
	Actual			As Adjusted
	(dollars in thousands)
Cash and cash equivalents	$	34,559		$

Subordinated capital certificates issued by RTFC(a)	$	42,659		$	5,556

Long term debt:
Borrowings under existing credit facilities:
Revolving credit facilities(b)	$	—		$	—
Long-term senior debt		421,900			—
Borrowings under new credit facilities:
Revolving credit facilities(c)		—			—
Term loan facilities		—			455,556
13¹/4% senior notes due 2010(d)		196,176			—
Mezzanine note(e)		20,800			—
Other long-term indebtedness(f)		393			—

Total long-term debt		639,269			455,556
Redeemable minority interest		3,000			—
Redeemable members’ capital		213,749			—

Members’ capital/stockholders’ equity:
Members’ capital		19,571			—
Common stock		—
Additional paid-in capital		—
Accumulated deficit		(204,940	)
Accumulated other comprehensive loss		(4,193	)		(4,193	)

Total members’ capital/stockholders’ equity		(189,562	)

Total Capitalization	$	666,456

(a)

As a condition of obtaining long-term financing from the RTFC, we purchased subordinated capital certificates equal to 10% of the amount borrowed that represent ownership interests in the RTFC. The subordinated capital certificates will be redeemed proportionately upon repayment of the existing credit facilities.

(b)

As of December 31, 2004, we had two secured revolving credit facilities with the RTFC with borrowing capacity of $41.0 million in the aggregate. Both credit facilities were fully available at December 31, 2004.

(c)

The new revolving credit facility provides $75.0 million, all of which would have been available for borrowing.

(d)

Net of unamortized discount of $1.8 million.

(e)

Consists of loans payable to Merrill Lynch Capital Corporation, an affiliate of one of the underwriters participating in this offering, that were borrowed on December 22, 2004. See “The Transactions” and “Certain Relationships and Related Transactions.”

(f)

Consists of the note payable held by Madison Dearborn Capital Partners, L.P. that we expect will be converted into Class A units of Madison River Telephone, which will then be converted into shares of Madison River Communications common stock as part of the reorganization transactions.

DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price of our common stock and the pro forma as adjusted net tangible book value or deficiency per share of our common stock after this offering. Net tangible book value or deficiency per share of our common stock is determined at any date by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of common stock deemed to be outstanding at that date.

For purposes of calculating dilution below, we have assumed that as of December 31, 2004, all outstanding Madison River Telephone member units had been converted in the reorganization transactions into shares of common stock of Madison River Communications simultaneously with the closing of this offering and shares of our common stock are outstanding.

After giving effect to the reorganization transactions, but before giving effect to this offering and the other transactions, the as adjusted net tangible book deficiency of Madison River Communications as of December 31, 2004 would have been approximately $ million, or $ per share of Madison River Communications’ common stock. After giving effect to the transactions, our pro forma as adjusted net tangible book deficiency as of December 31, 2004 would have been approximately $ million, or $ per share of common stock. This represents an immediate decrease in as adjusted net tangible book deficiency of $ per share of Madison River Communications’ common stock to the existing equity investors and an immediate dilution of $ per share of Madison River Communications’ common stock to new investors purchasing shares in this offering.

The following table illustrates this substantial and immediate dilution to new investors:


		Per Share of Common Stock
Assumed initial public offering price per share		$
As adjusted net tangible book deficiency as of December 31, 2004
Increase per share attributable to cash payments made by investors in this offering

Pro forma as adjusted net tangible book value (deficiency) after this offering

Dilution in net tangible book value per share to new investors		$

The following table summarizes on a pro forma basis as of December 31, 2004:

the total number of shares of Madison River Communications’ common stock owned by our existing equity investors and to be owned by new investors in this offering;

the total consideration paid to us by our existing equity investors and by new investors in this offering, before deducting the estimated underwriting discounts and commissions and offering expenses payable by us in connection with this offering; and

the average price per share of common stock paid by our existing equity investors and by new investors:


	Shares of Common Stock Purchased		Total Consideration		Average Price Per Share of Common Stock
	Number	Percent	Amount	Percent	Average Price Per Share of Common Stock
Existing equity investors
New investors

Total		%		%

The foregoing computations exclude shares to be available for future issuance under our Omnibus Stock Plan. See “Shares Eligible for Future Sale.”

SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

The following table presents selected historical financial and operating data. Madison River Communications was formed in December 2003 to serve as a holding company of our business. Madison River Communications has not commenced operations and has no assets or liabilities. In connection with this offering, we will consummate the reorganization transactions pursuant to which Madison River Communications will become the successor to Madison River Telephone. See “The Transactions.” Since Madison River Communications has not commenced operations, Madison River Telephone is considered the predecessor to Madison River Communications for accounting purposes.

The following selected historical financial data for Madison River Telephone as of December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003 and 2002 have been derived from Madison River Telephone’s audited consolidated financial statements and related notes included in the back of this prospectus. The following selected historical financial data for Madison River Telephone as of December 31, 2002, 2001 and 2000 and for the years ended December 31, 2001 and 2000 have been derived from Madison River Telephone’s audited consolidated financial statements and related notes, which are not included in this prospectus.

This selected historical financial and operating data should be read in conjunction with the information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Madison River Telephone’s audited consolidated financial statements and related notes included elsewhere in this prospectus.


	Year Ended December 31,
	2004			2003			2002			2001			2000(a)
	(dollars in thousands except per share data)
Statement of Operations Data:
Revenues	$	194,374		$	186,460		$	184,201		$	184,263		$	167,101
Operating expenses:
Cost of services and sales (exclusive of depreciation and amortization)		56,937			50,214			56,298			68,512			61,559
Depreciation and amortization		45,003			52,054			50,649			58,471			50,093
Selling, general and administrative expenses		38,339			42,438			45,702			54,495			55,457
Restructuring charge (benefit)		—			(718	)		2,694			2,779			—

Total operating expenses		140,279			143,988			155,343			184,257			167,109

Operating income (loss)		54,095			42,472			28,858			6			(8	)
Interest expense		(61,582	)		(64,441	)		(65,225	)		(64,624	)		(61,267	)
Other income (expense)		7,394			3,658			(2,457	)		(14,702	)		4,899

Loss before income taxes and minority interest expense		(93	)		(18,311	)		(38,824	)		(79,320	)		(56,376	)
Income tax benefit (expense)		6,418			1,846			(1,584	)		5,570			(2,460	)
Minority interest expense		—			—			(275	)		(1,075	)		(750	)

Net income (loss)	$	6,325		$	(16,465	)	$	(40,683	)	$	(74,825	)	$	(59,586	)


Other Financial Data:
Capital expenditures	$	14,643		$	12,223		$	12,344		$	39,936		$	89,644
Net cash provided by (used in) operating activities		38,793			43,665			32,092			(19,770	)		22,253
Net cash used in investing activities		(12,460	)		(10,019	)		(10,714	)		(24,013	)		(212,938	)
Net cash provided by (used in) financing activities		(19,917	)		(25,457	)		(23,030	)		1,979			170,366
EBITDA(b)		106,492			98,184			76,775			42,700			54,234

(footnotes on following page.)


	As of December 31,
	2004			2003			2002			2001			2000(a)
	(dollars in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	34,559		$	28,143		$	19,954		$	21,606		$	63,410
Telephone plant and equipment, net		292,893			321,534			359,365			396,794			400,319
Total assets		782,686			807,223			844,878			896,682			992,017
Long-term debt, including current portion		639,269			660,269			682,833			680,018			678,114
Redeemable members’ capital		213,749			213,413			213,273			213,573			213,043
Total members’ capital(c)		(189,562	)		(196,742	)		(176,944	)		(154,076	)		(83,942	)

Connections In Service: (Unaudited)
Voice access lines(d)		193,092			200,365			206,597			211,540			205,547
DSL and high-speed data connections(e)		40,215			24,863			17,128			11,831			4,536

Total connections		233,307			225,228			223,725			223,371			210,083

(a)

Presents our historical consolidated financial information, which includes the results of operations of our subsidiaries, including Coastal Communications, Inc., acquired on March 30, 2000.

(b)

EBITDA consists of our net income (loss) before interest expense, income tax (expense) benefit and depreciation and amortization. We believe that net cash provided by (used in) operating activities is the most directly comparable financial measure to EBITDA under generally accepted accounting principles. EBITDA is presented because we believe it is a useful indicator of our ability to service our long-term debt, capital expenditure and working capital requirements as well as pay dividends. EBITDA should not be considered in isolation. EBITDA is not a measurement of financial performance under generally accepted accounting principles and should not be considered as an alternative to cash flows from operating activities as a measure of our liquidity or as an alternative to net income (loss) as an indicator of our operating performance or any other measure of performance derived in accordance with generally accepted accounting principles. EBITDA is not a complete measure of our profitability as it does not include costs and expenses for depreciation and amortization, interest expense and income taxes; nor is EBITDA a complete net cash flow measure as it does not include uses of cash to fund our long-term debt, capital expenditures and working capital requirements or to pay dividends. Other companies in our industry may present EBITDA differently than we do.

Set forth below is a reconciliation of our cash provided by (used in) operating activities to EBITDA:


	Year Ended December 31,
	2004			2003			2002			2001			2000
	(dollars in thousands)
Net cash provided by (used in) operating activities	$	38,793		$	43,665		$	32,092		$	(19,770	)	$	22,253
Adjustments:
Depreciation and amortization		(45,003	)		(52,054	)		(50,649	)		(58,471	)		(50,093	)
Deferred long-term compensation		(2,921	)		(5,429	)		(5,284	)		(1,271	)		(4,772	)
Deferred income taxes		6,269			4,117			(6,771	)		4,585			4,436
Losses on investments carried on the equity method		(156	)		(193	)		(3,338	)		(11,306	)		—
Realized gain on extinguishment of debt		3,184			—			—			—			—
Realized losses on marketable equity securities		—			(343	)		(3,985	)		(9,452	)		(3,071	)
Other non-cash items		462			657			(315	)		1,078			318
Changes in operating assets and liabilities		5,697			(6,885	)		(2,433	)		19,782			(28,657	)

Net income (loss)		6,325			(16,465	)		(40,683	)		(74,825	)		(59,586	)
Income tax (benefit) expense		(6,418	)		(1,846	)		1,584			(5,570	)		2,460
Interest expense		61,582			64,441			65,225			64,624			61,267
Depreciation and amortization		45,003			52,054			50,649			58,471			50,093

EBITDA	$	106,492		$	98,184		$	76,775		$	42,700		$	54,234

(c)

Includes members’ interest, accumulated deficit and accumulated other comprehensive income (loss).

(d)

Voice access lines refer to each line of local telephone service provided to residential and business customers.

(e)

DSL and high-speed data connections refer to the high-speed connections provided to end users for purposes of accessing the Internet.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements, including the notes related thereto, and other financial information appearing elsewhere in this prospectus, including “Summary—Summary Historical Financial and Operating Data,” “Capitalization” and “Selected Historical Financial and Operating Data.” Certain statements set forth below constitute forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”

Included in our discussion and analysis of our operating results are comparisons of EBITDA. EBITDA consists of our net income (loss) before interest expense, income tax (expense) benefit and depreciation and amortization. EBITDA is presented because we believe it is a useful indicator of our ability to service our long-term debt, capital expenditure and working capital requirements as well as pay dividends. EBITDA should not be considered in isolation. EBITDA is not a measurement of financial performance under generally accepted accounting principles and should not be considered as an alternative to cash flows from operating activities as a measure of our liquidity or as an alternative to net income (loss) as an indicator of our operating performance or any other measure of performance derived in accordance with generally accepted accounting principles. EBITDA is not a complete measure of our profitability as it does not include costs and expenses for depreciation and amortization, interest expense and income taxes; nor is EBITDA a complete net cash flow measure as it does not include uses of cash to fund our long-term debt, capital expenditures and working capital requirements or to pay dividends. Other companies in our industry may present EBITDA differently than we do.

Our operations are classified into two reportable segments, our RLEC operations and our edge-out services. Our RLEC operations represent the operations of our four rural telephone companies providing a variety of telecommunications services, including local and long distance voice services and Internet access services to business and residential customers in their franchised territories, which we refer to as our RLEC markets. In the following discussion, included within our RLEC operations as a separate line of business are our edge-out services. See note 13 to Madison River Telephone’s audited consolidated financial statements included in the back of this prospectus for further information regarding our segments.

Overview

We operate four rural telephone companies that serve business and residential customers in the Southeast and Midwest regions of the United States. We offer our customers a variety of telecommunications services, including local and long distance services, Internet and enhanced data services, telephone directory and other miscellaneous services and edge-out services. At December 31, 2004, we had 233,307 voice access line, DSL and high-speed data connections in service in our RLEC operations and our edge-out services.

Our RLEC markets are located in Alabama, Georgia, Illinois and North Carolina. We also provide edge-out services as a competitive local exchange carrier in territories that are in close proximity to our RLEC markets. We currently provide edge-out services to medium and large customers in three markets: (i) the Triangle (Raleigh, Durham and Chapel Hill) and the Triad (Greensboro and Winston-Salem) in North Carolina; (ii) Peoria and Bloomington in Illinois and (iii) New Orleans, Louisiana and nearby cities. The management and operating responsibility for the edge-out operations are provided by the managers of the respective rural telephone companies.

Our edge-out services include not only local exchange carrier services but also a transport service that provides transport and Internet Protocol, or IP, transit services to other carriers and large businesses along approximately 2,300 route miles of fiber optic network. The majority of this network comprises a long-haul network in the Southeast United States that connects Atlanta, Georgia and Dallas, Texas, two of the five Tier I Network Access Points. Further, the route connects other metropolitan areas such as Mobile and Montgomery, Alabama; Biloxi, Mississippi; New Orleans, Louisiana; and Houston, Texas. We have designated Atlanta and

Dallas as our Internet egress points. Our edge-out transport business provides services in Atlanta, Georgia; New Orleans, Louisiana; and Houston and Dallas, Texas. Because we have found the fiber transport business to be extremely competitive, we are not actively expanding this line of business at this time. The main value being derived from our fiber optic network is through support for our dial-up, DSL and high-speed access services which require the use of our fiber optic network to connect to the Internet.

Since our inception, our principal activities have been the acquisition, integration, operation and improvement of rural telephone companies. In acquiring our four rural telephone companies, we purchased established businesses with stable cash flows, governmental authorizations and certifications in place, operational support systems, experienced management and key personnel and technologically advanced facilities. We continue to develop the established markets in which our rural telephone companies operate with successful marketing of related services and DSL products and are controlling expenses through the use of business process management tools and other methods. For our edge-out services, our strategy is focused on developing a profitable customer base and achieving sustainable positive cash flow from this business. Accordingly, we have established more rigorous criteria for evaluating new customers and the desirability of renewing existing contracts for our edge-out services.

Impact of the Transactions on our Results of Operations and Liquidity

Results of Operations

We expect to record one-time expenses related to the transactions, including the following:

$ million in fees and expenses associated with our repayment of existing indebtedness, including prepayment penalties and call premiums;

$ million in loss on extinguishment of debt associated with the repayment in full of our existing credit facilities; and

$ in compensation expense for the cash bonuses that will be paid to one of our executive officers in connection with the consummation of the transactions.

As a result of these transactions, the total amount of our long-term debt we have outstanding will decrease from $639.3 million at December 31, 2004 to approximately $455.6 million at the time of the offering. Accordingly, our interest expense will decrease significantly. For 2004, our interest expense was $61.6 million. After the offering, we expect our annual interest expense to be $26.2 million.

We will incur higher expenses as a public company after the consummation of this offering. These expenses will include additional legal and corporate governance expenses, exchange listing fees, transfer agent and stockholder-related fees and increased premiums for director and officer liability insurance coverage. We estimate that these additional expenses will be approximately $1.0 million annually.

Following the completion of this offering, primarily as the result of the decrease in our interest expense, we expect our income tax expense will increase and accordingly, our obligation to pay taxes as a corporation for United States federal income tax purposes will also increase.

Liquidity

Upon completion of this offering, our board of directors will adopt a dividend policy that reflects an intention to distribute a substantial portion of the cash generated by our business in excess of operating needs, interest and principal payments on our indebtedness, capital expenditures, taxes and future reserves, if any, as regular quarterly dividends to our stockholders, rather than retaining such cash for other purposes, including to finance growth opportunities. In accordance with our dividend policy, we currently intend to pay an initial dividend of $ per share on or about , 2005 and to continue to pay quarterly dividends at an annual rate of $ per share for the first full year following the closing of this offering. We expect the aggregate impact of this dividend policy in the year following the offering to be $ million. The cash requirements of the expected dividend policy are in addition to the debt service, capital expenditure and income tax requirements discussed below in “Post-Transactions Liquidity, Capital Resources and Long-Term Debt.” We expect that the cash requirements discussed here and below in “Post-Transactions Liquidity, Capital Resources and Long-Term Debt” will be funded through cash flow generated from the operations of our business. We also expect to have access to the $75.0 million new revolving credit facility to supplement our liquidity position as needed.

Factors Affecting Future Operations

The following is a discussion of the primary factors that we believe will affect our operations over the next few years.

Revenues

Our revenues are derived principally from the sale of voice and data communications services to business and residential customers in our established RLEC markets. For the year ended December 31, 2004, approximately 93.9% of our operating revenues came from our RLEC operations and 6.1% from our edge-out services. For the year ended December 31, 2003, approximately 92.5% of our operating revenues came from our RLEC operations and 7.5% from our edge-out services. We intend to focus on continuing to generate increasing revenues in our RLEC operations from voice services (local and long distance), Internet access and enhanced data and other services. We believe the sale of communications services to customers in our RLEC markets will continue to provide the predominant share of our revenues for the foreseeable future. We do not anticipate growth in revenues from our edge-out services as we continue to focus on a business plan that provides sustainable positive cash flows from that line of business. Our fiber transport business, which provides services to other carriers and major accounts, will increase revenues only if certain profit margins are obtained without making significant additional capital investments. Our fiber transport facilities will primarily be used to support our retail Internet service business in our RLEC operations.

At December 31, 2004, we had 233,307 voice access line, DSL and high-speed data connections in service compared to 225,228 connections in service at December 31, 2003, an increase of 8,079 connections, or 3.6%. Our RLEC operations had 220,774 connections in service at December 31, 2004 and 210,084 connections in service at December 31, 2003, an increase of 10,690 connections, or 5.1%. For our edge-out services, connections in service at December 31, 2004 and December 31, 2003 were 12,533 and 15,144, respectively, a decrease of 2,611 connections, or 17.2%. Voice access lines refer to local telephone service provided to residential and business customers. DSL connections are the high-speed connections provided to end users for purposes of accessing the Internet. In our RLEC operations, voice access lines for residential customers are primarily acquired by responding to customer inquiries. Customers generally contact us by referring to our telephone directories for information on our services and how to contact us. Voice access lines for businesses are usually obtained by direct contact by customer premise sales employees. Most DSL customers are residential customers who also subscribe to our local telephone service. In our edge-out services, our customers are primarily medium and large businesses that we actively market our services to through sales calls. Our revenues are highly dependent on the number of connections in service.

The services we offer to customers may be purchased separately, but are increasingly being included in a package with selected other service offerings, often referred to as bundling, and sold at a discount. An important part of our sales and marketing strategy for our RLEC operations emphasizes the bundling of services and the benefits it provides to our customers. In 2003, we introduced a residential bundled offering which we have branded as our “No Limits” package. The No Limits bundle is marketed to our residential customers at a price that varies slightly by location. The No Limits package offers:

unlimited local telephone service;

unlimited nationwide long distance;

unlimited use of our most popular custom calling features, including caller identification and voicemail; and

unlimited use of our high-speed DSL service for Internet access.

Our results show that the No Limits package has been successful in increasing penetration rates in services such as DSL and long distance. Many of our existing customers selecting the No Limits package are new DSL subscribers and long distance customers, and this has led to an overall increase in our monthly average revenue per unit for a subscriber of the No Limits bundle of approximately $18. We intend to continue to enhance our bundled service offerings with promotional pricing and new service additions.

We have entered an agreement with the National Rural Telecommunications Cooperative that will allow us to offer DIRECTV satellite television service to our customers. We expect that this will be an attractive enhancement to our bundled service offerings. We anticipate that introduction of this product offering will commence by the second quarter of 2005.

We believe we have been successful in addressing competition from new high-speed Internet access product introductions, particularly by cable operators, in our markets in recent years as the number of DSL subscribers we serve in our RLEC operations has continued to increase. We believe that the execution of our strategy and our ability to deliver a quality DSL product at a competitive price and in a timely manner has made us the provider of choice in our markets. With the introduction of our No Limits package, we experienced significant growth in DSL subscribers in 2004 compared to the prior year. As of December 31, 2004, our penetration rate for residential DSL connections as a percentage of primary residential voice access lines was 32.2% compared to 18.5% at December 31, 2003. Although we cannot be certain, we anticipate that our DSL product will continue to provide a source of increasing revenues for our RLEC operations in future quarters. As of December 31, 2004, we had 39,562 DSL connections in service, an increase of 2,498 connections from 37,064 DSL connections in service at September 30, 2004 and an increase of 15,381 connections from 24,181 DSL connections in service at December 31, 2003.

As we have increased the number of DSL connections we serve, we have experienced a decrease in the number of dial-up Internet accounts we service. At December 31, 2004, we had 15,593 dial-up Internet customers, which was a decrease of 8,180 customers, or 34.4%, from 23,773 dial-up Internet customers at December 31, 2003. We believe that a large percentage of the decrease in dial-up Internet customers is the result of customers migrating from our dial-up Internet service to our DSL service.

We have also been successful in growing penetration rates in our RLEC operations for the provision of long distance and related services to our customers. At December 31, 2004, we had 101,469 long distance accounts compared to 96,586 long distance accounts at December 31, 2003. In addition, our penetration rates for our primary custom calling features including voicemail, caller identification, call waiting and call forwarding as of December 31, 2004 have increased since December 31, 2003.

In recent quarters, we have seen a decline in the number of voice access lines we serve in our RLEC operations. As of December 31, 2004, the RLEC operations had 181,212 voice access lines in service, which is a decrease of 4,691 voice access lines, or 2.5%, from 185,903 voice access lines in service at December 31, 2003. The decrease in voice access lines is attributed to three primary factors. First, storm-related damages from Hurricane Ivan in September 2004 resulted in approximately 2,840 voice access lines being disconnected as of December 31, 2004 at our Alabama rural telephone company, Gulf Telephone Company. Substantially all of these disconnected voice access lines are due to damage at the customer premises making the location unusable or uninhabitable until repairs or rebuilding, if necessary, can be completed. We believe that these voice access lines should return to service as repairs and restorations in this area are completed. Second, we have seen a decrease in primary voice access lines, which we define as total voice access lines less second lines, in our Illinois operations, Gallatin River, which served 2,587 fewer primary voice access lines at December 31, 2004 compared to December 31, 2003. The decrease in primary voice access lines is the result of a persistent weakness in the local economies in which Gallatin River operates. These areas are predominantly industrial and agricultural in nature and have had some losses in their business base, resulting in higher unemployment. We are uncertain at this time regarding the future trend for voice access lines at Gallatin River. Finally, second lines decreased by 1,097 lines, or 13.4% from 8,200 second lines in service at December 31, 2003 to 7,103 second lines in service at December 31, 2004. We believe this is the result of our existing customers migrating from our dial-up Internet service, where they may also purchase a second line from us, to our DSL service where they no longer need a second line. Therefore, we believe as we increase the number of DSL connections we serve, correspondingly, we will continue to experience a decrease in the number of second lines we serve. Excluding the voice access line losses related to hurricane damages, which we believe are temporary, our decrease in voice access lines would have been 1.0% during the twelve month period ended December 31, 2004.

In March 2004, military officials at Fort Stewart in Hinesville, Georgia announced that the 3rd Infantry Division stationed there had received orders to prepare for a full deployment. The deployment was completed in February 2005. Our rural telephone company, Coastal Utilities, Inc., serves the Hinesville area, including the military bases where the deployment is taking place. According to military officials, the deployment could last up to 14 months. The full extent of the impact on our operations is difficult to predict and will vary depending on, among other factors, the duration of the troop deployment. We are unable to project the range of the impact of this deployment on Coastal Utilities, Inc. or our operations or cash flows as a whole at this time.

Our RLEC operations benefit from requirements that rates in rural areas be reasonably comparable to rates in urban areas, which results in state and federal universal service funding support payments in high cost rural areas. For the years ended December 31, 2004 and December 31, 2003, revenues attributable to such support payments represented 6.6% and 6.2%, respectively, of our total revenues. Under the current regulatory scheme, as the number of access lines that we have in any given state increases, the rate at which we can recover certain support payments decreases. Therefore, as we implement our growth strategy, our eligibility for such support payments may decrease.

In September 2004, Hurricane Ivan made landfall at Gulf Shores, Alabama. Our rural telephone company located in Foley, Alabama provides service to the Gulf Coast area of Alabama from the western border of the Florida panhandle to the East side of Mobile Bay, including the coastal communities of Gulf Shores, Orange Beach and Fort Morgan. Our central office, remote switch locations, business offices and administrative facilities incurred only minimal damage from the hurricane. However, we did incur more substantial damage in certain outside plant facilities, primarily our transmission and distribution plant, in the coastal areas. Damage from the hurricane to residences, businesses and our facilities has resulted in voice access lines, DSL connections and other services being temporarily disconnected. As a result, our revenues from end user customers decreased approximately $0.5 million in 2004. We accrued approximately $1.7 million in the third quarter of 2004 for estimated building and equipment repairs, restoration of services to customers and other hurricane-related expenses. In addition, in the fourth quarter of 2004 we made approximately $2.6 million in capital expenditures related to storm damages, the majority of which replaced damaged transmission and distribution facilities. Substantially all anticipated repairs and replacements were completed by December 31, 2004. We received authorization from the Alabama Public Service Commission to accelerate depreciation of these storm-related capital expenditures completely in the fourth quarter of 2004, and accordingly, we recognized an additional $2.6 million in depreciation expense for these capital expenditures. As a result of the additional repairs and restoration expenses and depreciation expense, we recognized approximately $0.8 million in revenues from settlements from the NECA carrier common line pool.

In our edge-out services, revenues decreased in 2004 compared to 2003 as sales of new services and renewals of expiring customer contracts have not been enough to replace customers that ceased purchasing our services. At December 31, 2004, our edge-out services had 11,880 voice access lines and 653 high-speed data connections in service. At December 31, 2003, our edge-out services served 14,462 voice access lines and 682 high-speed data connections. A customer in our edge-out services, representing recurring monthly revenues of approximately $55,000, replaced our service during the third quarter of 2004. The expenses to provide services to this customer were minimal. In terms of business development, we are focusing our efforts on only adding customers that meet certain profitability criteria and on increasing our profitability and margins for services provided to existing customers when renegotiating their contracts at expiration.

Bankruptcies by interexchange carriers in recent years, including MCI WorldCom and Global Crossing, have impacted our financial results, including our revenues and cash flows. Without additional clarification or regulatory changes that recognize the additional financial burdens placed on local exchange carriers, we may be unable to appropriately protect ourselves against the financial impact associated with any future bankruptcies of interexchange carriers or other telecommunication providers. At December 31, 2004, we had approximately $1.3 million reserved against our interexchange carrier receivables.

Operating Expenses

Our primary operating expenses consist of cost of services and sales (exclusive of depreciation and amortization), selling, general and administrative expenses and depreciation and amortization.

Cost of services

Our cost of services includes:

plant specific costs and expenses, such as network and general support expense, central office switching and transmission expense, DSL costs, including modems, peripheral materials and egress and transport, information origination/termination expense, underlying carrier costs for long distance transmissions services and cable and wire facilities expense;

plant nonspecific costs, such as testing, provisioning, Internet service provider, or ISP, external help desk costs, network administration, outside plant administration, power and engineering;

materials and contract labor costs related to construction of certain telecommunication facilities and telecommunication equipment installations for customers;

the cost of collocating in incumbent local exchange carrier central offices and leasing unbundled copper loop lines and high capacity digital lines from the incumbent local exchange carriers to connect our customers and other carriers’ networks to our network; and

the cost of leasing transport from incumbent local exchange carriers or other providers where our fiber transport capacity is not available.

We have entered into interconnection agreements with BellSouth, Verizon, Sprint and SBC which allow, among other things, the edge-out services to lease unbundled network elements from these incumbent local exchange carriers, at contracted rates contained in the interconnection agreements. We use these network elements to connect our edge-out services customers with our network. Other interconnection agreements may be required by our edge-out services. In addition, each of the edge-out services currently has the necessary certifications to operate in the states where it has customers.

In response to a decision by the United States Court of Appeals for the District of Columbia, or the DC Circuit Court, to vacate certain portions of the FCC’s Triennial Review Order, on August 20, 2004, the FCC released its Order and Notice of Proposed Rulemaking in the Matter of Unbundled Access to Network Elements and initiated a proceeding to review and revise its unbundling rules. In response to the reversal of its rules by the DC Circuit Court, the FCC issued interim rules on August 20, 2004, and initiated a proceeding to review and revise its unbundling rules. On December 15, 2004, the FCC adopted new rules which were released February 4, 2005. The new rules reduce incumbent local exchange carriers’ obligations to lease interoffice transport and high-capacity loops, and eliminate the requirement to lease mass market local circuit switching, including the unbundled network element platform (a combination of loop, switching and transport which allows competitive local exchange carriers to offer service without their own infrastructure). The revised rules take effect March 11, 2005 and, subject to a twelve month transition, eliminate incumbent local exchange carriers’ obligations to provide unbundled network element platform services nationwide, certain high speed interoffice facilities and certain high capacity unbundled network element loops in larger incumbent local exchange carrier wire centers. Several parties are expected to challenge those rules in court and it is not possible to predict the result of any subsequent reconsideration or appeal. It is not possible to predict the outcome or the ultimate impact on our RLEC operations or our edge-out services. We are also uncertain as to the impact on our RLEC operations or edge-out services of actions that may be taken by state utility commissions based upon the new regulations or new legislation that may be considered and passed in response to the new regulations or any further court decisions. Pending further clarification and guidance from the FCC, we may enter into good faith discussions with SBC and BellSouth on amendments to these provisions of our interconnection agreements. The FCC is also considering changes in the rules it applies to the pricing of unbundled network elements. Significant increases in

pricing of unbundled network elements, currently based on FCC total element long-run incremental cost pricing rules, would significantly increase the cost of obtaining facilities necessary to provide services to customers in our edge-out markets and would have a material impact on the results of operations and cash flows of our edge-out services. Our objective for the edge-out services has been to maintain a line of business that generates sufficient cash flows to fund its own operations and capital requirements and does not harm the enterprise as a whole. Given the developments with the edge-out services discussed herein, we intend to analyze its financial and operating results to determine that our objective is being accomplished.

Selling, general and administrative expenses

Selling, general and administrative expenses include:

selling and marketing expenses;

expenses associated with customer care;

billing and other operating support systems; and

corporate and administrative expenses.

We market our business services through agency relationships and professional sales people. We market our consumer services primarily through our professional customer sales and service representatives. We offer competitive compensation packages including sales commissions and incentives.

We have operating support and other back office systems that we use to enter, schedule, provision and track customer orders, test services and interface with trouble management, inventory, billing, collection and customer care service systems for the access lines in our operations. We may review and consider the benefits offered by the latest generation of systems, and, if we implement new systems, we expect that our operating support systems and customer care expenses may increase.

Depreciation and amortization expenses

We recognize depreciation expense for our telephone plant and equipment that is in service and is used in our operations, excluding land which is not depreciated. Our regulated RLEC operations use straight-line rates approved by the public utility commissions in the states where we have regulated telephone plants in service. In our unregulated RLEC operations and in our edge-out services, telephone plant and equipment is depreciated over lives, determined according to the class of the asset, ranging from three years to thirty-three years.

We have seen a decline in recent quarters in our depreciation expense as a result of certain asset classes becoming fully depreciated. As a result of damages incurred in our Alabama rural telephone company related to Hurricane Ivan, we made capital expenditures of approximately $2.6 million with substantially all of these expenditures being made in the fourth quarter of 2004. We received authorization from the Alabama Public Service Commission to accelerate depreciation of these capital expenditures completely in the fourth quarter of 2004. Beyond this one-time event, we anticipate that our depreciation expense will continue to decrease in the near-term.

Amortization expense is recognized primarily for our intangible assets considered to have finite lives on a straight-line basis. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), goodwill and intangible assets deemed to have indefinite lives are no longer permitted to be amortized but are subject to impairment tests at least annually in accordance with the tenets of SFAS 142.

Results of Operations

The following table sets forth certain items reflected in our consolidated statements of operations for the periods indicated, expressed as a percentage of revenues. The year to year comparisons of financial results are not necessarily indicative of future results.


	Year Ended December 31,
	2004		2003		2002
	(Unaudited)
Revenues	100.0	%	100.0	%	100.0	%
Operating expenses:
Cost of services and sales (exclusive of depreciation and amortization)	29.3		26.9		30.6
Depreciation and amortization	23.2		27.9		27.5
Selling, general and administrative expenses	19.7		22.8		24.8
Restructuring	—		(0.4	)	1.5

Total operating expenses	72.2		77.2		84.4

Operating income	27.8		22.8		15.6
Interest expense	(31.7	)	(34.6	)	(35.4	)
Other income (expense)	3.8		2.0		(1.3	)

Loss before income taxes and minority interest expense	(0.1	)	(9.8	)	(21.1	)
Income tax benefit (expense)	3.3		1.0		(0.9	)
Minority interest expense	—		—		(0.1	)

Net income (loss)	3.2	%	(8.8	)%	(22.1	)%

Year Ended December 31, 2004 compared to Year Ended December 31, 2003

Revenues

Total revenues for the year ended December 31, 2004 were $194.4 million, an increase of $8.0 million, or 4.2%, from $186.4 million for the year ended December 31, 2003. Revenues in the RLEC operations were $182.5 million in 2004, an increase of $10.0 million, or 5.8%, from revenues of $172.5 million in 2003. In our edge-out services, revenues decreased $2.0 million, or 14.6%, to $11.9 million in 2004 compared to $13.9 million in 2003.

For 2004, our RLEC operations and edge-out services provided approximately 93.9% and 6.1%, respectively, of our revenues. Comparatively, for 2003, our RLEC operations provided 92.5% of our revenues and our edge-out services provided 7.5% of our revenues.

Voice Services. Revenues from voice services, which are comprised of local service, including network access and long distance service, as a percentage of total revenues, were approximately 75.0% and 76.6% for the years ended December 31, 2004 and 2003, respectively.

Local service revenues in 2004 were $130.7 million, an increase of $3.7 million, or 2.9%, from local service revenues in 2003 of $127.0 million. The increase is attributable largely to an increase of $1.7 million in revenues from interconnection agreements with wireless carriers. In addition, revenues from federal and state universal service support increased $1.3 million and revenues from cost study settlements increased $0.9 million in 2004 compared to 2003.

Long distance revenues in 2004 were $15.1 million, a decrease of $0.7 million, or 4.5%, compared to long distance revenues of $15.8 million in 2003. The decrease is primarily attributable to a decrease in customer billing. As the number of subscribers to the No Limits bundle increased, more customer billings reflect a flat rate charge for long distance service compared to the higher usage-based charges for these customers in prior periods. Long distance revenues also decreased as the result of certain non-recurring revenues in 2003 related to a settlement agreement with another carrier.

At December 31, 2004, our RLEC operations served 181,212 voice access lines, a decrease of 4,691, or 2.5%, from 185,903 voice access lines at December 31, 2003. The decrease in voice access lines was attributable

to three primary factors: the impact of Hurricane Ivan on our Alabama RLEC operations, the loss of primary voice access lines at Gallatin River Communications due to the persistent weakness in the local economies in which it operates and a decrease in second lines which we believe is the result of our customers migrating from our dial-up Internet Service, where they also purchase a second line from us, to our DSL service, where they no longer need a second line.

Internet and Enhanced Data Services. Revenues from Internet and enhanced data services increased $4.4 million, or 27.4% to $20.7 million in 2004 compared to $16.3 million in 2003. The increase in revenues is attributable to the increase in the number of DSL subscribers served in our RLEC operations. At December 31, 2004, our RLEC operations served 39,562 DSL subscribers compared to 24,181 at December 31, 2003, an increase of 15,381 connections, or 63.6%. The growth in DSL connections is attributable to the strong demand for our No Limits bundled offering.

Edge-Out Services. Revenues from our edge-out services in 2004 were $11.9 million, a decrease of approximately $2.0 million, or 14.6%, from revenues of $13.9 million in 2003. The decrease was attributable primarily to a $1.5 million decrease in local service revenues and a $0.2 million decrease in long distance service revenues as the result of a decrease in the number of connections served. At December 31, 2004 and 2003, our edge-out services served approximately 11,880 and 14,462 voice access lines, respectively, representing a 17.9% decrease. In addition, revenues from enhanced data services provided in our edge-out services decreased $0.1 million, or 5.4%, in 2004 compared to 2003 as a result of a decrease in the number of high speed data connections in service. At December 31, 2004, our edge-out services served 653 connections compared to 682 connections at December 31, 2003, a decrease of 29 connections or 4.3%. Revenues from transport services were $2.5 million in 2004, a decrease of $0.2 million, or 7.6%, from transport service revenues of $2.7 million in 2003. We have found the fiber transport business to be extremely competitive and we are not actively expanding this line of business at this time. The main value being derived from our fiber optic network is through support for our dial-up, DSL and high-speed access services which require the use of our fiber optic network to connect to the Internet.

Miscellaneous Revenues. Miscellaneous revenues were $16.0 million in 2004, an increase of $2.5 million, or 18.3%, compared to miscellaneous revenues of $13.5 million in 2003. The increase is largely attributable to revenues from a special construction project. Revenues from this project were approximately $1.8 million higher in 2004 than 2003. In addition, revenues from two equipment installation projects were approximately $0.2 million in 2004. Finally, revenues from publishing telephone directories increased approximately $0.3 million and uncollectibles expenses decreased approximately $0.2 million.

Operating Expenses

Total operating expenses decreased approximately $3.7 million from $144.0 million, or 77.2% of total revenues in 2003, to $140.3 million, or 72.2% of total revenues in 2004. The decrease is primarily attributable to a decrease of $7.1 million in depreciation and amortization expenses in 2004 compared to 2003. The decrease in depreciation and amortization expenses is largely due to certain classes of assets becoming fully depreciated during 2004. This decrease was partially offset by the one-time depreciation charge of $2.6 million in our RLEC operations from storm-related capital expenditures that were accelerated into the fourth quarter of 2004.

Approximately $4.8 million of the decrease in operating expenses resulted from higher short-term incentive accruals of $2.8 million and a $1.3 million accrual for potential sales tax liabilities made in 2003 for which no comparable accruals were made in 2004. In addition, favorable regulatory rulings resulted in the reversal of approximately $0.7 million of the sales tax accrual in 2004 which contributed to the decrease.

Approximately $2.5 million of the decrease in operating expenses is attributable to a decrease in long-term incentive plan expenses from $5.4 million in 2003 to $2.9 million in 2004 due to a decrease in the number of new grants being made.

Partially offsetting the decrease in operating expenses are the following factors. First, in the first quarter of 2003, we recognized a one-time, non-cash gain of approximately $2.7 million from a pension curtailment. The gain resulted in a reduction in pension expense in 2003 whereas no comparable gain was recognized in the first quarter of 2004. Approximately $2.1 million of the net gain was recognized as a reduction of pension expense in the RLEC operations and $0.6 million as a reduction of pension expense in the edge-out services. Second, in 2004, we recognized approximately $1.7 million in expenses related to storm-related repairs and restoration performed in our Alabama rural telephone company as a result of Hurricane Ivan. Finally, costs to terminate long distance calls attributable primarily to an increase in access minutes of use related to the No Limits package increased approximately $1.5 million and costs for special construction and equipment installation projects were $1.3 million higher in 2004 compared to 2003.

Cost of services and sales, as a percentage of total revenues, increased to 29.3% in 2004 from 26.9% in 2003, and selling, general and administrative expenses, as a percentage of total revenues, decreased from 22.8% in 2003 to 19.7% in 2004. Depreciation and amortization expenses, as a percentage of total revenues, decreased from 27.9% in 2003 to 23.2% in 2004. Restructuring benefit in 2003, as a percentage of total revenues, was 0.4%.

RLEC Operations Operating Expenses. In the RLEC operations, operating expenses in 2004 were $118.5 million, an increase of $0.4 million, or 0.4%, from operating expenses of $118.1 million in 2003. Depreciation and amortization expense in 2004 was $33.2 million, a decrease of $3.7 million, or 10.0%, from depreciation and amortization expense of $36.9 million in 2003. The decrease was attributable to certain classes of assets becoming fully depreciated in 2004. Included in depreciation and amortization expenses for 2004 is the one-time depreciation charge of $2.6 million for storm-related capital expenditures. Cost of services and sales (exclusive of depreciation and amortization) in the RLEC operations increased approximately $8.4 million, or 19.9%, to $50.3 million in 2004 from $41.9 million in 2003. The increase in cost of services includes approximately $1.7 million in storm-related repairs and restoration expenses in our Alabama rural telephone company. In addition, costs to terminate long distance calls attributable primarily to an increase in access minutes of use related to the No Limits package increased approximately $1.5 million and costs for special construction and equipment installation projects increased approximately $1.3 million in 2004 compared to 2003. Expenses for DSL modems used in the RLEC operations were approximately $0.5 million higher in 2004 when compared to 2003 as DSL modems were capitalized in the first six months of 2003. Finally, cost of services in the RLEC operations in 2003 reflect $0.6 million for a non-cash gain from a pension curtailment for which no comparable gain was recognized in 2004. Selling, general and administrative expenses in the RLEC operations decreased $4.2 million, or 10.6%, to $35.1 million in 2004 compared to $39.3 million in 2003. The decrease is attributable primarily to higher short-term incentive accruals of $2.8 million and a $1.3 million accrual for potential sales tax liabilities made in 2003 for which no comparable accruals were made in 2004. Favorable regulatory rulings resulted in the reversal of approximately $0.7 million of the potential sales tax accrual in 2004 which contributed to the decrease. In addition, long-term incentive plan expenses included in selling, general and administrative expenses in the RLEC operations were $2.3 million lower in 2004 compared to 2003. Partially offsetting these lower selling, general and administrative expenses in the RLEC operations was the impact on selling, general and administrative expenses of the non-cash pension curtailment gain of $1.5 million recognized in 2003 for which no comparable gain was recognized in 2004.

Edge-Out Services Operating Expenses. Operating expenses in our edge-out services decreased approximately $4.2 million from $25.9 million in 2003 to $21.7 million in 2004, attributable to a decrease in depreciation and amortization expense. Depreciation and amortization expense decreased $3.4 million, or 22.2%, to $11.8 million in 2004 compared to $15.2 million in 2003. The decrease in depreciation expenses is primarily attributable to certain assets becoming fully depreciated. In addition, nonrecurring settlements from several disputes arising out of interconnection agreements, totaling approximately $0.6 million, reduced cost of services in 2004 whereas no comparable settlements were recorded in 2003. Other operating expenses also decreased as a result of the decrease in the number of connections served. Partially offsetting these decreases were the $0.6 million noncash gain from the pension curtailment that reduced pension expense and a $0.7 million adjustment to restructuring accruals that reduced operating expenses in the edge-out services in 2003. No similar pension curtailment gains or adjustments to restructuring accruals were recorded in 2004.

Net Operating Income

Net operating income increased approximately $11.6 million from $42.5 million, or 22.8% of total revenues in 2003 to $54.1 million, or 27.8% of total revenues in 2004. The increase is primarily attributable to the increase in revenues in the RLEC operations. Net operating income in the RLEC operations increased $9.5 million, or 17.4%, to $63.9 million in 2004 from $54.4 million in 2003. For the edge-out services, the net operating loss improved $2.2 million, or 17.9%, to $9.8 million in 2004 from $12.0 million in 2003.

Interest Expense

Interest expense decreased $2.8 million, or 4.4% to $61.6 million, or 31.7% of total revenues, in 2004 compared to $64.4 million, or 34.6% of total revenues, in 2003. Approximately $1.7 million of the decrease is attributed to lower weighted average outstanding balances and lower weighted average interest rates on long-term debt with the RTFC. In addition, interest expense for certain income tax-related exposures was $1.5 million in 2003 compared to $0.9 million in 2004, a decrease of $0.6 million. Included in the $0.9 million in 2004 is interest expense of approximately $0.4 million in the second quarter of 2004 related to income tax refunds that are the subject of two lawsuits filed against us as further discussed under “—Deferred Income Tax Contingency” below. Finally, $0.5 million of the decrease in 2004 related to the settlement of a vendor dispute.

Other Income

Other income in 2004 was $7.4 million, an increase of $3.7 million, or 102.1%, from other income of $3.7 million in 2003. Other income represented 3.8% and 2.0% of total revenues in 2004 and 2003, respectively. The increase is attributed primarily to a net gain of $3.2 million on the extinguishment of long-term debt. In addition, dividend income in 2004 was $0.5 million higher when compared to 2003 and is attributed primarily to a $0.5 million increase in the dividend received from the Rural Telephone Bank. Finally, in 2003, we had realized losses of $0.4 million on disposals of marketable equity securities whereas no comparable realized losses were recognized in 2004.

Income Tax Benefit

We recognized an income tax benefit of $6.4 million in 2004, an increase of $4.6 million from an income tax benefit of $1.8 million in 2003. The income tax benefit in 2004 was largely due to the reversal of our valuation allowance established to recognize our deferred income tax assets at their net realizable value. The reduction in the valuation allowance was $9.2 million. Partially offsetting this benefit was income tax expense of $2.1 million recorded in the second quarter of 2004 related to two erroneous refund lawsuits filed against two of our subsidiaries by the Department of Justice.

The income tax benefit in 2003 was attributable primarily to a benefit of $2.7 million recognized in the fourth quarter of 2003 related to certain refunds received in 2002. We received the refunds after amending our 1998 income tax returns. The benefit was recognized after we were advised that the statute of limitations for taxing authorities to assert audit adjustments against our 1998 income tax returns had expired in 2003.

In June 2004, the Department of Justice, on behalf of the Internal Revenue Service, filed the erroneous refund lawsuits against our two subsidiaries that received the refunds from the amended 1998 returns and subsequently recognized the benefit. As a result, during the second quarter of 2004, we accrued $2.1 million as income tax expense and also accrued $0.4 million in related interest expense to recognize the potential exposure under the suits. See “—Deferred Income Tax Contingency” below for further information on these suits.

Net Income (Loss)

We reported net income of $6.3 million in 2004, or 3.2% of total revenues, which was an improvement of $22.8 million from our net loss of $16.5 million, or 8.8% of total revenues, in 2003, as a result of the factors discussed above. The RLEC operations reported net income of $42.2 million in 2004 compared to net income of $22.4 million in 2003, an increase of $19.8 million, or 88.0%. For the years ended December 31, 2004 and 2003, our edge-out services reported net losses of $35.9 million and $38.9 million, respectively, an improvement of $3.0 million. Our EBITDA increased $8.3 million from $98.2 million, or 52.7% of total revenues, in 2003, to $106.5 million, or 54.8% of total revenues, in 2004. (See footnote (b) under “Selected Historical Financial and Operating Data” for a definition of EBITDA and reconciliation of EBITDA to net cash provided by (used in) operating activities.)

Year Ended December 31, 2003 compared to Year Ended December 31, 2002

Revenues

Total revenues for the year ended December 31, 2003 were $186.4 million, an increase of $2.2 million from $184.2 million for the year ended December 31, 2002. Revenues in the RLEC operations were $172.5 million in 2003, an increase of $3.6 million, or 2.1%, from revenues of $168.9 million in 2002. In our edge-out services, revenues decreased $1.4 million, or 8.6%, to $13.9 million in 2003 compared to $15.3 million in 2002.

For 2003, our RLEC operations and edge-out services provided approximately 92.5% and 7.5%, respectively, of our revenues. Comparatively, for 2002, our RLEC operations provided 91.7% of our revenues and our edge-out services provided 8.3% of our revenues.

Voice Services. Revenues from voice services, which are comprised of local service, including network access and long distance service, as a percentage of total revenues, were approximately 76.6% and 78.1% for the years ended December 31, 2003 and 2002, respectively.

Local service revenues in 2003 were $127.0 million, a decrease of $2.0 million, or 1.6%, from local service revenues of $129.0 million in 2002. The decrease is attributable primarily to a $4.5 million decrease in switched access revenues from a decrease in minutes of use in addition to an access rate decrease. This decrease was partially offset by an increase of $1.8 million increase in revenues from interconnection agreements with wireless carriers and $0.7 million from an increase in subscriber line charges.

Long distance revenues were $15.8 million in 2003, an increase of $1.0 million, or 6.5%, compared to long distance revenues of $14.8 million in 2002. The increase is attributable primarily to increased minutes of use of our private label toll service as a result of an increase in the number of long distance accounts served. The number of long distance accounts in service increased 5.9% in 2003. In addition, long distance revenues also increased as the result of certain non-recurring revenues in 2003 related to a settlement agreement with another carrier.

At December 31, 2003, the RLEC operations served 185,903 voice access lines, a decrease of 4,350 voice access lines, or 2.3%, from 190,253 voice access lines served at December 31, 2002.

Internet and Enhanced Data Services. Revenues from Internet and enhanced data services increased $2.8 million, or 20.4% to $16.3 million in 2003 compared to $13.5 million in 2002. The increase in revenues is attributable to the increase in the number of DSL subscribers served in our RLEC operations. At December 31, 2003, our RLEC operations served 24,181 DSL subscribers compared to 16,423 at December 31, 2002, an increase of 7,758 connections or 47.2%.

Edge-Out Services. Revenues in our edge-out services in 2003 were $13.9 million, a decrease of $1.4 million, or 8.6%, from revenues of $15.3 million in 2002. Approximately $0.8 million of the decrease is attributed to the decrease in the average number of voice access lines and high-speed data connections in service during 2003 compared to 2002. At December 31, 2003 and 2002, our edge-out services served approximately

15,144 and 17,049 voice access and high-speed data connections, respectively, an 11.2% decrease. Approximately $0.7 million of the decrease is attributed to a decrease in our fiber transport business as we are not actively expanding this line of business.

Miscellaneous Revenues. Miscellaneous revenues were $13.5 million in 2003, an increase of $1.8 million, or 16.0%, compared to miscellaneous revenues of $11.7 million in 2002. The increase is largely attributable to the impact on miscellaneous revenues in 2002 from approximately $1.5 million in bad debts being charged against revenues for pre-petition amounts of two customers, MCI WorldCom and Global Crossing, which filed for bankruptcy during the second quarter of 2002. No comparable bad debt charges were recognized in 2003.

Operating Expenses

Total operating expenses decreased $11.3 million from $155.3 million, or 84.3%, of total revenues in 2002, to $144.0 million, or 77.2%, of total revenues in 2003. Approximately $2.7 million of the decrease is the result of a one-time, non-cash gain from a pension curtailment in the first quarter of 2003. Accrual of benefits for qualified plan participants who are not members of bargaining units in our non-contributory, defined benefit pension plan was frozen in the first quarter of 2003. As a result, Statement of Financial Accounting Standards No. 88, Employer’s Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits became effective. The pension plan curtailment resulted in an immediate net gain of $2.8 million, of which $2.7 million resulted in a reduction in pension expenses and $0.1 million went to reduce capital additions. The gain was recognized in the first quarter of 2003 and was allocated between our operating subsidiaries who participate in the pension plan. Although further accrual of benefits by plan participants is frozen, we have a continuing obligation to fund the plan and continue to recognize net periodic pension expense. Approximately $2.1 million of the net gain was recognized as a reduction of pension expenses in our RLEC operations and $0.6 million as a reduction of pension expenses in our edge-out services.

Approximately $3.4 million of the decrease in operating expenses resulted from changes in restructuring expenses, with the majority of the decrease, or $3.2 million, in the edge-out services. In 2003, we recognized a benefit of approximately $0.7 million for adjustments made to restructuring accruals to recognize differences between actual operating results and our original estimates of restructuring expenses properly recorded in prior years in accordance with Emerging Issues Task Force Issue 94-3 (“EITF 94-3”). In 2002, we recorded restructuring expenses of $2.8 million. The remaining decreases in operating expenses are attributed to further expense reductions realized primarily in our edge-out services and to a lesser degree in the RLEC operations when compared to the prior year.

These operating expense reductions were partially offset by certain higher operating expenses. Our short-term incentive accruals increased $2.5 million in 2003 compared to 2002. In addition, during the fourth quarter of 2003, we accrued a one-time charge of $1.3 million for potential sales tax liabilities that may be retroactively imposed on the rural telephone companies. We also recognized $0.9 million in expenses for DSL modems used in the RLEC operations. Prior to the third quarter of 2003, under our accounting policies, the cost of DSL modems were capitalized. However, beginning in the third quarter of 2003, we began expensing DSL modems as their cost fell below the threshold for capitalization.

Cost of services and sales, as a percentage of total revenues, decreased from 30.6% in 2002 to 26.9% in 2003, and selling, general and administrative expenses, as a percentage of total revenues, decreased from 24.8% in 2002 to 22.8% in 2003. Depreciation and amortization expenses, as a percentage of total revenues, increased from 27.5% in 2002 to 27.9% in 2003. Restructuring benefit in 2003, as a percentage of total revenues, was 0.4% compared to the restructuring charge in 2002, as a percentage of total revenues, of 1.5%.

RLEC Operations Operating Expenses. Operating expenses in the RLEC operations in 2003 were $118.1 million, a decrease of $1.1 million, or 1.0%, from 2002 operating expenses of $119.2 million. Cost of services and sales (exclusive of depreciation and amortization) were $41.9 million in 2003, a decrease of $1.6 million, or 3.6%, from $43.5 million in 2002. Approximately $0.6 million of the decrease is attributable to the pension

curtailment gain. The remaining decrease is attributable to overall decreases in expenses from implementation of business process improvements. Selling, general and administrative expenses decreased $1.1 million, or 2.7%, from $40.4 million in 2002 to $39.3 million in 2003. The decrease is attributable to the $1.5 million impact on selling, general and administrative expenses from the pension curtailment gain. Restructuring expenses in the RLEC operations were $0.1 million in 2002 compared to a benefit of $0.1 million in 2003, a change of $0.2 million. These decreases were offset by an increase of $1.7 million in depreciation and amortization expenses to $36.9 million in 2003 from $35.2 million in 2002. In our RLEC operations, in addition to the impact of slower growth on our operating expenses, we also realized a full year of cost reductions in 2003 from the implementation of more cost efficient methods of managing our business processes in earlier years.

Edge-Out Services Operating Expenses. In our edge-out services, operating expenses in 2003 were $25.9 million compared to operating expenses in 2002 of $36.1 million, a decrease of $10.2 million or 28.3%. Cost of services decreased approximately $4.5 million, or 35.4%, to $8.3 million in 2003 from $12.8 million in 2002. The decrease is largely due to the benefits from the changes we implemented to our cost structure, including reduced personnel costs, circuit expenses and overhead expenses, in our edge-out services in the fourth quarter of 2001 and the third quarter of 2002 being fully realized in 2003. Depreciation and amortization expense was $15.1 million in 2003 and $15.4 million in 2002, a decrease of $0.3 million, or 1.9%. Selling, general and administrative expenses decreased $2.2 million, or 41.5%, to $3.1 million in 2003 from $5.3 million in 2002. Again, the change in our cost structure in the third quarter of 2002 and fourth quarter of 2001 was the primary factor in the decrease in selling, general and administrative expenses. Restructuring expenses in the edge-out services were $2.6 million in 2002 compared to a benefit of $0.6 million in 2003, a change of $3.2 million.

Net Operating Income

Net operating income increased approximately $13.6 million, or 47.2%, from net operating income of $28.9 million, or 15.7% of total revenues in 2002 to net operating income of $42.5 million, or 22.8% of total revenues in 2003. The increase is attributable primarily to the reductions in operating expenses in the RLEC operations and edge-out services. Net operating income in the RLEC operations increased $4.7 million, or 9.5%, to $54.4 million in 2003 from $49.7 million in 2002. In our edge-out services, our net operating loss improved $8.9 million, or 42.6%, to a net operating loss of $12.0 million in 2003 from a net operating loss of $20.9 million in 2002.

Interest Expense

Interest expense decreased $0.8 million to $64.4 million, or 34.6% of total revenues, in 2003 compared to $65.2 million, or 35.4% of total revenues, in 2002. The decrease in interest expense is primarily attributable to a lower average balance of long-term debt outstanding and slightly lower weighted average interest rates during 2003 compared to 2002. This decrease was partially offset by the accrual of $1.4 million in interest expense related to a potential income tax liability in 2003.

Other Income (Expense)

For 2003, we had net other income of approximately $3.7 million compared to net other expenses of $2.5 million in 2002, a change of $6.2 million. Included in other expenses for 2002 is a $4.0 million realized loss for a decrease in the fair market value of an investment in US Unwired, Inc. common stock that was deemed to be other than temporary and an impairment charge of $2.1 million taken against the carrying value of our investment in US Carrier Telecom, LLC that is accounted for using the equity method. No such comparable charges were recorded in 2003.

Income Tax Benefit (Expense)

We recorded an income tax benefit of $1.8 million in 2003 compared to income tax expense of $1.6 million in 2002, a change of $3.4 million. The change is attributable primarily to the recognition of $2.7 million in income tax refunds in 2003 that offset income tax expense. During 2002, we amended certain prior year income

tax returns, covering the years 1998 to 2001, which resulted in refunds of approximately $7.8 million. We received the refunds in 2002 and recorded them as deferred income tax liabilities. In the third quarter of 2003, the Internal Revenue Service, as part of an audit of our tax years from 1999 to 2001, verbally notified us that our position in the amended income tax returns would be disallowed and in the fourth quarter, we received formal notice of disallowance. The refunds impacted by this IRS notification totaled $5.1 million and remain as part of our deferred income tax liabilities. The refunds from amending our 1998 income tax returns, totaling $2.7 million, were not subject to the audit. Upon being advised that the statute of limitations for taxing authorities to make audit adjustments to the 1998 income tax returns had expired during 2003, we recognized the $2.7 million as an income tax benefit.

Net Loss

Our net loss improved $24.2 million from a net loss of $40.7 million, or 22.1% of total revenues, in 2002, to a net loss of $16.5 million, or 8.8% of total revenues, in 2003, as a result of the factors discussed above. We reported net income in our RLEC operations of $22.4 million in 2003 compared to net income of $7.2 million in 2002, an increase of $15.2 million, or 210.2%. For 2003 and 2002, our edge-out services reported a net loss of $38.9 million and $47.9 million, respectively, an improvement of $9.0 million, or 18.8%. Our EBITDA increased $21.4 million from $76.8 million, or 41.7% of total revenues, in 2002, to $98.2 million, or 52.7% of total revenues, in 2003. (See footnote (b) under “Selected Historical Financial and Operating Data” for a definition of EBITDA and reconciliation of EBITDA to net cash provided by (used in) operating activities.)

Liquidity and Capital Resources

Following the reorganization transactions, Madison River Communications will be a holding company with no business operations, sources of income or assets of its own. Its only significant assets will be its direct and indirect ownership of the capital stock/member interests of its subsidiaries. Accordingly, the only sources of cash to pay our obligations are cash on hand and distributions from our subsidiaries from their net earnings and cash flows. Even if our subsidiaries determine to pay a dividend on, or make a distribution in respect of, their capital stock/member interests, we cannot guarantee that our subsidiaries will generate sufficient cash flow to pay such a dividend or distribute such funds or that they will be permitted to pay such dividend or distribution under the terms of our new credit facilities, their contractual obligations or the laws of their jurisdiction of incorporation.

At December 31, 2004, we had total liquidity of $75.6 million, which consisted of cash and cash equivalents of $34.6 million and available borrowings under our lines of credit with the RTFC of $41.0 million.

At December 31, 2004, we had positive working capital of approximately $8.5 million compared to a working capital deficit of $2.3 million at December 31, 2003, a change of $10.8 million. The change was attributable primarily to an increase of $6.4 million in our cash balance and a decrease of $5.9 million in accrued expenses in 2004 compared to 2003.

Operating Activities. For the years ended December 31, 2004 and 2003, we generated cash from operating activities of $38.8 million and $43.7 million, respectively. The decrease of $4.9 million is attributable largely to the use of cash in 2004 to reduce accrued expenses by $4.2 million whereas in 2003, an increase in accrued expenses provided $4.8 million in cash. In 2004, our net income, excluding non-cash charges such as depreciation, amortization and long-term incentive plan expenses reflected net cash provided of $44.5 million, an increase of $7.7 million compared to $36.8 million for 2003. For the year ended December 31, 2003, we generated net cash from operating activities of $43.7 million, an increase of $11.6 million from net cash generated from operating activities of $32.1 million in the year ended December 31, 2002. In 2003, we continued to reduce our expenses in both the RLEC operations and the edge-out services, which resulted in a lower use of cash. Operating expenses, excluding non-cash depreciation and amortization expenses, in 2003 were $91.9 million in 2003 compared to $104.7 million in 2002, a decrease of $12.8 million.

Investing Activities. For the year ended December 31, 2004, net cash used for investing activities was $12.5 million and consisted of $14.6 million in cash used for the purchase of telephone plant and equipment

partially offset by cash received from the redemption of subordinated capital certificates by the RTFC in the amount of $1.4 million (discussed below under “—Long-Term Debt and Revolving Credit Facilities”) and changes in other assets of $0.8 million. Included in the $14.6 million in capital expenditures was approximately $2.6 million for storm-related damages in the fourth quarter of 2004. Excluding these storm-related capital expenditures, our capital expenditures in 2004 were $12.0 million compared to $12.2 million in 2003 and $12.3 million in 2002. For the year ended December 31, 2003, net cash used for investing activities was $10.0 million and consisted of $12.2 million for the purchase of telephone plant and equipment partially offset by $2.0 million in cash received from the redemption of subordinated capital certificates by the RTFC and $0.2 million from changes in other assets. For the year ended December 31, 2002, net cash used in investing activities was $10.7 million, primarily due to capital expenditures of $12.3 million. This was offset by net cash received of $0.7 million from redemption of subordinated capital certificates by the RTFC and a decrease in other assets of $0.9 million.

Financing Activities. For the year ended December 31, 2004, net cash used in financing activities was $19.9 million and included $26.8 million in repayments on long-term debt, $10.0 million for the repayment of an outstanding balance on a revolving line of credit, $2.1 million for the repurchase of a portion of our 13¹/4% senior notes in the open market and $1.0 million for the partial redemption of a minority interest in Coastal Communications, Inc. These amounts were partially offset by $19.9 million received from the proceeds of a loan, net of related expenses, and $0.2 million from a note repayment made by a managing director. For the year ended December 31, 2003, net cash used in financing activities was $25.5 million and was attributable to scheduled principal payments on long-term debt of $13.6 million, the repayment of $21.0 million outstanding on a line of credit and the redemption of $1.0 million of a minority interest in Coastal Communications, Inc. These uses of cash were partially offset by the proceeds of a $10.0 million advance on a line of credit. For the year ended December 31, 2002, net cash used in financing activities was $23.0 million. The net use of cash for financing activities was attributable to scheduled principal payments on long-term debt of $20.4 million and the repayment of an outstanding line of credit of $10.0 million. In addition, during 2002, we redeemed $2.0 million in member’s interest in Madison River Telephone and $1.0 million in minority interest in Coastal Communications, Inc. and advanced $1.4 million to certain of our managing directors. These uses of cash were offset by the proceeds of $4.0 million from advances on a line of credit and $7.8 million from borrowings under a term loan.

Off-Balance Sheet Arrangements

As of December 31, 2004, we had no off-balance sheet arrangements as defined under Regulation S-K 303(a)(4).

Material Contractual Cash Obligations

The following table contains a summary of our material contractual cash obligations as of December 31, 2004:


	Cash Payments Due by Period (amounts in thousands)
	Total		2005		2006-2007		2008-2009		Thereafter
Long-term debt—principal(a)	$	641,093	$	9,385	$	18,770	$	18,770	$	594,168
Long-term debt—interest(b)		475,213		61,232		125,587		128,315		160,079
Operating leases(c)		7,709		1,457		1,889		1,382		2,981
Redemption of minority interest(d)		3,000		1,000		2,000		—		—
Other contractual cash obligations(e)		5,110		2,134		1,361		822		793

Material contractual cash obligations	$	1,132,125	$	75,208	$	149,607	$	149,289	$	758,021

(a)

Includes scheduled principal repayments per long-term debt agreements. Amount excludes the unamortized discount of $1.8 million on the existing notes and includes $0.4 million for a note payable to an existing equity investor which is convertible into Class A units of Madison River Telephone. Our

long-term debt is discussed further below and in Note 7 to Madison River Telephone’s audited consolidated financial statements included in the back of this prospectus.

(b)

Includes estimates of interest expense on long-term debt amounts currently outstanding based on scheduled principal repayments and certain interest rate assumptions for our various tranches of long-term debt. Our long-term debt is discussed further below and in Note 7 to Madison River Telephone’s audited consolidated financial statements included in the back of this prospectus.

(c)

Amount is shown net of estimated sublease income from current subleases.

(d)

See “—Minority Interest in Coastal Communications, Inc.” below and Note 14 to Madison River Telephone’s audited consolidated financial statements included in the back of this prospectus.

(e)

Includes miscellaneous other commitments represented by contracts or other agreements requiring scheduled cash outlays in future periods. Amounts presented are on an undiscounted basis and include, among other things, maintenance agreements, service agreements, professional fees and employment agreements.

Long-Term Debt and Revolving Credit Facilities

At December 31, 2004, Madison River Telephone Company, LLC or its subsidiaries had outstanding borrowings totaling $421.9 million under our existing credit facilities with the RTFC. In addition, we had outstanding $198.0 million in 13¹/4% senior notes that are due in March 2010, $20.8 million under a note due to Merrill Lynch Capital Corporation and a $0.4 million miscellaneous note payable. In January 2004, a $2.3 million mortgage note payable entered into at the time of the Coastal Communications acquisition, and secured by land and buildings used in those operations, was repaid in full.

RTFC Debt Facilities

Our subsidiary, MRLTDF, is the borrower under a loan agreement with the RTFC. MRLTDF is the holding company for three of our rural telephone companies and our management company: Mebtel, Inc., Gulf Coast Services, Inc., Coastal Communications, Inc. and Madison River Management LLC. Each of these rural telephone companies and Gallatin River Holdings, LLC have provided a guaranty to the RTFC and its operating assets and revenues are subject to a first mortgage lien in favor of the RTFC.

As of December 31, 2004, MRLTDF had approximately $421.9 million in term loans outstanding with the RTFC. Of this amount, $188.3 million in term loans bear fixed interest rates that range between 5.65% and 9.0%, with a weighted average rate approximating 7.4%. The fixed interest rates expire at various times, beginning in April 2005 through August 2006, depending on the terms of the note. Upon the expiration of the fixed interest rates, the term loans will convert to the RTFC’s prevailing base variable interest rate plus a 1.0% interest rate adder. We have the ability to allow the interest rate on a term loan to remain variable or to choose a fixed rate as is then available and in effect for similar loans for any portion or all of the principal amount then outstanding on the term loan, provided the RTFC offers a fixed rate. The remaining $233.6 million in outstanding term loans have a variable interest rate of 6.85% at December 31, 2004. In total, as of December 31, 2004, our weighted average interest rate on all RTFC term debt is 7.1%.

Our loan agreement with the RTFC matures in November 2016. Quarterly principal payments through 2010 are approximately $2.3 million. Beginning in 2011, scheduled principal payments increase, ranging from $8.9 million to $17.5 million per quarter through the end of 2016. At the closing of this offering, we will repay the obligations of MRLTDF under the existing credit facilities, including accrued and unpaid interest and prepayment premiums, out of the proceeds of this offering and the new credit facilities and cash on hand.

As a condition of obtaining long-term financing from the RTFC, we purchased subordinated capital certificates that represent ownership interests in the RTFC equal to 10% of the amount borrowed. The RTFC financed the purchase of the subordinated capital certificates by increasing the balance advanced for a loan by an amount equal to the subordinated capital certificates purchased.

At December 31, 2004, we owned $42.7 million in subordinated capital certificates. The subordinated capital certificates are redeemed for cash on an annual basis, at par, in an amount equivalent to 10% of the term

loan principal that was repaid in the prior year. Therefore, at December 31, 2004, based on principal payments of approximately $4.7 million made in 2004, we have approximately $0.5 million in subordinated capital certificates eligible to be redeemed in 2005. In March 2004 and March 2003, the RTFC redeemed approximately $1.4 million and approximately $2.0 million, respectively, of our subordinated capital certificates. In connection with our repayment of outstanding obligations under the credit facilities, our remaining subordinated capital certificates will be redeemed by the RTFC.

We also receive a share of the RTFC’s net margins in the form of patronage capital refunds. Patronage capital is allocated based on the percentage that our interest payments contribute to the RTFC’s gross margins. Currently, 70% of the RTFC’s patronage capital allocation is retired with cash after the end of the year, and 30% is paid in the form of patronage capital certificates. The patronage capital certificates will be retired with cash in accordance with the RTFC’s board-approved fifteen-year rotation cycle.

In addition to the term loans, we also have two secured revolving lines of credit with the RTFC. One line of credit is a $31.0 million facility at MRLTDF and has no annual paydown provisions. This line of credit bears interest at the RTFC base rate for a standard line of credit plus 50 basis points, or 6.9% at December 31, 2004. During the first quarter of 2004, we repaid the $10.0 million we had advanced against this line of credit as of December 31, 2003. The entire $31.0 million is fully available to be drawn. The second line of credit is a $10.0 million facility that is available to Coastal Utilities, Inc. for general corporate purposes. Under the terms of this line of credit, we must repay all amounts advanced under this facility within 360 days of the first advance and bring the outstanding amount to zero for a period of five consecutive days in each 360-day period. This line of credit is fully available to be drawn and bears interest at the RTFC base rate for a standard line of credit plus 100 basis points, or 7.4% at December 31, 2004. This line of credit was initially unsecured. In April 2004, we provided the RTFC with a first lien security interest in the assets of Coastal Utilities, Inc. to secure this line of credit.

Each line of credit is scheduled to expire in March 2005. We have been notified by the RTFC that a 180-day extension of these revolving credit facilities has been granted to complete the documentation for a new secured line of credit in the amount of $41.0 million for a term ending in March 2010. Completion of the new line of credit, if necessary, is subject to satisfactory completion of documentation for the new agreements and all conditions precedent to closing being satisfied. At the closing of this offering, we will cancel these lines of credit with the RTFC.

Senior Notes

Madison River Capital, LLC is the issuer of $200.0 million in publicly traded 13¹/4% senior notes outstanding that are due in March 2010. The senior notes are callable beginning in March 2005 at 106.625%. Interest is payable semiannually on March 1 and September 1 of each year. The senior notes are registered with the SEC and are subject to the terms and conditions of an indenture. In June 2004, as permitted under the terms of our loan agreement with the RTFC, MRLTDF acquired $2.0 million in outstanding senior notes for approximately $2.1 million. The senior notes, which are held by MRLTDF, are considered to be retired and the Company recognized approximately $0.2 million as a loss from the extinguishment of long-term debt in the second quarter of 2004. At December 31, 2004, the senior notes had a carrying value of $196.2 million, which is net of a $1.8 million unamortized discount. At the closing of this offering, we will satisfy and discharge the obligations of Madison River Capital, LLC under the senior notes, including the accrued and unpaid interest and redemption premiums thereon, out of the proceeds of this offering and borrowings under the new credit facilities and cash on hand. Following the closing of this offering, we will redeem the senior notes in full in accordance with the provisions of the indenture governing the existing notes.

Other Long-Term Debt

On November 24, 2004, we entered into an agreement with the Coastal shareholders to repay the outstanding principal amount of notes owed to them, plus accrued and unpaid interest thereon, in exchange for $20.0 million in cash plus 2,000,000 newly issued Madison River Telephone Class A membership units, representing an approximately 1% ownership interest in Madison River Telephone. We financed the cash

payment and related fees and expenses utilizing borrowings under the Coastal facility. Under the Coastal facility, we advanced $20.8 million in loans that mature on May 22, 2010. Proceeds of $20.0 million were used to repay the existing outstanding notes to the Coastal shareholders, with the remaining proceeds used to pay fees and expenses related to the transaction. Interest on the Coastal facility accrues at a fixed rate of 8.4257% per annum through June 30, 2005, increasing retroactively to 13% per annum if the loans are not repaid by such time. Any accrued interest not paid in cash on that date will be capitalized and added to the outstanding balance of the loans. Thereafter, interest is payable semiannually, and at our option, can be either paid in cash or capitalized as part of the outstanding balance under the loans.

In addition, we have an outstanding note payable of $0.4 million that bears interest at 8.0% per annum and is due on demand. The principal amount and unpaid interest are due in October 2011. The note is held by Madison Dearborn Capital Partners, L.P., one of our existing sponsors. The note is unsecured and, at any time prior to the payment of the entire principal amount, the holder may convert all unpaid principal and accrued interest into Class A units in Madison River Telephone. As part of the reorganization transactions, the note will be converted into 392,610 Class A units, which will then be converted into shares of common stock in Madison River Communications pursuant to the reorganization transactions.

Interest Rates

On April 5, 2005, the fixed interest rate on one of our RTFC notes with an outstanding principal balance of $98.1 million will expire. The note, with a fixed interest rate of 9.0% prior to expiration, will convert to the RTFC’s prevailing variable base rate plus 1.0% interest rate adder, or 6.85%, using the rate in effect as of December 31, 2004. After conversion of this interest rate, our fixed rate term loans with the RTFC will total $90.1 million at a weighted average interest rate of 5.65% and our variable rate term loans with the RTFC will total $331.8 million at a variable interest rate of 6.85% using the rate in effect as of December 31, 2004.

Minority Interest in Coastal Communications, Inc.

As part of the consideration paid in the Coastal Communications, Inc. acquisition in March 2000, Madison River Telephone issued to the Coastal shareholders 300 shares of Series A stock and 300 shares of Series B non-voting common stock of Coastal Communications, Inc. in the face amount of $10.0 million and $5.0 million, respectively. The Series A and Series B stock had put and call features that were defined pursuant to the terms of a shareholders’ agreement and were exercisable by the holders and Coastal Communications, Inc. In April 2002, Madison River Telephone completed an agreement with the Coastal shareholders that, among other things, modified certain provisions of the shareholders’ agreement. Under the terms of the agreement, the Coastal shareholders exchanged certain of their equity interests in Coastal Communications, Inc. for equity in Madison River Telephone and the notes payable from Madison River Telephone that were repaid in December 2004.

Coastal Communications, Inc. redeemed 30 shares of Series A Stock retained by the Coastal shareholders for $33,333.33 per share, or approximately $1.0 million, at the closing of the transaction in April 2002. Under the terms of the amended shareholders’ agreement, the Coastal shareholders have the right to require Coastal Communications, Inc. to redeem their remaining shares of Series A stock in increments not to exceed 30 shares at $33,333.33 per share, or an aggregate value of $1.0 million, in any thirteen-month period. Accordingly, the Coastal shareholders put 30 shares of Series A stock to Coastal Communications, Inc. in June 2003 and July 2004 and, in each case, Coastal Communications, Inc. redeemed the shares for approximately $1.0 million shortly thereafter. After the redemption in July 2004, the Coastal shareholders continue to hold 90 shares of Series A stock with the next available put right for 30 shares occurring in August 2005. Under the terms of the agreement, we may at any time require the Coastal shareholders to sell their shares of Series A stock to us for a purchase price of $33,333.33. At the closing of this offering, we will repurchase the 90 remaining shares of Series A stock held by the Coastal shareholders for an aggregate purchase price of $3.0 million of the proceeds of this offering and borrowings under the new credit facilities and cash on hand.

Deferred Income Tax Contingency

During 2002, we amended certain prior year income tax returns that resulted in refunds to the Company of approximately $7.8 million. We received the refunds in 2002 and recorded them as deferred income tax liabilities. In the third quarter of 2003, the Internal Revenue Service, as part of an audit, verbally notified us that our position taken in the amended tax returns would be disallowed and in the fourth quarter of 2003, we received formal notice of such action by the IRS. The refunds impacted by this IRS notification totaled approximately $5.1 million and these amounts continue to be included in our deferred income tax liabilities. We believe that our position is appropriate under current tax laws and we intend to vigorously defend the position taken in our amended income tax returns. We continue to accrue interest expense of approximately $0.1 million quarterly related to these refunds until the issue is resolved. At this time, we cannot assure you that we will prevail in our defense of our position taken in the amended income tax returns and we are uncertain as to the amount of time it will take to resolve. If we are not successful, we may be required to repay the amounts received as refunds plus accrued interest. We believe this matter may take up to two years to resolve.

The remaining $2.7 million in refunds for 1998 amended income tax returns, which were not included in the IRS notification and for which we were advised the statute of limitations for audit adjustments had expired, were recognized as an income tax benefit in the fourth quarter of 2003. However, in June 2004, the Department of Justice filed suit against two of our subsidiaries, Gulf Coast Services, Inc. and Coastal Utilities, Inc., claiming that these were erroneous refunds of income taxes that our subsidiaries received which the United States of America is entitled to have returned. The amount of erroneous refunds being sought in the lawsuits total approximately $2.9 million. In the first quarter of 2004, as the result of certain income tax audit adjustments made related to the examination of a separate year, we paid approximately $0.9 million of these claims. Accordingly, to recognize our potential exposure under the lawsuits, we accrued the remaining $2.1 million as income tax expense during the second quarter of 2004. At the same time, we also recognized $0.4 million in interest expense related to these erroneous refunds. We believe that our position taken in the amended income tax returns is appropriate under current tax laws and we intend to vigorously defend against these claims. However, if we are not successful, we may be required to repay the amounts received as refunds plus the accrued interest and plaintiff’s costs.

Post-Transactions Liquidity, Capital Resources and Long-Term Debt

The following table summarizes our material contractual cash obligations immediately following the transactions:


	Cash Payments Due by Period (amounts in thousands)
	Total		2005		2006- 2007		2008- 2009		Thereafter
Long-term debt—principal(a)	$	455,556	$	—	$	—	$	—	$	455,556
Long-term debt—interest(b)		192,844		20,069		55,244		55,741		61,790
Operating leases(c)		7,709		1,457		1,889		1,382		2,981
Other contractual cash obligations(d)		5,110		2,134		1,361		822		793

Material contractual cash obligations	$	661,219	$	23,660	$	58,494	$	57,945	$	521,120

(a)

As of December 31, 2004, after giving effect to the transactions as if they had been consummated as of such date, $455.6 million would have been outstanding as term loans under our new credit facilities and $75.0 million would have been available for revolving borrowing under our new credit facilities.

(b)

Includes estimates of interest expense on the amounts outstanding under our new credit facilities based on scheduled principal repayments and certain interest rate assumptions.

(c)

Amount is shown net of estimated sublease income from current subleases.

(d)

New Credit Facilities

At December 31, 2004, after giving effect to the transactions as if they had been consummated as of such date, we would have had approximately $455.6 million principal amount of consolidated indebtedness, consisting of seven-year senior secured term loans under the new term loan facility portion of our new credit facilities. In addition, $75.0 million would have been available under the new revolving credit facility portion of our new credit facilities. Principal and interest payments under our new credit facilities will represent significant liquidity requirements for us. Borrowings under our new credit facilities will bear interest either at a base rate plus a margin or at LIBOR plus a margin. In addition to paying interest on the outstanding principal amount of loans under our new credit facilities, we will be required to pay a commitment fee to the lenders under the revolving portion of the new credit facilities in respect of unused commitments at a rate equal to 0.50% per annum. The new credit facilities will require us to repay loans under our new credit facilities out of excess cash flow and out of net proceeds from certain dispositions of assets, debt issuances and equity issuances and during certain periods when our total leverage ratio exceeds certain thresholds.

Our new credit facilities will contain negative covenants that limit or restrict our ability to incur debt and guarantees, create liens and further pledges, make investments, make restricted payments (subject to an exception for dividend payments), merge or sell assets, make acquisitions, change the nature of our business, prepay or repurchase subordinated debt and engage in certain transactions with affiliates. In addition, our new credit facilities will contain financial covenants that will require us to maintain a maximum total leverage ratio of not greater than 5.50 to 1.00 and a minimum fixed charge coverage ratio of not less than 2.25 to 1.00 through the end of the third fiscal quarter of 2007 and 2.00 to 1.00 thereafter. The chart below illustrates the computation of our total leverage ratio and fixed charge coverage ratio as of December 31, 2004 on an historical basis and on an as adjusted basis after giving effect to the transactions as if they had been consummated as of December 31, 2004.


	As of December 31, 2004
	Historical			As Adjusted
Total leverage ratio:
Total debt	$	639,269		$	455,556
Less: subordinated capital certificates		(42,659	)		(5,556	)
Less: cash and cash equivalents		(34,559	)

Total net debt	$	562,051		$

Adjusted EBITDA(a)	$	105,690		$	105,690

Total leverage ratio		5.32	x			x

Fixed charge coverage ratio:
Adjusted EBITDA(a)	$	105,690		$	105,690

Consolidated Cash Interest Expense(a)	$	59,034		$	26,246
Cash taxes		984			11,500

Fixed charges	$	60,018		$	37,746

Fixed charge coverage ratio		1.76	x		2.80	x

(a)

See “Description of New Credit Facilities” for a definition of Adjusted EBITDA and Consolidated Cash Interest Expense.

These restrictions could limit our ability to respond to unanticipated liquidity demands and to take advantage of business opportunities.

See “Description of New Credit Facilities” for a more detailed description of our new credit facilities.

Capital and Liquidity Requirements

Our dividend policy, our working capital needs, our debt service requirements and our capital expenditures will be funded from our cash flow from operations and our existing liquidity on-hand, including available borrowings under the revolving portion of our new credit facilities. In the near term, we expect that our primary uses of cash will include:

payments of dividends on Madison River Communications’ common stock in accordance with our dividend policy;

scheduled interest payments on our new credit facilities;

the maintenance and growth of our telephone plant and network infrastructure;

the maintenance, upgrade and integration of operating support systems and other automated back office systems;

required federal and state income taxes;

sales and marketing expenses;

corporate overhead; and

personnel and related expenses.

As a result of the dividend policy that our board of directors will adopt upon completion of this offering, we currently intend to pay an initial dividend of $ per share on or about , 2005 and to continue to pay quarterly dividends at an annual rate of $ per share for the first full year following the closing of this offering, subject to various restrictions on our ability to do so. The cash requirements of the expected dividend policy are expected to be funded from our cash flows from operations. We will not be able to borrow under our new credit facilities to fund dividends. In determining that our operations will generate sufficient cash flows to fund our dividend policy, we reviewed and analyzed numerous factors, including assumptions regarding future capital expenditures, interest expense, taxes and other matters. The factors we reviewed and the assumptions we made are discussed in detail under “Dividend Policy and Restrictions.” We believe that our dividend policy will significantly limit, but not preclude, our ability to pursue growth out of cash generated by operations. If we pay dividends at the level currently anticipated under our dividend policy, we expect that we would need additional financing to fund significant acquisitions or to pursue growth opportunities requiring capital expenditures significantly beyond our current anticipated capital expenditure requirements. Sources of additional financing to fund significant acquisitions or growth opportunities may include, subject to the terms of our new credit facilities, including any amendment or waiver thereof, public or private sales of equity, including common stock, or debt securities, additional bank borrowings, including under the revolving portion of our new credit facilities, and sales of non-strategic assets. Any debt service requirements or dividend requirements, as the case may be, attributable to any such additional financing source will represent an additional liquidity requirement for us. There can be no guarantee that these additional financing sources will be available on acceptable terms or at all.

We currently estimate that capital expenditures in 2005 to be approximately $12.8 million. For 2004, our capital expenditures were approximately $14.6 million, which included approximately $2.6 million in capital expenditures to replace certain telephone and plant equipment, primarily our transmission and distribution facilities used to serve the coastal areas of our RLEC operations in Alabama, as a result of damages from Hurricane Ivan. For the years ended December 31, 2003 and 2002, our capital expenditures were approximately $12.2 million and $12.3 million, respectively. Our use of cash for capital expenditures in 2004, 2003 and 2002 was significantly less than we have incurred in prior years. This is a result of several factors. First, we invested a significant amount in capital additions during 2000 and 2001 to build-out and enhance our telephone plant and network facilities in our markets. Absent major changes in the technology that we employ, we believe that we have facilities in place capable of providing a high level of service to our customers without significant alterations or enhancements. A large portion of our capital expenditures in 2004 have been directed toward

maintaining our existing facilities. Second, we have experienced slower growth in recent quarters for our RLEC operations including losses in the number of voice access lines we serve. In addition, we have not expanded our edge-out services into any new markets, nor do we have any current intentions to expand into new markets, and our existing edge-out operations have not demonstrated any growth as part of our business plan to generate sustainable cash flow. Therefore, there is minimal demand currently to expand our telephone plant or network facilities. In 2004 and 2005, the demand for use of capital in the expansion of our telephone plant and network facilities has been assessed and will continue to be assessed, in part, using factors such as the increase in demand for access lines and communications services and the introduction of new technologies that will provide an appropriate return on capital invested. We recently entered into an agreement with the National Rural Telecommunications Cooperative that will allow us to offer DIRECTV satellite television service to our customers. This agreement will not require us to make any significant capital expenditures to provide this service. We anticipate that introduction of this product offering will commence by the second quarter of 2005.

Based on our business plan, we currently project that cash and cash equivalents on hand, available borrowings under our new credit facilities and our cash flow from operations will be adequate to meet our foreseeable operational liquidity needs, including funding our working capital deficit, for the next 12 months. However, our actual cash needs may differ from our estimates, and those differences could be material. Our future capital requirements will depend on many factors, including, among others:

the accuracy of our estimates for capital needed to make hurricane-related repairs and restoration of services;

the extent to which we consummate any significant additional acquisitions;

our success in maintaining a net positive cash flow in our edge-out operations;

the demand for our services in our existing markets;

our ability to acquire, maintain, develop, upgrade and integrate the necessary operating support systems and other back office systems; and

regulatory, technological and competitive developments.

We may be unable to access the cash flow of our subsidiaries since certain of our subsidiaries are parties to our new credit facilities or other borrowing agreements that restrict paying dividends or making intercompany loans and investments, and those subsidiaries are likely to continue to be subject to such restrictions and prohibitions for the foreseeable future. In addition, future agreements that our subsidiaries may enter into governing the terms of indebtedness may restrict our subsidiaries’ ability to pay dividends or advance cash in any other manner to us. Our subsidiaries’ ability to pay dividends or make distributions to us is also subject to the laws of their jurisdiction of incorporation.

To the extent that our business plans or projections change or prove to be inaccurate, we may require additional financing or require financing sooner than we currently anticipate. Sources of additional financing may include commercial bank borrowings, including additional borrowings under our new credit facilities, sales of non-strategic assets, vendor financing or the private or public sales of equity and debt securities. We cannot assure you that we will generate sufficient cash flow from operations in the future or that future borrowings or other financings will be available to us in amounts sufficient to provide adequate working capital, service our indebtedness, make anticipated capital expenditures or pay dividends on our common stock. Failure to obtain adequate financing, if necessary, could require us to significantly reduce our operations or level of capital expenditures which could have a material adverse effect on our projected financial condition or results of operations.

Critical Accounting Estimates

Accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties. In making these estimates, we considered various assumptions and factors that will differ from the

actual results achieved and will need to be analyzed and adjusted in future periods. These differences may have a material impact on our financial condition, results of operations or cash flows.

Allowance for Uncollectible Accounts

We evaluate the collectibility of our accounts receivable using a combination of estimates and assumptions. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us, such as a bankruptcy filing or substantial down-grading of credit scores, we record a specific allowance against the customer’s account based on our estimate of the net realizable value of what we believe can be reasonably collected. For our other accounts receivable, we estimate the net realizable value of the accounts based on a review of specific customer balances, our trends and experience with prior receivables, the current economic environment and the length of time the receivables are past due. If circumstances change, we review the adequacy of the allowance and our estimates of the net realizable value. At December 31, 2004, our total allowance for uncollectible accounts for both our accounts receivable and our receivables, primarily from interexchange carriers, was $2.7 million. If our estimate was understated by 10%, the result would be a charge of approximately $273,000 to our operations.

Revenues

We recognize revenues from universal service funding and charges to interexchange carriers for switched and special access services. In certain cases, our rural telephone companies participate in interstate revenue and cost sharing arrangements, referred to as pools, with other telephone companies. These pools are managed by NECA, which also provides administrative functions, such as the filing of the interstate access tariffs in which our operating companies participate. The NECA pools are funded by charges made by participating companies to customers. The revenue we receive from participation in NECA pools is based on our actual cost of providing the interstate services. Such costs are not precisely known until after year-end and special jurisdictional cost studies are completed. Cost estimates may be updated from time to time during the year, based on updated estimates of costs determined from review of actual costs for a portion of the year. Because our NECA pool revenues are based upon our costs, revenues are also necessarily calculated during the year based on our cost estimates until final cost studies are completed. Final cost studies are generally completed during the second quarter following the year. For 2003 and 2002, the variance between our estimated revenues and our actual revenues, calculated based on the final cost studies, was less than 5%. Detailed rules for cost studies and participation in NECA pools are established by the FCC and codified in Title 47 of the Code of Federal Regulations.

Goodwill and Long-Lived Assets

Goodwill represents the excess of the purchase price of our acquisitions over the fair value of the net assets acquired and has an indefinite life. In accordance with the provisions of SFAS 142, we test goodwill for impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred, such as significant underperformance by a reporting unit relative to its historical or its projected future operating results, significant regulatory changes that would impact the financial condition or future operating results of the reporting unit or significant adverse industry or economic trends. In performing our review of goodwill under the terms of SFAS 142, we make certain estimates regarding the implied fair value of our individual operating companies where goodwill is recorded. Under SFAS 142, Step 1 in determining whether an impairment has occurred requires the valuation of the respective reporting unit, which we estimate using undiscounted cash flows and comparative market multiples when available and appropriate. In completing our analysis of the carrying value of goodwill, we rely on a number of factors, including actual operating results, market data and future business plans.

If our analysis indicates that goodwill is impaired, measuring its impairment requires a fair value estimate of each identified tangible and intangible asset per SFAS 142’s Step 2 evaluation. Step 2 requires the calculation of the implied fair value of goodwill by allocating the fair value of the reporting unit to its tangible and intangible

net assets, other than goodwill. The remaining unallocated fair value represents the implied fair value of the goodwill. If the carrying value of the goodwill exceeds its implied fair value, an impairment charge is recorded for the difference. If the implied fair value of goodwill exceeds its carrying amount, there is no impairment. See Note 1 to the consolidated financial statements for further discussion regarding goodwill.

We review the carrying value of our long-lived assets, primarily our fiber network, in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”), to determine if the carrying value of these assets has been impaired. Our review on the carrying value of long-lived assets is conducted on an annual basis or more frequently if events or circumstances indicate that an impairment may exist. In accordance with the terms of SFAS 144, we estimate the undiscounted future cash flows to be generated by our long-lived assets and compare them to the carrying value of the respective assets. If the carrying value of the fiber network exceeds the undiscounted expected future cash flows, an impairment exists for the amount by which the carrying value of the asset exceeds its estimated fair value. Our estimate of the fair value of the long-lived asset would be made using the best information available, which may include among other things, quoted market prices, prices for similar assets and liabilities or present value techniques as allowed under SFAS 144.

Recent Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”), the primary objective of which is to provide guidance on the identification of entities for which control is achieved through means other than voting rights, defined as variable interest entities, or VIEs, and to determine when and which business enterprise should consolidate the VIE as the “primary beneficiary”. This new consolidation model applies when either (1) the equity investors, if any, do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without additional financial support. In addition, FIN 46 requires additional disclosures. This interpretation applies immediately to VIEs created after January 31, 2003 and to VIEs in which an enterprise obtains an interest after that date. We have not obtained an interest in any VIE’s since January 31, 2003. We determined that an unconsolidated company in which we hold an investment that is accounted for under the equity method is a VIE under FIN 46 but we are not the primary beneficiary of the VIE. According to FASB Interpretation No. 46 (revised December 2003), entities shall apply the Interpretation only to special-purpose entities subject to the Interpretation no later than December 31, 2003 and all other entities no later than March 31, 2004. Special-purpose entities are defined as any entity whose activities are primarily related to securitizations or other forms of asset-backed financings or single-lessee leasing arrangements. Given that we have no significant variable interests in special-purpose entities, the Interpretation was effective March 31, 2004.

In December 2003, the FASB revised and re-released FIN 46 as “FIN No. 46R”. The provisions of FIN 46R are effective for periods ending after March 15, 2004. The adoption of FIN 46R did not have a material impact on our financial position or results of operations.

On January 1, 2003, we adopted Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (“SFAS 143”). SFAS 143 addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the related asset retirement costs. SFAS 143 requires that companies recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred and capitalize the expected retirement costs as part of the book value of the long-lived asset. We have not previously had a legal obligation to remove assets and therefore, have not accrued a liability for anticipated removal costs. As a result, the adoption of SFAS 143 did not have a material effect on our financial statements.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity (“SFAS 150”). SFAS 150 requires certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity to be classified as liabilities. Many of these instruments previously may have been classified as equity or

temporary equity and as such, SFAS 150 represents a significant change in practice in the accounting for a number of financial instruments, including mandatorily redeemable equity instruments. SFAS 150 was effective for public companies for all financial instruments created or modified after May 31, 2003, and to other instruments at the beginning of the first interim period beginning after June 15, 2003. We adopted SFAS 150 during the third quarter of 2003. Upon adoption, we reclassified the redeemable minority interest on our balance sheet from a mezzanine level presentation between liabilities and equity to current and long-term liabilities. Beyond the reclassification of redeemable minority interest, the adoption of SFAS 150 did not have a material impact on our results of operations, financial position or cash flows.

Quantitative and Qualitative Disclosures About Market Risk

Although we invest our short-term excess cash balances, the nature and quality of these investments are restricted under our internal investment policies. These investments are limited primarily to U.S. Treasury agreement and agency securities, certain time deposits and high quality repurchase agreements and commercial paper. We do not invest in any derivative or commodity type instruments. Accordingly, we are subject to minimal market risk on our investments.

Our long-term secured debt facilities with the RTFC mature in 2016. As of December 31, 2004, our fixed rate secured debt with the RTFC was $188.3 million at a weighted average rate of 7.4%. The remaining fixed rates on these term loans expire beginning April 2005 through August 2006. Upon the expiration of the fixed interest rates, these term loans will convert to the RTFC’s prevailing base variable interest rate plus a 1.0% interest rate adder. We have the ability to allow the interest rate on a term loan to remain variable or to choose a fixed rate as is then available and in effect for similar loans for any portion or all of the principal amount then outstanding on the term loan, provided the RTFC offers a fixed rate. Our other fixed rate long-term debt consists of our senior notes that have a stated fixed rate of 13.25%, the Coastal note facility that has a fixed rate of approximately 8.43% and a miscellaneous note for $0.4 million bearing an 8.0% fixed interest rate. As of December 31, 2004, we also had $233.6 million in term loans with the RTFC that accrue interest at a variable rate of 6.85%. A one percent change in the underlying interest rates for this variable rate debt would have an impact of approximately $2.3 million on interest expense on an annual basis. As of December 31, 2004, our weighted average interest rate on our fixed rate and variable rate secured debt with the RTFC was approximately 7.1% and our weighted average interest rate on all outstanding long-term debt was 9.0%.

We anticipate that, immediately following consummation of the transactions, our primary market risk exposure will consist of interest rate risk relating to the variable rate borrowings under our new credit facilities. Borrowings under the new credit facilities will be outstanding at either a base rate plus a margin or LIBOR plus a margin. Depending on the composition of borrowings under our new credit facilities, we may be vulnerable to changes in interest rates. The credit agreement governing our new credit facilities will require that we employ hedging strategies such that not less than 50% of the loans outstanding under our new term loan facilities carries a fixed rate of interest for three years following consummation of the transactions. We may also consider entering into voluntary arrangements to hedge additional portions of our interest rate exposure, with the objective of reducing the financial impact on us of fluctuations in market interest rates, using arrangements such as interest rate swaps. Based on what we expect to be our outstanding indebtedness upon completion of the transactions, and without giving effect to any interest rate protection measures we may adopt, our potential loss in terms of pre tax earnings and cash flows from a 1% increase in interest rates would be approximately $ million on an annual basis, attributable to the impact of the interest rate increase on our variable rate borrowings.

INDUSTRY OVERVIEW

Industry and market data used throughout this prospectus were obtained from our own research, studies conducted by third parties and industry and general publications published by third parties. In some cases, these data are management estimates based on our industry and other knowledge. Neither we nor the underwriters have independently verified market and industry data from third-party sources. While we believe internal company estimates are reliable and market definitions are appropriate, they have not been verified by any independent sources.

Industry Participants

Industry participants include both incumbent and competitive local exchange carriers. The local exchange industry is comprised of a few large, well-known companies, including the four regional Bell operating companies, several mid-sized companies like us, and hundreds of relatively small independent companies. Incumbent local exchange carriers were the providers of local service in their service territories prior to the passage of the federal Telecom Act and have generally retained local service obligations. The Telecom Act, which amended the Communications Act, substantially changed the regulatory structure applicable to the telecommunications industry, with a stated goal of stimulating competition for virtually all telecommunications services, including local telephone service, long distance service and enhanced services. Competitive local exchange carriers have emerged as competing providers of local service since the passage of the Telecom Act. See “Regulation—Federal Regulation.”

Large incumbent local exchange carriers generate the vast majority of the nation’s local exchange revenues and provide a majority of the nation’s access lines. According to the FCC, total local exchange revenues in 2003 were over $123 billion. A majority of the mid-sized and small incumbent local exchange carriers operate in rural areas and are referred to as rural local exchange carriers. Rural local exchange carriers generally experience stable revenues and predictable cash flows due to their stable customer bases and limited wireline competition. Compared to urban operators, rural local exchange carriers, which serve rural communities and small cities and towns, generally have limited wireline competition because of the lower customer density in their service areas and the high residential percentage of their subscriber base. In addition, rural local exchange carriers benefit from a favorable regulatory environment which limits the requirement to resell elements of their networks to competing carriers and a universal service fund which compensates rural local exchange carriers to the extent they have to offset the higher costs of operating in rural areas.

Rural local exchange carriers owned by families or small groups of individuals face technical, administrative and regulatory complexities of the local telephone business which challenge the capabilities of local management. We believe that the owners of many of these small companies will consider selling their businesses. In addition, several larger, urban oriented, telephone companies have sold, or are considering selling, a portion of their rural telephone exchanges in order to focus on major metropolitan operations that generate the majority of their revenues. As a result, we believe that there will be further acquisition opportunities for rural telephone operations.

Interexchange carriers generally provide long distance services between telephone users, often using local exchange carriers networks to originate and terminate calls. These interexchange carriers operate interconnected networks that comprise, together with the local exchange carriers, a system referred to as the public switched telephone network. Through the public switched telephone network, any user of switched telecommunications services has the ability to place a call to any other switched telecommunications user in the nation. Other providers, such as wireless carriers, and technological developments, such as digital microwave, satellite and VOIP, offer alternatives to traditional telecommunications services.

BUSINESS

Our Business

Overview

We operate rural telephone companies that serve business and residential customers in Alabama, Georgia, Illinois and North Carolina. We offer our customers a variety of telecommunications services, including local and long distance voice services and Internet access services. Our rural telephone companies have been serving their local communities for over 50 years.

We were founded with the goal of acquiring, integrating and improving operations at rural telephone companies. Since 1998, we have acquired our four rural telephone companies. With these acquisitions, we purchased established businesses with stable cash flows, governmental authorizations and certifications in place, operational support systems, experienced management and key personnel and technologically advanced facilities. We believe our disciplined approach to operations has allowed us to improve the operations at each of our acquired rural telephone companies.

Our rural telephone companies benefit from limited competition and a favorable regulatory environment, which we believe leads to stable operations. Competition is typically limited in areas served by rural telephone companies because they primarily are sparsely populated and rural, with predominantly residential customers. Accordingly, the cost of operations and capital investment requirements for new entrants is high. At the same time, existing state and federal regulations permit us to charge rates that enable us to recover our operating costs plus a reasonable rate of return on our invested capital (as determined by relevant regulatory authorities). In addition, we benefit from federal policies establishing the principle that rates in rural areas should be reasonably comparable to rates in urban areas. These policies have resulted in state and federal universal service funding payments to assist in the recovery of costs in high cost rural areas, such as those served by our operating companies. For the years ended December 31, 2004 and December 31, 2003, 6.6% and 6.2%, respectively, of our total revenues were attributable to such payments.

Madison River Communications was formed as a Delaware corporation in December 2003 to hold the existing business of Madison River Telephone. Madison River Telephone currently serves as the ultimate parent of our operating subsidiaries. We will consummate the reorganization transactions in connection with the completion of this offering. Pursuant to the reorganization transactions, Madison River Communications will become the successor to Madison River Telephone. The reorganization transactions will not affect our operations, which we will continue to conduct through our operating subsidiaries. See “The Transactions.”

As of December 31, 2004, we had 233,307 connections in service consisting of 193,092 voice access lines and 40,215 DSL and high-speed data connections.

An important part of our operating strategy for acquisitions is to maintain, to the extent possible, the local identity, customer service and management presence of the acquired company. With the exception of Gallatin River, our rural telephone companies continue to operate with the same corporate identity by which they were recognized before the acquisition. The exchanges and assets that comprise Gallatin River were acquired from Sprint and, therefore, were renamed. The responsibility for the operations of each rural telephone company is directed by an experienced, local management team. We have consolidated certain functions, including the purchase of certain products and services for the benefit of all of our rural telephone companies, at Madison River Management, LLC, or Madison River Management, in an effort to provide efficiencies and cost savings that could not be gained by each rural telephone company acting individually. Madison River Management provides certain management services to each of our operating companies, including: personnel and payroll management; finance, accounting and tax services; legal, regulatory and compliance advice; and information technology, data processing and engineering services. The services are performed at a set annual rate which is negotiated in large part based on the size of the operating company and the services to be provided. Our rural telephone companies pay Madison River Management aggregate fees of $20.8 million per year for these services. In addition, our rural telephone companies share information between respective management teams regarding

process improvements that have been implemented and best practices that are employed to leverage the knowledge developed by each rural telephone company and further the overall improvement in operations.

Our Strengths

We believe we are distinguished by the following competitive strengths, each of which will contribute to produce stable cash flows:

Long-standing local operations with limited competition. As a locally-managed and operated rural telephone company, active in our markets for over 50 years, we believe we have a reputation for providing high quality telecommunications services. We feel we play an integral role in the communities we serve. We believe our thorough knowledge of the markets we operate in, our established operations and our reputation for a high standard of service give us a competitive advantage.

Proven track record of service growth. We have succeeded in consistently growing the services used by our customers by offering an integrated bundle of local, long-distance and Internet and enhanced data services as well as other enhanced services such as call waiting and caller identification. For example, our DSL service penetration as a percentage of residential primary lines in our service area was 32.2% at December 31, 2004 compared to the national average of approximately 12.0% of total households at such time. As of December 31, 2004, 56.0% of our local service customers used our long distance service, up from 52.0% at December 31, 2003. The services we provide can be purchased separately but more often are included in a package with selected other service offerings, often referred to as bundling. We believe that a fully-integrated bundle of services increases penetration of new and existing services and customer loyalty.

Technologically advanced and scalable network infrastructure. We have a technologically advanced network capable of delivering a full suite of telecommunications services to our customers. We are currently able to offer DSL to approximately 97% of our customers and our network is capable of supporting future generations of broadband services with minimal investment in physical infrastructure. We currently provide high-speed Internet service at multi-megabit speeds. We are capable of providing multi-megabit service to approximately 86% of our customers.

Disciplined approach to operations. We bring a disciplined approach to operations, including a strict budgeting process and providing our employees with incentives to meet operating targets and improve cash flows. We believe our disciplined approach to operations allows us to acquire rural telephone companies and improve their operations.

Successful track record of acquisitions and integration. Since 1998, we have acquired and integrated four rural telephone companies that were established businesses with stable cash flows, governmental authorizations in place, operational support systems, experienced personnel and technologically advanced facilities. We believe we have successfully integrated these telephone companies within our organization and have been able to improve the business and operations at each of these acquired telephone companies.

Experienced and proven management team. We have an experienced management team, averaging over 30 years of experience in telecommunications, network engineering and operations, customer care, sales and marketing, project development, regulatory management and finance. We believe our management team has successfully demonstrated the ability to acquire and integrate strategic assets into our existing operations. Further, we believe the skill and experience of our management team continues to provide significant benefits to us as we evaluate opportunities to enhance and expand our service offerings and grow our rural telecommunications business.

Geographically diversified markets. Our rural telephone companies provide local and long distance services and high-speed data and Internet access primarily in the states of Alabama, Georgia, Illinois and North Carolina. Operating in multiple states limits our exposure to regulatory or operational risk in any one state. We are certified to provide intrastate local, toll and access services in the states of Alabama, Georgia,

Illinois, North Carolina, Kentucky, South Carolina, Tennessee, Florida, Mississippi, Louisiana and Texas.

Our Strategy

Our objective is to maintain and strengthen our position as a leading provider of telephone services in our target markets in the Southeast and Midwest. The key elements of our strategy include:

Continuing to improve operating efficiencies by providing centrally managed resources and sharing best practices across our operations. We have centralized many of our business and back office functions, including network management, network operations, information technology, procurement, regulatory, finance, accounting, legal and human resources, resulting in a more efficient utilization of resources. By providing these centrally managed resources to our operating companies, we allow our local management and customer service functions to focus on their business locally and better serve our customers in a cost-effective manner. We intend to continue to identify and develop more cost efficient methods of managing our business processes, including sharing and implementing best practices across our operations, to provide a higher level of service to our operating companies and our customers.

Taking a disciplined approach to capital expenditures. We purchased established telephone companies with operational support systems and technologically advanced network facilities. Furthermore, we invested significant amounts during 2000 and 2001 to build-out and enhance our telephone plant and network facilities in our markets. Absent major changes in technology, we believe that our network facilities are capable of providing a high quality, full suite of telecommunications services to our customers without significant alterations or enhancements. We currently estimate that capital expenditures in fiscal 2005 will be approximately $12.8 million. We will continue to maintain a disciplined approach to making capital expenditures. We review each element of our business to determine possible capital expenditure programs and then prioritize them based on a return on investment model.

Improving on our competitive position through superior service offerings by continuing to add new services and providing bundled offerings. We focus on delivering superior, high quality services to our customers. We were the first company in our markets to offer high-speed Internet access and regularly introduce new services to our customers. We also were the first company to offer a bundle in our markets which offers, for a single price, unlimited use of local telephone service, long distance service, high-speed DSL service for Internet access as well as custom calling features, including caller identification and voicemail. We intend to continue to add new services and provide bundle offerings which we believe will allow us to continue to build upon our strong competitive position.

Expanding market position through knowledge of local markets and strong customer retention. We have dedicated and experienced senior managers and customer service representatives located in each region in which we operate with an extensive knowledge of the dynamics of their specific markets and the needs of our customers. In each of our markets, we maintain business offices that provide our customers the opportunity to meet personally with our local management, customer service and sales representatives and pay their bills directly. We intend to build upon our local presence to continue to produce better than industry average growth in customer connections and strong customer retention.

Growing through selective acquisitions. We believe that we can continue to add value to our business by selectively acquiring rural telecommunication assets and effectively integrating them into our organization. In evaluating acquisition opportunities, we apply rigorous selection criteria which include, among other things, the opportunity to improve cost structure, margins and operations; current and historical operating performance; geographic location of network; market demographic profile; quality of infrastructure and facilities; regulatory environment; and outlook, integration and management.

Products and services

We seek to capitalize on our local presence and network infrastructure by offering a full suite of integrated communications services in voice, high-speed data, fiber transport, Internet access and long distance services, as well as value-added features such as call waiting, caller identification, voicemail and conference bridge services, all on one bill. Set forth below are brief descriptions of the communications services we provide to our customers in our markets:

Local voice services

We provide basic local voice telephone service to residential and business customers in our franchised territories. Except for customers of Gallatin River, our customers are charged a flat monthly fee for the use of this service. Our Gallatin River customers pay a flat fee plus local usage pursuant to a local measured service type tariff. We also offer our customers a variety of custom calling features, such as voicemail, caller identification, call waiting and call forwarding. These custom calling features are bundled into packages with other services and sold at a discount as well as being offered separately. We charge a flat monthly fee for these custom calling features that will vary depending on the bundled offering and types of services selected. As of December 31, 2004, we had 181,212 voice access lines, comprised of 120,649 residential access lines and 60,563 business access lines, in our franchised territories. In addition, we provided the following custom calling features to customers: 52,696 voicemail accounts, 71,690 caller identification accounts, 69,358 call waiting accounts and 59,345 call forwarding accounts.

Also included in our local voice service revenues are network access revenues. Network access revenues are earned for the origination and termination of long distance calls, and usually involve more than one carrier providing long distance service to the customer. Long distance calls are generally billed to the customer originating the call. Therefore, a mechanism is required to compensate each carrier involved in providing services related to the long distance calls such as the origination and termination of the long distance call. This mechanism is referred to as a network access charge and revenues from these charges are derived from charges to the end user of the service as well as billings to interexchange carriers for the use of our facilities to access our customers. In addition, contributions received from our participation in universal service funding support mechanisms are included as part of network access revenues. Universal service funding mechanisms provide support for the capital invested in communications infrastructure to promote universal telecommunications services at affordable rates for rural customers. For the years ended December 31, 2004 and December 31, 2003, local voice service revenues represented 67.3% and 68.1%, respectively, of our total revenues.

Long distance voice services

We provide long distance voice services under our own brand names in each of our franchised territories. Long distance voice revenues are earned as our long distance customers make calls. The charges are based on the length of the calls and the rate charged per minute unless offered under one of our bundled packages at a fixed price. In addition, some customers pay a fixed minimum monthly charge for our long distance service independent of the actual calls made. We bundle our long distance service with other custom calling features to offer an attractively priced option to our customers. We have resale agreements with Global Crossing and Qwest Communications Corp. to provide long distance transmission services to our customers. The current resale agreement with Global Crossing has a $100,000 minimum monthly volume commitment which expires in April 2005. The Qwest Agreement expires in February 2007 and has no monthly minimum volume commitment. As of December 31, 2004, we had 101,469 long distance accounts in our franchised territories. For the years ended December 31, 2004 and December 31, 2003, long distance voice service revenues represented 7.7% and 8.4%, respectively, of our total revenues.

Internet and enhanced data services

We provide DSL services and dial-up Internet services in our franchised territories. Our DSL service provides high-speed access to the Internet at multi-megabit upload and download speeds. Our DSL services are purchased by both residential and business customers for a monthly fee. Currently, we are capable of providing

DSL service to approximately 97% of our customers. Our dial-up Internet service provides customers, primarily residential customers, a connection for unlimited access to the Internet over their existing phone lines for a flat monthly fee. Customers using our Internet access services have the ability to establish an email account and to send and receive email. We offer our customers these services as part of discounted packages that include other services and features. As of December 31, 2004, we had 39,562 DSL connections in service and 15,593 dial-up Internet access subscribers in our franchised territories. For the years ended December 31, 2004 and December 31, 2003, Internet and enhanced data service revenues represented 10.7% and 8.7%, respectively, of our total revenues.

Edge-out services

In markets near our franchised territories, we provide local, long distance and high-speed data services primarily to medium and large businesses. In addition, as part of our edge-out services, we maintain and market a fiber transport and Internet egress business to customers primarily in the Southeast region of the United States. In our edge-out markets, we provided basic local exchange services to 11,880 voice access lines and 653 high-speed data connections as of December 31, 2004. Approximately 59.4% of our edge-out customers take our data product. In addition, we provide data and Internet related services to our customers primarily using asynchronous transfer mode, or ATM, switches distributed strategically throughout our network, enabling customers to use a single network connection to communicate with multiple sites throughout our fiber optic network and egress to the Internet. Our transport business customers are other interexchange carriers and major accounts and we provide services such as intercity transport, including both high capacity and optical wavelength transport, metro access services and Internet egress services at a DS-3 level and above. For the years ended December 31, 2004 and December 31, 2003, edge-out service revenues represented 6.1% and 7.5%, respectively, of our total revenues.

Telephone directory and other miscellaneous revenues

Our telephone directory and other miscellaneous revenues consist primarily of revenues from advertising sold in our telephone directories, revenues earned from construction of telecommunications facilities for customers, revenues earned from sales of telephone equipment to business customers and revenues earned from other carriers for billing their long-distance customers for long-distance calls and collecting the amounts due.

Our directory service provides telephone directories in our franchised territories that consist of residential and business white and yellow page listings and advertisements. We currently produce nine different directories in our service areas. We provide this service through third-party contractors who pay us a percentage of revenues realized from the sale of advertising placed in these directories.

For certain large customers, we earn revenues from construction of certain telecommunication facilities designed for their specific use. We are a reseller of telephone equipment, such as telephone systems and handsets, primarily to business customers. As part of this service, we provide installation and support to our customers including maintenance under contract agreements for fees based on the level of services provided. For the years ended December 31, 2004 and December 31, 2003, telephone directory and other miscellaneous revenues represented 8.2% and 7.3%, respectively, of our total revenues.

We are currently assessing the potential benefits of adding video services to the suite of products we offer to our customers. Since we are early in the planning process for this product offering, at this time we are not certain what types of video services we may offer, if any, or what types of technology we may use to deliver these services to our customers.

Our Markets

Our franchised territories are predominantly in rural areas and small towns and cities. We are the incumbent provider of basic telephone services in these markets. At December 31, 2004, we served 181,212 voice access lines in service, of which approximately 67% were residential and 33% were business in our franchised territories. We believe our markets have demonstrated the need and potential for a provider of a full range of

communications solutions. We strive to be the service provider of choice for our customers in our franchised territories by providing a full suite of integrated communications services in local and long distance voice, high-speed data, Internet access and custom calling features.

We have dedicated and experienced senior managers and customer service representatives located in each region in which we operate with an extensive knowledge of the dynamics of their specific markets and the needs of our customers. In each of our markets, we maintain business offices that provide our customers the opportunity to meet personally with our local management, customer service and sales representatives and pay their bills directly.

Our four rural telephone companies, their location, date acquired and total number of voice access lines and DSL connections in service in their franchised territories at December 31, 2004 are:


Company	Location	Date Acquired	Connections at December 31, 2004
Mebtel, Inc.	Mebane, North Carolina	January 1998	14,597
Gallatin River Communications, LLC	Galesburg, Illinois	November 1998	83,665
Gulf Telephone Company	Foley, Alabama	September 1999	71,312
Coastal Utilities, Inc.	Hinesville, Georgia	March 2000	51,200

Sales and marketing

Our marketing approach emphasizes customer oriented sales, marketing and service with a local presence. In our franchised territories, we market our products primarily through our customer service and sales representatives supported by direct mail, bill inserts, newspaper advertising, website promotions, public relations activities and sponsorship of community events. Best sales practices are shared amongst our rural telephone companies. In each of our markets, we maintain business offices that allow our customers the opportunity to pay their bills directly or meet personally with our customer service and sales representatives. Our customer service and sales representatives are well trained and earn incentive compensation to promote sales of services to customers that meet their unique needs. In each rural telephone company, we also have quota-carrying outside sales representatives that market to businesses by offering focused, customized proposals.

The services we provide can be purchased separately but more often are included in a package with selected other service offerings, often referred to as bundling, and sold at a discount. Our sales and marketing strategy for our operations in our franchised territories focuses on the bundling of services and the benefits it provides to our customers. We believe that a fully-integrated bundle of services maximizes our opportunity to increase penetration of new and existing services and reduces our risks of losing customers to increasingly aggressive competitors. We feel that the convenience and simplicity of a single provider and a single bill, in addition to the cost savings, is highly valued by our customers. Because of the convenience a bundle offers, we believe customers are more satisfied and less likely to select other vendors as their telecommunications provider.

In 2003, we introduced a residential bundled offering in each of our markets which we have branded as our “No Limits” package. Our results show that the No Limits package has been successful in increasing penetration rates in services such as DSL and long distance. Many of our existing customers selecting the No Limits package are new DSL subscribers and long distance customers and this has led to an overall increase in our monthly average revenue per unit for a subscriber of the bundle of approximately $18.

The No Limits bundle is marketed to our residential customers at approximately $85 per month, with the price varying slightly by location. We believe our pricing points for the No Limits package is at a level equal or better than packages offered by cable, wireless, and interexchange competitors in our markets. The No Limits package offers:

unlimited local telephone service;

unlimited nationwide long distance;

unlimited use of our most popular custom calling features including caller identification and voicemail; and

unlimited use of our high-speed DSL service for Internet access.

We also employ marketing campaigns to systematically move customers from our dial-up Internet service to DSL and from purchasing single services to purchasing bundled options like the No Limits package. Because of the convenience a bundle offers, we believe customers are more satisfied and less likely to seek other vendors for their voice and data services.

In our edge-out services, our sales and marketing group consists of an agent liaison manager for each of our three edge-out operating regions that work with 28 companies authorized as agents to market our services. In addition, two quota-carrying outside sales representatives for Gallatin River in Illinois also market edge-out services. Our agents and our direct sales force market our services to medium and large businesses. These sales forces make direct calls to prospective and existing business customers, conduct analyses of business customers’ usage histories and service needs, and demonstrate how our service package will improve a customer’s communications capabilities and costs. Our network engineers work closely with our sales representatives to design service products and applications, such as high-speed data and wholesale transport services, for our customers. For our existing customer base, our Client Based Marketing group handles contract renewals and upgrades. We divide our account types between General Business and Major Accounts. General Business customers generally have under 100 access lines. Major Account business customers generally have more than 100 access lines and/or requirements for high capacity data transport and access.

We serve our edge-out markets predominantly from our established operations in Mebane, North Carolina and Pekin, Illinois. We also have sales and operations facilities in New Orleans, Louisiana that are managed by our rural telephone company in Foley, Alabama. Our local offices are primarily responsible for coordinating service and customer premise equipment installation activities. Our technicians survey customer premises to assess building entry, power and space requirements and coordinate delivery, installation and testing of equipment.

We believe that our customers value our “single point of contact” for meeting their telecommunications needs as well as our ability to provide a fully integrated portfolio of services. Our ATM-based services are fully monitored for service performance by systems in our network operations center, enabling us to provide preventative as well as corrective maintenance 24 hours a day, 365 days a year.

We seek to maintain and enhance the strong brand identity and reputation that each of our rural telephone companies enjoys in its communities. We believe this provides us with a competitive advantage. For example, in each of our major areas of operation, we market our products and presence through our local brand names, Mebtel Communications, Gallatin River, Gulf Telephone Company and Coastal Utilities. As we market new services, or reach out from our established markets, we will seek to use our brand identities to attain increased recognition with potential customers. In our edge-out markets, we are building and enhancing our brand identity as Madison River Communications.

Network

We offer facilities-based services in each of our markets. Our fully integrated telecommunications network is comprised primarily of ATM core switches, capable of handling both voice and data, and time division modulation digital central office switches and our packet network used for DSL services that reach approximately 97% of our customers in our franchised territories. Our network also includes approximately 3,600 route miles of local and long-haul fiber optic network predominately based in the southeastern United States. We currently own predominantly all of our network facilities in our operations in our franchised territories. In our edge-out services, we own most of our network facilities, including substantially all of our long-haul fiber network, but do lease certain facilities and elements to allow us to serve our customers. We have not booked any revenues from swaps of indefeasible rights to use.

We have a full suite of proven operational support systems and customer care/billing systems that we believe allow us to meet or exceed our customers’ expectations. Our operational support systems include automated provisioning and service activation systems, mechanized line record and trouble reporting systems, inter-company provisioning and trading partner electronic data exchange systems. We employ an Internet service provider provisioning system and helpdesk database software to assist new data customers and to communicate with them when necessary. We currently bill our edge-out and Gulf Telephone Company customers using our Unix-based Single View billing system and Coastal Utilities customers with an AS400 based billing system from Comsoft. We outsource our billing for Mebtel Communications and Gallatin River to a third party vendor. We believe our operational support systems are scalable to accommodate reasonable growth and expansion we may experience.

Our network operations center located in Mebane, North Carolina monitors all of our networks, transport and ATM elements, our internal network routers and transport elements, digital switching systems and ISP infrastructure devices twenty-four hours a day, 365 days a year.

The majority of our fiber optic network comprises a long-haul network in the southeast United States that connects Atlanta, Georgia and Dallas, Texas, two of the five United States Tier I Network Access Points. Further, the route connects other metropolitan areas such as Mobile and Montgomery, Alabama; Biloxi, Mississippi; New Orleans, Louisiana; and Houston and Dallas, Texas. We have designated Atlanta and Dallas as our Internet egress points.

In connection with our offering of local exchange services in our edge-out markets, we have entered into interconnection agreements to resell the incumbent carrier’s local exchange services and interconnect our network with the incumbent carrier’s network for the purpose of immediately gaining access to the unbundled network elements necessary to provide local exchange services and high-speed data service. We have entered into such interconnection agreements with BellSouth, Verizon, Sprint and SBC. The interconnection agreements contain provisions that grant us the right to obtain the benefit of any arrangements entered into during the term of the interconnection agreements between the incumbent carriers and any other carrier that materially differs from the rates, terms or conditions of our interconnection agreements. Under the interconnection agreements, we may resell one or more unbundled network elements of the incumbent carriers at agreed upon prices. Our agreements with BellSouth and Sprint are scheduled to expire in July 2006 and June 2006, respectively. We have two interconnection agreements with Verizon, each of which is scheduled to expire in April 2005 and which automatically renew for six month terms unless either party gives 90 days notice of its intent to terminate. Our agreement with SBC is terminable at any time by either party upon 180 days notice. As discussed further under the caption “Regulation”, the status of our interconnection agreements with the incumbent carriers is at risk due to a ruling by the DC Circuit Court to vacate and remand portions of the FCC’s Triennial Review Order. As a result of this ruling, the FCC issued new rules on December 15, 2004. These new rules, however, remain subject to further legal challenge and, accordingly, we cannot be certain whether the interconnection agreements we have with other incumbent local exchange carriers will remain in effect or will be subject to significant modifications.

Competition

We operate primarily as an incumbent local exchange carrier in our franchised territories in an industry that is highly competitive. However, due to the rural, low-density characteristics of our existing operating areas, the high cost of entry into these markets and the lack of concentration of medium and large business users, we believe that compared to local exchange carriers serving more urban and densely populated areas, we have historically faced less competition in our existing markets. As characteristics of our markets change, regulatory barriers are removed and entry costs decrease, the likelihood of local competitors entering our markets may increase. Significant and potentially larger competitors could enter our markets at almost any time. Use of bundles of service, provided at a discount, helps us to gain market share and increase our monthly average revenue per unit for a subscriber of the bundle. In each of our operations, we have benefited from being first to market with broadband service, particularly since customers avoid changing broadband service providers and e-mail addresses when they are satisfied with the quality of service and pricing received from their existing

provider. Our competitors are expected to utilize a similar strategy in competing with us, but generally have concentrated their marketing efforts on larger cities, which has allowed us to achieve the advantage of being the first to market.

We may face competition from future market entrants, including cable television companies, wireless telecommunications providers, competitive local exchange carriers, VOIP providers, electric utilities, microwave carriers, Internet service providers and private networks built by large end users and municipalities.

Local and Long Distance. With wireless telephone companies offering significant minutes of use, including long distance calls, for a flat fee, customers may believe it is more cost effective to substitute their wireless telephones for wireline telephones and to use their wireless telephones to make long distance calls, and we may experience a decrease in our local, long distance and network access service revenues. The introduction of wireline to wireless intermodal number portability, or the ability of a customer to change from a traditional wireline service provider to a wireless service provider while retaining his or her telephone number, may increase the attractiveness of wireless service as a substitute for our wireline services. Each of our rural telephone companies’ long-distance services compete with MCI, Sprint and AT&T and, other than at our Illinois rural telephone company, BellSouth.

Internet Services. We face or expect to face competition for high-speed access to the Internet from cable TV companies in each of our markets. Further, cable TV companies are developing the ability to provide voice services over their network facilities which could create additional competition for our voice services, especially in our Coastal Utilities, Inc. market. We also have facilities-based interconnection agreements at Gallatin River and Gulf Telephone and could potentially enter into more interconnection agreements in the future, some of which may allow competitors to provide additional voice services to our customers. Our primary broadband competitors providing cable modem service are Time Warner Cable in North Carolina, Insight Communications in Illinois, Mediacom in Alabama and Comcast in Georgia.

Edge-Out Services. In each of the edge-out markets where we provide competitive local services, the services we offer compete principally with the services offered by the incumbent local exchange carrier serving that area. These local telephone companies have long-standing relationships with their customers and have the potential to fund their competitive services with their monopoly service revenues. Incumbent local exchange carriers are generally constrained in pricing by tariffs filed with state and federal regulators. Such carriers generally are not free to reduce customer pricing in response to specific competitive situations, but are required to use filed and approved tariffs, rates and terms for all customers. These carriers unsuccessfully have sought the approval of regulators for increased pricing flexibility to help them respond to competitive offerings. Such pricing flexibility would allow an incumbent local exchange carrier to offer lower prices only to customers at risk of converting to competitive providers. Such pricing flexibility would make marketing of our competitive local exchange carrier services more difficult. Pursuant to the Telecom Act, it is likely that as competition increases, the FCC will forbear from exercising regulatory authority over additional aspects of the operations of incumbent local exchange carriers; similar changes may occur with respect to state regulation. As a result, incumbent local exchange carriers may be afforded increased pricing flexibility for their services and other regulatory relief, which could adversely effect our competitive local operations. The incumbent local exchange carriers with which we compete may be allowed by regulators to lower rates for their services, engage in substantial volume and term discount pricing practices for their customers or seek to charge us substantial fees for interconnection to their networks.

Other incumbent local exchange carriers can also adversely affect the pace at which we add new customers to our edge-out business by prolonging the process of providing unbundled network elements, collocations, intercompany trunks and operations support system interfaces, which allow the electronic transfer between incumbent local exchange carriers and competitive local exchange carriers of needed information about customer accounts, service orders and repairs. Although the Telecom Act requires incumbent local exchange carriers to provide the unbundled network elements, interconnections and operations support system interfaces needed to allow the competitive local exchange carriers and other new entrants to the local exchange market to obtain service comparable to that provided by the incumbent local exchange carriers to their own customers in terms of installation time, repair response time, billing and other administrative functions, in many cases the incumbent

local exchange carriers have not complied with the mandates of the Telecom Act to the satisfaction of many competitors. In addition, the interconnection regulations may be affected by the outcome of pending court decisions and FCC rulemaking.

Employees

As of December 31, 2004, our work force consisted of 625 full-time employees of which 138 of our employees at Gallatin River are subject to collective bargaining agreements with the International Brotherhood of Electrical Workers, or IBEW, and with the Communications Workers of America, or CWA. Our labor agreement with the CWA, covering 56 employees of Gallatin River in Galesburg, Illinois, was renegotiated during 2002 for a three-year period that ends April 30, 2005. Our labor agreements with the IBEW, covering 28 employees of Gallatin River in Dixon, Illinois and 54 employees of Gallatin River in Pekin, Illinois, were also renegotiated during 2002. The collective bargaining agreement for the employees in Dixon was extended to November 30, 2005 and the collective bargaining agreement for employees in Pekin was extended to September 30, 2005. We conduct quarterly communication meetings with the union supervisors and are preparing for formal union negotiations to be initiated on each of the above contracts approximately 30-45 days in advance of the contract expiration date. The outcome of these negotiations cannot be determined at this time and there can be no assurance that, upon the expiration of existing collective bargaining agreements, new agreements will be reached without union action or that such new agreements will be on terms satisfactory to us. We believe that our future success will depend on our continued ability to attract and retain highly skilled and qualified employees. We also believe that our relations with our employees are good.

Environmental Regulations

Our operations are subject to federal, state and local laws and regulations governing the use, storage, disposal of, and exposure to, hazardous materials, the release of pollutants into the environment and the remediation of contamination. As an owner or operator of property and a generator of hazardous wastes, we could be subject to certain environmental laws that impose liability for the entire cost of cleanup at a contaminated site, regardless of fault or the lawfulness of the activity that resulted in contamination. We believe, however, that our operations are in substantial compliance with applicable environmental laws and regulations.

Properties

We own and lease offices and space in a number of locations within our regions of operation, primarily for our corporate and administrative offices, central office switches and business offices, network operations centers, customer service centers, sales offices and network equipment installations. Our corporate headquarters and our accounting center are located in approximately 24,100 square feet of leased space in two separate buildings in Mebane, North Carolina. The lease for the corporate headquarters, including our renewal options, will expire in approximately 14 years. The leases for our accounting center will expire in March 2006.

Our rural telephone companies own predominantly all of the properties used for their central office switches, business offices, regional headquarters and warehouse space in their operating regions. The poles, lines, wires, cable, conduits and related equipment owned by the rural telephone companies are located primarily on properties that we do not own, but are available for the rural telephone companies’ use pursuant to consents of various governmental bodies or subject to leases, permits, easements or other agreements with the owners. Our rural telephone companies own approximately 1,300 route miles of fiber in their operating regions.

In our edge-out markets, we lease properties primarily for sales and administrative offices, collocations, ATM switches and data transmission equipment. We also lease local loop lines that connect its customers to its network as well as leasing space for central offices for our rural telephone companies for collocating transmission equipment. In our edge-out markets we closed certain sales and administrative offices and we are currently evaluating our options related to disposal or sublease of these spaces. We have leases on office space in Peoria, Illinois and Atlanta, Georgia that are no longer used by our edge-out services and have been sublet. In addition, we have office space in Greensboro, North Carolina and New Orleans, Louisiana that is being actively

marketed on a sublet basis. We own approximately 2,300 route miles of fiber in North Carolina, Illinois and across the southeast from Atlanta to Houston and Dallas that is used in providing our edge-out services.

Substantially all of our rural telephone company properties and telephone plant and equipment are pledged as collateral for our senior indebtedness. We believe our current facilities are adequate to meet our needs in our incumbent local and competitive local markets for the foreseeable future.

Legal Proceedings

On May 7, 2004, a lawsuit was filed in the United States District Court for the Southern District of Alabama that named as defendants our subsidiaries, Gulf Telephone Company and Gulf Coast Services, Inc., Madison River Telephone and certain of our officers and directors among others including former directors and officers and other third party plan administrators and advisors to the Gulf Telephone Company Employee Stock Ownership Plan. The suit, entitled David Eslava, et. al. vs. Gulf Telephone Company, et. al. Civil Action No. 04-297-MJ-B, alleges certain ERISA violations. In conjunction with the acquisition of Gulf Telephone Company in September 1999, an escrow fund was established and continues to remain in effect to provide support in part for lawsuits such as this. We have engaged legal counsel and we intend to vigorously defend against all such claims. On June 30, 2004, we replied to the complaint and on July 25, 2004, we filed a Motion for Summary Judgment on the majority of the claims. The Court has stayed discovery pending a ruling on the Motion for Summary Judgment which has not yet been received.

In June 2004, the Department of Justice for the United States of America filed lawsuits against two of our subsidiaries, Gulf Coast Services, Inc. in the United States District Court for the Southern District of Alabama and Coastal Utilities, Inc. in the United States District Court for the Southern District of Georgia. In each lawsuit, the Department of Justice claimed that our subsidiary received an erroneous refund of income taxes and related interest to which the United States of America is entitled to have returned. The amount being sought in the lawsuits totals approximately $3.5 million of which $2.9 million is erroneous income tax refunds and $0.6 million is related interest expense. Approximately $0.9 million of these erroneous refund claims were paid in the first quarter of 2004 as part of a separate year income tax audit adjustment. Therefore, we have responded to the lawsuits accordingly and believe the claims to be approximately $2.1 million for erroneous income tax refunds plus related interest expense of $0.4 million. We believe that our position taken in the amended income tax returns is appropriate under current tax laws and we intend to vigorously defend against these claims. On August 31, 2004, the parties entered into a Joint Motion to Stay the proceeding in Alabama pending resolution of the Georgia proceeding which is scheduled to go to trial in the summer of 2005.

We are involved in other various claims, legal actions and regulatory proceedings arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Intellectual Property

We believe we have the trademarks, trade names and licenses that are necessary for the operation of our business as we currently conduct it. We do not consider our trademarks, trade names or licenses to be material to the operation of our business.

REGULATION

The following summary does not describe all present and proposed federal, state and local legislation and regulations affecting us or the telecommunications industry. Some legislation and regulations are currently the subject of judicial proceedings, legislative hearings and administrative proceedings which could change the manner in which we or our industry operates. Neither the outcome of any of these developments, nor their potential impact on us, can be predicted at this time. Regulation can change rapidly in the telecommunications industry, and such changes may have an adverse effect on us in the future. See “Risk Factors—Risks Relating to Our Regulatory Environment—We are subject to extensive government regulation that could change in a manner adverse to us.”

Overview

We are subject to regulation by federal, state and local government agencies. At the federal level, the FCC has jurisdiction over interstate and international telecommunications services. State telecommunications regulatory commissions exercise jurisdiction over intrastate telecommunications services. The FCC does not directly regulate enhanced services and has preempted certain inconsistent state regulation of enhanced services. Additionally, municipalities and other local government agencies regulate limited aspects of our business, such as use of government owned rights of way, construction permits and building codes.

The following description discusses some of the major telecommunications-related regulations that affect us, but numerous other substantive areas of regulation not discussed here may influence our business.

Federal Regulation

We are subject to, and must comply with, the Communications Act. Pursuant to this statute and associated FCC rules, the FCC regulates the rates and terms for interstate access services, which are an important source of revenues for our rural telephone companies. The amendments to the Communications Act contained in the Telecom Act have changed and are expected to continue to change the telecommunications industry. Among its more significant provisions, the Telecom Act (1) removes barriers to entry into local telephone services while enhancing universal service, (2) requires incumbent local exchange carriers to interconnect with competitors, (3) establishes procedures pursuant to which incumbent local exchange carriers may provide other services, such as the provision of long distance services by regional Bell operating companies and their affiliates (including their respective holding companies) and (4) directs the FCC to establish an explicit subsidy mechanism (while simultaneously removing implicit subsidies) for the preservation of universal service.

Access Charges

The FCC regulates the prices that incumbent local exchange carriers charge for the use of their local telephone facilities in originating or terminating interstate transmissions. State regulatory bodies regulate intrastate charges. Federal and state charges are subject to change at any time. The FCC has structured these prices, or access charges, as a combination of recurring monthly charges paid by the end-users, recurring monthly charges paid by long distance carriers for dedicated facilities and usage sensitive charges paid by long distance carriers.

The FCC regulates the levels of interstate access charges by imposing price caps on larger incumbent local exchange carriers. These price caps can be adjusted based on various formulae and otherwise through regulatory proceedings. Smaller incumbent local exchange carriers may elect to base access charges on price caps, but are not required to do so unless they elected to use price caps in the past or their affiliated incumbent local exchange carriers base their access charges on price caps. Through 2004, our rural telephone companies elected not to utilize federal price caps. Instead, our rural telephone companies employ rate-of-return rate-making for their interstate access charges. Our rural telephone companies all participate in the NECA common line pool, which files tariffs on behalf of its members to establish interstate common line end user rates for its participants to recover the interstate portion of their loop costs. One of our rural telephone companies, Mebtel, also participates

in NECA’s traffic sensitive pool, which files tariffs on behalf of its members to establish interstate switched and special access rates. The other rural telephone companies file their own interstate traffic sensitive rates with the FCC. NECA tariffs, as well as our own tariffs, are established at rates which will allow the carriers to recover operating expenses incurred and earn the authorized after-tax return on their investment. The authorized rate of return for interstate access services is currently 11.25%.

In May 1997, the FCC initiated a multi-year transition designed to lead to lower usage-sensitive access charges for larger incumbent local exchange carriers. As part of this transition, the FCC in August 1999 adopted an order and further notice of proposed rulemaking aimed at introducing additional pricing flexibility and other deregulation for these larger companies’ interstate access charges, particularly special access and dedicated transport. In May 2000, the FCC lowered switched access rates, increased caps applicable to end-user rates and established additional universal service funding support for these larger companies. Previously, in May 1998, the FCC proposed to initiate a similar transition for smaller incumbent local exchange carriers, including our rural telephone companies. This proceeding was concluded and an order issued in November 2001 known as the MAG Order.

The MAG Order was released November 8, 2001 and was effective January 1, 2002. The MAG Order applies to non-price cap or “rate-of-return” exchange carriers. The MAG Order increased the maximum Subscriber Line Charges, or SLCs. The MAG order reduced access charges paid by long distance carriers, increased the recovery of costs from end users and increased the amount of costs recovered from federal universal funding. As a result, although total revenue did not change, the aggregate amount of access charges paid by long distance carriers to access providers, such as our rural telephone companies, has decreased and may continue to decrease. Beginning January 1, 2002, the maximum SLCs for single line business and residential customers increased from $3.50 per month to $5.00 per month. The maximum single line business and residential SLCs increased to $6.00 as of July 1, 2002 and increased to $6.50 as of July 1, 2003. Maximum SLCs for multi-line business customers increased to $9.20 effective January 1, 2002, and no further increases are scheduled.

The MAG Order included a notice of proposed rulemaking on incentive regulation and the introduction of pricing flexibility measures for rate-of-return carriers. This proceeding has not been completed, and no incentive option (other than price caps, pursuant to the Coalition for Affordable Local and Long distance Services (CALLS) plan) is currently available to our RLEC operations.

On February 26, 2004, the FCC released the text of its Report and Order and Further Notice of Proposed Rulemaking in the MAG proceeding. In the Order, the FCC eliminated the requirement for rate-of-return carriers to obtain a waiver of FCC rules to convert acquired price cap properties to a rate-of-return status. In the Further Notice of Proposed Rulemaking, the FCC asked for comments on two proposals for federal alternative regulation plans. It is not known at this time whether the FCC will establish additional alternative regulation options for rate-of-return carriers and if so, when such options would be available or what the terms of those options would be.

On May 22, 2001, the FCC released an order adopting the recommendation of the Federal-State Joint Board to impose an interim freeze of the Part 36 category relationships and jurisdictional cost allocation factors for price cap incumbent local exchange carriers and a freeze of all allocation factors for rate-of-return incumbent local exchange carriers. This order also gave rate-of-return incumbent local exchange carriers a one-time option to freeze their Part 36 category relationships in addition to their jurisdictional allocation factors. The freeze is in effect from July 1, 2001 through June 30, 2006, or until the FCC has completed comprehensive separations reform, whichever comes first. The frozen allocation factors and category relationships will be based on carriers’ separations studies for calendar year 2000. Our rural telephone companies opted not to freeze their category relationships.

During 2001, the FCC released an order establishing access charge rules for competitive local exchange carriers. Under FCC rules, competitive local exchange carriers can file interstate tariffs for access charges only if the access charge rates conform to FCC safe harbor rates (essentially, the rate charged by the largest incumbent local exchange carrier in that market area). A competitive local exchange carrier wishing to charge higher rates

can do so, but cannot use the tariff process to collect such rates. Under these rules, interexchange carriers are required to interconnect with companies whose rates are within the FCC safe harbor guideline, and are required to pay access charges at the tariffed rates. On May 18, 2004, the FCC released an order in response to petitions for reconsideration of its prior decision on competitive local exchange carrier access charges. The FCC further clarified its rules with respect to the rights of a rural competitive local exchange carrier to assess access charges equal to those charged by its incumbent local exchange carrier competitor.

The Telecommunications Act of 1996

The Telecom Act, which amended the Communications Act, changed and will continue to change the regulatory and competitive landscape in which we operate. The most important of these changes are removing most legal barriers to market entry into local telephone services; requiring that incumbent local exchange carriers, such as our incumbent local exchange carriers, interconnect with competitors and offer unbundled network elements; establishing procedures for the regional Bell operating companies to provide long distance services within their home regions; and creating greater opportunities for competitive providers, such as our competitive local exchange carrier, to compete with other incumbent local exchange carriers. Each of these changes is discussed below.

Removal of Entry Barriers

Prior to the enactment of the Telecom Act, many states limited the services that could be offered by a company competing with an incumbent local exchange carrier. The Telecom Act generally prohibits state and local governments from enforcing any law, rule or legal requirement that has the effect of prohibiting any entity from providing any interstate or intrastate telecom service. However, states can modify conditions of entry into areas served by rural telephone companies where the state telecommunications regulatory commission has determined that certain universal service protections must be satisfied. The federal law should allow us to provide a full range of local and long distance services in most areas of any state. Following the passage of the Telecom Act, the level of competition in the markets we serve has increased and is expected to continue to increase.

Interconnection with Local Telephone Companies and Access to Other Facilities

The Telecom Act imposes a number of access and interconnection requirements on all local exchange carriers, including competitive local exchange carriers, with additional requirements imposed on incumbent local exchange carriers. These requirements are intended to promote competition in the local exchange market by, in part, ensuring that a carrier seeking interconnection will have access to the interconnecting carrier’s networks under reasonable rates, terms and conditions. Specifically, local exchange carriers must provide the following:

Resale. Local exchange carriers generally may not prohibit or place unreasonable restrictions on the resale of their services.

Telephone Number Portability. Local exchange carriers must provide for telephone number portability, allowing a customer to keep the same telephone number when it switches service providers.

Dialing Parity. Local exchange carriers must provide dialing parity, which allows customers to route their calls to a telecommunications provider without having to dial special access codes.

Access to Rights-of-Way. Local exchange carriers must provide access to their poles, ducts, conduits and rights-of-way on a reasonable, nondiscriminatory basis.

Reciprocal Compensation. The duty to establish reciprocal compensation arrangements for the transport and termination of telecommunications originated and terminated within a geographic scope established by FCC rules.

All of our rural telephone companies have implemented full equal access (dialing parity) capabilities and local number portability. On an industry-wide basis, the porting of numbers from rural telephone companies like ours to

wireless carriers has not been significant. We are uncertain, however, of what impact wireline to wireless portability will have on our costs to provide service and on our customer base in the future.

In addition, all incumbent local exchange carriers must provide the following, subject to the statutory exemptions for rural telephone companies:

Interconnection. Interconnect their facilities and equipment with any requesting telecommunications carrier at any technical feasible point;

Notice of Changes. Provide reasonable notice of changes to the information necessary for transmission and routing of services over the incumbent telephone company’s facilities or in the information necessary for interoperability;

Resale at a wholesale discount. Offer its retail local telephone services to resellers at a wholesale rate that is less than the retail rate charged to end-users.

Unbundling of Network Elements. Offer access to various unbundled elements of their networks at cost-based rates.

Collocation. Provide physical collocation, which allows competitive local exchange carriers to install and maintain their own network termination equipment in incumbent local exchange carriers’ central offices, or functionally equivalent forms of interconnection under some conditions.

Competitors are required to compensate the incumbent telephone company for the cost of providing these interconnection services.

All of our rural telephone companies qualify as rural telephone companies under the Telecom Act. They are, therefore, statutorily exempted from the incumbent local exchange carrier interconnection requirements unless and until they receive a bona fide request for wholesale resale, unbundling or collocation, and the applicable state telecommunications regulatory commission acts to lift the exemption. Despite their rural status, Gallatin River agreed with the Illinois Commerce Commission and Mebtel agreed with the North Carolina Utilities Commission that they would not contest requests by competitive local telephone companies for such interconnection arrangements. State commissions have jurisdiction to review certain aspects of interconnection and resale agreements. Our rural telephone companies may also seek specific suspensions or modification of interconnection obligations under the Telecom Act as a company that serves less than two percent of the nation’s access lines, where such interconnection obligations would otherwise cause undue economic burden or are technically infeasible.

The FCC has adopted rules regulating the pricing of the provision of unbundled network elements by incumbent local exchange carriers. On May 13, 2002, the Supreme Court affirmed that the FCC’s rules basing unbundled network element, pricing on forward-looking economic costs, including total element long-run incremental costs methodology, were proper under the Telecom Act. The Court also affirmed the FCC’s requirement that incumbent local exchange carriers combine unbundled network elements for competitors when they are unable to do so themselves. Although the United States Supreme Court has upheld the FCC’s authority to adopt total element long-run incremental cost pricing rules, the specific pricing guidelines created by the FCC remain subject to review in a pending FCC proceeding and to further review by the federal courts. In addition to proceedings regarding the FCC’s pricing rules, the FCC’s other interconnection requirements remain subject to further court and FCC proceedings.

The Telecom Act requires utilities to provide access to their poles, ducts, conduits and rights-of-way to telecom carriers on a nondiscriminatory basis. In October 2000, the FCC adopted rules prohibiting certain anticompetitive contracts between carriers and owners of multi-tenant buildings, requiring incumbent local exchange carriers to disclose existing demarcation points in such buildings and to afford competitors with access to rights-of-way, and prohibiting restrictions on the use of antennae by users which have a direct or indirect ownership or leasehold interest in such properties.

Unbundling of Network Elements

On February 20, 2003, the FCC announced a decision to revise its rules requiring the unbundling of network elements by the incumbent local exchange carriers, which was released in a formal Order on August 21, 2003 (the “Triennial Review Order”). The new regulations limit the obligation of the incumbent local exchange carriers to provide access to broadband network facilities. The new rules do not require incumbent local exchange carriers to make fiber-to-the-home loops or the increased transmission capacity that exists after the extension of fiber networks further into a neighborhood available to competitive local exchange carriers. Similarly, the FCC eliminated the requirement that line-sharing, where a competitive local exchange carrier offers high-speed Internet access over certain frequencies while the incumbent local exchange carrier provides voice telephone services over other frequencies using the same local loop, be available as an unbundled element.

The Triennial Review Order redefined the standard for determining which services are subject to mandatory unbundling by requiring that, for a network element to be required to be unbundled, a competitive local exchange carrier must demonstrate that a lack of access to an incumbent local exchange carrier’s network element creates barriers, including operational and economic barriers, to its entry into the local telecommunications market which are likely to make entry into that market unprofitable. The FCC also eliminated its presumption that switching for business customers served by high-capacity loops, such as DS-1, must be unbundled to ensure competition. Instead, state utility commissions were given 90 days from the effective date of the Triennial Review Order (August 21, 2003) to determine based on market conditions that such switching must still be unbundled to preserve competition. No state utility commissions made any such determinations by November 20, 2003, the deadline for doing so under the Triennial Review Order. The FCC also eliminated the limited requirement for unbundling of packet switching.

The revised rules provided state utility commissions with an increased role in determining which individual elements must be unbundled in the markets they regulate. The state utility commissions were to make detailed assessments of the status of competition in the markets within their states to ensure that the unbundling requirements are applied in a manner consistent with the newly announced standard for determining which services are subject to mandatory unbundling. On March 2, 2004, however, the United States Court of Appeals for the District of Columbia Circuit issued a decision that affirmed in part and vacated and remanded in part the Triennial Review Order. The Court held that the FCC’s delegation to the state utility commissions was unlawful. The Court also vacated and remanded the FCC finding that competitive local exchange carriers are impaired without access to mass market switching and dedicated transport elements based on the DC Circuit Court’s view that the FCC cannot subdelegate its responsibilities to the state utility commissions. The Court upheld the FCC finding that incumbent local exchange carriers are not required to provide unbundled network elements for data services or to provide line sharing. The Court vacated the FCC finding that wireless carriers are impaired without access to dedicated transport facilities. The DC Circuit Court then stayed the effective date of its decision for 60 days, giving the telecommunications industry time to appeal the decision and the FCC time to put interim rules in place until the vacated and remanded issues are resolved.

In response to the reversal of its rules by the Court, the FCC issued interim rules on August 20, 2004, and initiated a proceeding to review and revise its unbundling rules. On December 15, 2004, the FCC adopted new rules which were released February 4, 2005. The new rules reduce incumbent local exchange carriers’ obligations to lease interoffice transport and high-capacity loops, and eliminate the requirement to lease mass market local circuit switching, including the unbundled network element platform (a combination of loop, switching and transport which allows competitive local exchange carriers to offer service without their own infrastructure). The revised rules take effect March 11, 2005 and, subject to a twelve month transition, eliminate an incumbent local exchange carrier’s obligations to provide unbundled network element platform services nationwide, certain high speed interoffice facilities and certain high capacity unbundled network element loops in larger incumbent local exchange carrier wire centers. Several parties are expected to challenge those rules in court and it is not possible to predict the result of any subsequent reconsideration or appeals. It is not possible to predict the outcome or the ultimate impact on our RLEC operations or our edge-out services. We are also uncertain as to the impact on our

RLEC operations or edge-out services of actions that may be taken by state utility commissions based upon the new regulations or new legislation that may be considered and passed in response to the new regulations or any further court decisions.

On July 8, 2004, the FCC issued an Order in a proceeding in which it considered whether to modify the pick-and-choose rule established pursuant to Section 252(i) of the Communications Act that permits requesting competitive local exchange carriers to opt into individual portions of interconnection agreements without accepting all the terms and conditions of such agreements. The FCC adopted an “all or nothing” rule whereby a competitive local exchange carrier that seeks interconnection with an incumbent local exchange carrier by adopting the terms and conditions of an interconnection agreement between the incumbent local exchange carrier and another carrier must adopt all of the terms and conditions of the existing agreement. This new rule eliminates the prior opportunity for a competitive local exchange carrier to assemble an interconnection agreement by utilizing a “pick and choose” process to obtain the most favorable terms from all existing agreements. The implementation of this new rule is favorable to our RLEC operations and other incumbent companies.

On April 27, 2001, the FCC released a notice of proposed rulemaking addressing inter-carrier compensation issues. Under this rulemaking, the FCC asked for comment on a “bill and keep” compensation method that would overhaul the existing rules governing reciprocal compensation and access charge regulation. The outcome of this proceeding could change the way we receive compensation from other carriers and our end users. On February 10, 2005, the FCC adopted a Further Notice of Proposed Rulemaking in the Matter of Developing a Unified Intercarrier Compensation Regime. In this Rulemaking, the FCC seeks comment on various new interconnection proposals for consideration. At this time, we cannot estimate whether any such changes will occur or, if they do, what the effect of the changes on our wireline revenues and expenses would be.

RLEC Operations Services Regulation

Our RLEC operations segment revenue is subject to regulation, including incentive regulation by the FCC and various state regulatory bodies. We believe that state lawmakers will continue to review the statutes governing the level and type of regulation for telecommunications services. It is expected that over the next few years, legislative and regulatory actions will provide opportunities to restructure rates, introduce more flexible incentive regulation programs and possibly reduce the overall level of regulation. We expect the election of incentive regulation plans and the expected reduction in the overall level of regulation to allow us to introduce services more expeditiously than in the past.

The FCC generally must approve in advance most transfers of control and assignments of operating authorizations by FCC-regulated entities. Therefore, if we seek to acquire companies that hold FCC authorizations, in most instances we will be required to seek approval from the FCC prior to completing those acquisitions. The FCC has the authority to condition, modify, cancel, terminate or revoke operating authority for failure to comply with applicable federal laws or rules, regulations and policies of the FCC. Fines or other penalties also may be imposed for such violations. This may impair our ability to make acquisitions.

Bell Operating Company Entry into Long Distance Services

The FCC has required that incumbent and independent local exchange carriers that provide interstate long distance services originating from their local exchange service territories, must do so in accordance with “structural separation” rules. These rules require that our long distance affiliates (i) maintain separate books of account, (ii) not own transmission or switching facilities jointly with the local exchange affiliate, and (iii) acquire any services from their affiliated local exchange telephone company at tariffed rates, terms and conditions. The FCC has initiated a rulemaking proceeding to examine whether there is a continuing need for such requirements, but we cannot predict the outcome of that proceeding.

Our principal competitor for local services in each area where we operate as a competitive local exchange carrier is an incumbent local exchange carrier. In many of these areas, the incumbent local exchange carrier is a regional Bell operating company. Although regional Bell operating companies and their affiliates were, prior to the

passage of the Telecom Act, prohibited from providing long distance services, the Telecom Act allows a regional Bell operating company to provide long distance service in its own local service region upon a determination by the FCC that it had satisfied a 14 point checklist of competitive requirements. This provision increases the regional Bell operating companies’ incentives to open their markets to competition, to the benefit of competitive local exchange carriers; obtaining long distance service authority increases the ability of the regional Bell operating companies to compete against providers of integrated communications services. The states in which regional Bell operating company in-region authority has been granted includes each of the states in which we operate: Illinois, North Carolina, Georgia, Alabama, Mississippi and Louisiana.

Relaxation of Regulation

Through a series of proceedings, the FCC has decreased the regulatory requirements applicable to carriers that do not dominate their markets. All providers of domestic interstate services other than incumbent local exchange carriers are classified as non-dominant service providers. Our RLEC operations that operate as non-dominant service providers, primarily our long distance business and our Internet access business, are subject to relatively limited regulation by the FCC. Among other requirements, these subsidiaries must offer interstate services at just and reasonable rates in a manner that is not unreasonably discriminatory.

The FCC phased out the ability of long distance carriers to provide domestic interstate services pursuant to tariffs during 2001. These carriers are no longer able to rely on tariffs as a means of specifying the prices, terms and conditions under which they offer interstate services. The FCC has adopted rules that require long distance carriers to make specific public disclosures on the carriers’ Internet web sites.

Universal Service

The FCC is required to establish a “universal service” program that is intended to ensure that affordable, quality telecommunications services are available to all Americans. The Telecom Act sets forth policies and establishes certain standards in support of universal service, including that consumers in rural areas should have access to telecommunications and information services that are reasonably comparable in rates and other terms to those services provided in urban areas. A revised universal service support mechanism for larger incumbent local exchange carriers went into effect on January 1, 2000. A similar new universal service mechanism for rate-of-return incumbent local exchange carriers, known as the ICLS, went into effect January 1, 2002.

Per FCC rules, all incumbent local exchange carriers were required to choose whether to disaggregate specific rate centers for the purpose of establishing the amount of universal service support associated with such rate centers, or maintain an aggregated study area approach. Our rural telephone companies developed and filed disaggregation studies in compliance with FCC rules. These studies identify the amount of portable universal service funding that would be available to a competitor that has been certified as an eligible telecommunications carrier in each rate center.

Competitive local exchange carriers that have been granted eligible telecommunications carrier status currently are eligible to receive the same amount of universal service funding per customer as the incumbent local exchange carrier serving the universal service area. To date, only two carriers have been granted eligible telecommunications carrier status in an area served by our incumbent local exchange carrier subsidiaries. In Alabama, two cellular providers have been certified as eligible telecommunications carriers in areas served by Gulf Telephone Company. As these cellular providers introduce services to customers in this geographic area and/or submit claims for existing customers, they will be eligible to draw universal service funds. Under current rules and procedures, the payment of universal service funding to an eligible telecommunications carrier in an area served by an incumbent local exchange carrier does not reduce the funding to the incumbent local exchange carrier. However, the growth of the fund due to payments to new eligible telecommunications carriers has generated concerns of legislative and regulatory bodies. The FCC review of the situation could result in rules being promulgated that could reduce universal service funding to our rural telephone companies.

Moreover, some disbursements to schools and libraries from the universal service fund were temporarily suspended during 2004 to comply with the Anti-Deficiency Act. As a result, a concern arose that similar delays could occur in disbursements from the universal service fund high cost support mechanism to rural carriers including our incumbent local exchange carriers. In response to these concerns, Congress has temporarily suspended the application of the Anti-Deficiency Act to the universal service fund through December 31, 2005. We cannot predict the impacts on us, including the timing of our receipts from and contributions to the universal service fund, of any actions that may subsequently be undertaken to address this issue on a permanent basis or the impact that would occur if the temporary suspension of the application of the Anti-Deficiency Act expires without further governmental action.

Our rural telephone companies receive federal and state universal service support and are required to make contributions to federal and state universal service support. Such payments represented approximately 1.3% of our revenues for the year ended December 31, 2004. Our contribution to federal universal service support programs is assessed against our interstate end-user telecommunications revenues. Furthermore, under the current regulatory scheme, as the number of access lines that we have in any given state increases, the rate at which we can recover certain support payments decreases. Therefore, as we implement our growth strategy, our eligibility for such support payments may decrease. Our contribution for such state programs is assessed against our intrastate revenues. Although many states are likely to adopt an assessment methodology similar to the federal methodology, states are free to calculate telecommunications service provider contributions in any manner they choose as long as the process is not inconsistent with the FCC’s rules.

There are a number of factors which impact universal service. The recent history of declining interstate long distance revenues reduces the assessment base for universal service. The increase in payments to wireless carriers designated as eligible telecommunications carriers has resulted in increased funding requirements. The increased number of subscribers to VOIP services may reduce the number of wireline local services which constitute a portion of the assessment base for universal service. The continued scrutiny of federal universal service funding could trigger regulatory or legislative changes in how assessments are made for contributions to the fund, how support is calculated for rural local exchange carriers such as our rural telephone companies and what companies will be eligible for such support. In addition, there are a number of appeals challenging several aspects of the FCC’s universal service rules. We cannot predict with certainty whether regulatory or legislative changes will occur, when such changes would occur or what impact these changes would have on our business, results of operations or cash flow.

On December 13, 2002, the FCC released rules making minor changes to the procedures related to universal service fund assessments. This includes a higher assessment to wireless carriers, use of a current (rather than historical) basis of revenues for assessments, and rules limiting the charges to individual carriers to no more than the assessment percentage on that customer’s interstate revenues. These new rules are not expected to have any significant impacts on the operations of our rural telephone companies. In the order, the FCC also asked for comment on proposed changes to the way the assessments are recovered from end users, proposing to assess end users on a per line or per number basis rather than on the basis of retail-billed revenues. Although no decision from this notice of proposed rulemaking has been issued, it is anticipated that a recommendation from the Federal-State Joint Board on Universal Service will be issued soon followed by FCC action to consider the recommendation.

On February 27, 2004, the Federal-State Joint Board on Universal Service released a Recommended Decision addressing a number of universal service issues. The Recommended Decision is the product of state and federal commissioners working together to develop a consensus recommendation. The FCC has up to one year to act on the Recommended Decision and it can accept, reject or modify the recommendations in any manner it chooses. In the Recommended Decision, the Joint Board recommends the FCC adopt permissive federal guidelines for states to consider in eligible telecommunications carrier proceedings. These guidelines would generally make it more difficult for competitive eligible telecommunications carriers to be certified by requiring applicants to show a public interest benefit beyond a simple showing of increased competition. The Joint Board goes on to recommend that universal service support be limited to a single primary connection that provides

access to the public telephone network. It then recommends that the Commission seek comment on three alternative proposals to minimize impacts on rural carriers if support is limited to a single primary connection. The Joint Board also recommends universal service support per primary line be capped when a competitive eligible telecommunications carrier enters the market of a rural carrier. In response to the concerns of both rural landline and wireless carriers, however, Congress recently enacted legislation to stop the FCC from adopting a plan to distribute universal service fund on the basis of a single primary connection.

It is not known at this time how the FCC will act with respect to the Recommended Decision of the Joint Board on Universal Service and, therefore, we cannot estimate the impact of any such decision on our operations. On June 28, 2004, the FCC issued an order asking the Federal-State Joint Board on Universal Service to review the rules governing federal universal service support mechanisms for rural carriers. The FCC requested recommendations on whether universal service fund payments should be calculated on the basis of a rural carrier’s actual embedded costs or forward-looking economic cost estimates, whether to modify the definition of rural telephone company, and other issues. In response, on August 16, 2004, the Federal-State Joint Board on Universal Service issued a public notice seeking comment on these FCC rules. We are unable to predict whether and to what extent we would be eligible to receive any federal high-cost support under such a plan.

Internet

In connection with our Internet access offerings, we could become subject to laws and regulations as they are adopted or applied to the Internet. There is currently only a small body of laws and regulations applicable to access to or commerce on the Internet. As the significance of the Internet expands, federal, state and local governments may adopt rules and regulations, or apply existing laws and regulations to the Internet.

To date, the FCC has treated Internet service providers, or ISPs, as enhanced service providers rather than common carriers. As such, ISPs have been exempt from various federal and state regulations, including the obligation to pay access charges and contribute to universal service funds. As part of a reciprocal compensation order, the FCC has determined that both dedicated and dial-up calls from a customer to an ISP are interstate, not local, calls and, therefore, are subject to the FCC’s jurisdiction. On March 24, 2000, the United States Court of Appeals for the District of Columbia vacated and remanded this determination so that the FCC can explain more clearly why such calls are not considered local. In April 2001, the FCC released an order that reclassified Internet service as information access and therefore not subject to reciprocal compensation. This finding was appealed to the United States Court of Appeals for the District of Columbia, which, on May 3, 2002, remanded the issue back to the FCC, finding that the FCC’s basis of its decision was insufficient. The FCC has not issued a further order establishing a different basis for its decision.

On February 12, 2004, the FCC initiated a proceeding to examine the manner in which ISPs should be regulated with respect to VOIP services and other services with respect to such matters as public safety, emergency 911 service, law enforcement access, consumer protections, disability access, USF and intercarrier compensation. It is not known at this time what impact this proceeding will have on our operations.

On February 12, 2004, the FCC ruled that pulver.com’s Free World Dialup service offering will remain a minimally regulated competitive option for consumers. The Declaratory Ruling adopted emphasizes the FCC’s long-standing policy of keeping consumer Internet services free from burdensome economic regulation at both the federal and state levels. In 2003, pulver.com filed a petition for declaratory ruling requesting that the FCC rule pulver.com’s Free World Dialup service to be neither a “telecommunications service” nor “telecommunications,” and therefore not subject to traditional telephone regulation. The FCC granted pulver.com’s petition and also declared Free World Dialup to be an unregulated information service that is subject to federal jurisdiction. On November 9, 2004, the FCC announced a decision that would preclude states from requiring certification of VOIP service providers.

Internet services are subject to a variety of other federal laws and regulations, including those related to privacy, indecency, copyright and tax.

Customer Information

Carriers are subject to limitations on the use of customer information the carrier acquires by virtue of providing telecommunications services. Protected information includes information related to the quantity, technical configuration, type, destination and the amount of use of services. A carrier may not use such information acquired through one of its service offerings to market certain other service offerings without the approval of the affected customers. These restrictions may affect our ability to market a variety of packaged services to existing customers.

Communications Assistance for Law Enforcement Act

Under the Communications Assistance for Law Enforcement Act and related federal statutes, we are required to provide law enforcement officials with call content and call identifying information under a valid electronic surveillance warrant and to reserve a sufficient number of circuits for use by law enforcement officials in executing court-authorized electronic surveillance. We believe we are in compliance with those laws and regulations, as currently applied.

Preferred Carrier Selection Changes

A customer may change its preferred long distance carrier or its local service provider at any time, but the FCC and some states regulate this process and require that specific procedures be followed. When these procedures are not followed, particularly if the change is unauthorized or fraudulent, the process is known as slamming. The FCC has levied substantial fines for slamming and has recently increased the penalties for slamming. No such fines have been assessed against us.

Truth-in-Billing

The FCC has adopted rules designed to make it easier for customers to understand the bills of telecommunications carriers. These new rules establish requirements regarding the formatting of bills and the information that must be included in bills.

State Regulation—Incumbent Local Telephone Company

Most states have some form of certification requirement which requires telecommunications providers to obtain authority from the state telecommunications regulatory commission prior to offering common carrier services. Our operating subsidiaries in Alabama, Illinois, North Carolina and Georgia are incumbent local exchange carriers and are certified in those states to provide local telephone services.

State telecommunications regulatory commissions generally regulate the rates incumbent local exchange carriers charge for intrastate services, including rates for intrastate local services, long distance services and access services paid by providers of intrastate long distance services. Incumbent local exchange carriers must file tariffs setting forth the terms, conditions and prices for their intrastate services. Under the Telecom Act and FCC orders, state telecommunications regulatory agencies have jurisdiction to arbitrate interconnection disputes and to review and approve agreements between incumbent local exchange carriers and other carriers in accordance with rules set by the FCC. State regulatory commissions may also formulate rules regarding fees imposed on providers of telecommunications services within their respective states to support state universal service programs.

States often require prior approvals or notifications for certain acquisitions and transfers of assets, customers or ownership of regulated entities. Therefore, in most instances we will be required to seek state approval prior to

completing new acquisitions of rural telephone companies. States generally retain the right to sanction a carrier or to revoke certifications if a carrier materially violates relevant laws and/or regulations.

In Alabama, Gulf Telephone Company is subject to regulation by the Alabama Public Service Commission. Gulf Telephone Company must have tariffs approved by and on file with that commission for basic, non-basic and interconnection services. Gulf Telephone Company operates in Alabama under price regulation rules. The Alabama Public Service Commission has completed a review of the state price regulation plan and has issued new rules effective December 27, 2004. Under these new rules, all companies which have previously elected price regulation, including Gulf Telephone Company, are placed into the state Price Cap Plan, with an option to elect the state Price Flex Plan upon agreement to certain conditions. The new Price Cap Plan is similar to the previous Price Regulation plan and has no material impact on Gulf Telephone Company. The new Price Flex Plan offers additional pricing flexibility in return for the electing company agreeing to offer an expanded local calling plan and agreeing to open its network to competition. We are evaluating the benefits to Gulf Telephone Company of moving to the Price Flex Plan, but are waiting on the Alabama Public Service Commission to clarify certain aspects of the Price Flex option.

The Illinois Commerce Commission, or ICC, regulates Gallatin River Communications. Gallatin River Communications provides services pursuant to tariffs that are filed with, and subject to the approval of, the ICC. The rates for these services are regulated on a rate of return basis by the ICC, although Gallatin River Communications has pricing flexibility with respect to services that have been deemed competitive by the ICC, such as digital centrex, high capacity digital service, intra-local access and transport area toll service, wide area telephone service and digital data services. The ICC has approved several interconnection agreements under the Telecom Act between Gallatin River Communications and mobile wireless carriers, as well as agreements between Gallatin River Communications and facility-based competitive local exchange carriers. Gallatin River Communications is required to support state universal service programs and is subject to ICC rules implementing these and the federal universal service programs.

In North Carolina, our rural telephone company, MebTel, is regulated by the North Carolina Utilities Commission. MebTel provides service pursuant to tariffs that are filed with, and subject to the approval of, the North Carolina Utilities Commission. Effective January 1, 2000, a price cap plan applies to MebTel’s rates for intrastate services, replacing rate of return regulation. Under the terms of the state price regulation plan, the North Carolina Utilities Commission has the right to review the terms of Mebtel’s price regulation. The North Carolina Utilities Commission has not indicated any intent to perform such a review. MebTel is subject to commission rules implementing state and federal universal service programs.

In Georgia, Coastal Utilities, Inc. is regulated by the Georgia Public Service Commission. Passage of the Telecommunications and Competition Development Act of 1995 (the “Georgia Act”) in Georgia significantly changed the Georgia Public Service Commission’s regulatory responsibilities. Instead of setting prices for competitive telecommunications services, the Georgia Public Service Commission now manages and facilitates the transition to competitive markets, establishes and administers a universal access fund, monitors rates and service quality, and mediates disputes between competitors. Under the alternative regulation available pursuant to the Georgia Act, Coastal Utilities, Inc. has agreed to cap the rate it charges for basic residential service; Coastal Utilities, Inc. is otherwise not subject to rate regulation for the telecommunications services it offers to its end user customers.

In Alabama and North Carolina, BellSouth has proposed changes to compensation arrangements between itself and the rural incumbent local exchange carriers, including our rural telephone companies. Pursuant to these discussions, the companies have agreed to “meet-point” billing of intra-local access and transport area private line customers. Under this arrangement, both our rural telephone company and BellSouth would bill end users for their respective portion of intra-local access and transport area private line services with one end in our rural telephone company’s service area and the other end in BellSouth’s service area.

Interconnection with Wireless Carriers

The FCC has directed that IntraMTA traffic exchanged between an incumbent local exchange carrier and wireless carriers is subject to reciprocal compensation payments. An “MTA” is a Major Trading Area, as defined by the FCC, for purposes of awarding PCS spectrum licenses and often covers a significant portion of a one or two state area. Our rural telephone companies have received wireless reciprocal compensation based on a combination of state settlement arrangements and interconnection agreements with wireless carriers. During 2003, BellSouth took action throughout its region to attempt to terminate state settlement arrangements and replace these with direct interconnection agreements between the rural telephone companies and the wireless carriers. These actions impact MebTel, Coastal Utilities, Inc. and Gulf Telephone Company. In response, our rural telephone companies have worked with state industry groups to negotiate individual state transition agreements and also have entered into a number of interconnection agreements with individual wireless carriers. These interconnection agreements generally have contract lives of three years or less, so our rural telephone companies are required to renegotiate and renew agreements on an ongoing basis.

State Regulation—Competitive Local Telephone Company

Madison River Communications, LLC is certified to provide intrastate local, toll and access services in the states of Illinois, North Carolina, South Carolina, Tennessee, Georgia, Florida, Alabama, Mississippi, Louisiana and Texas. In association with these certifications, Madison River Communications, LLC has filed state and local access and toll tariffs in all states except North Carolina, in which, pursuant to North Carolina Utilities Commission rules, Madison River Communications, LLC has filed a price list. Madison River Communications, LLC has filed interstate access tariffs and maintains long distance rates on its web site in accordance with FCC orders. Tariffs are updated as needed and periodic state financial and quality of service filings are made as required.

Madison River Communications, LLC has interconnection agreements with Verizon in Illinois and North Carolina, with Sprint in North Carolina, with SBC in Texas and Illinois, and with BellSouth in its nine state operating area. These interconnection agreements govern the relationship between the incumbent local exchange carriers and Madison River Communications, LLC’s operations in the areas of resale of retail services, reciprocal compensation, central office collocation, purchase of unbundled network elements and use of operational support systems.

Local Government Authorizations

We are required to obtain from municipal authorities on-street opening and construction permits or operating franchises to install and expand fiber optic facilities in certain cities. We have obtained such municipal franchises in our incumbent local telephone company territories in Alabama, North Carolina, Illinois and Georgia. In some cities, subcontractors or electric utilities with which we have contracts may already possess the requisite authorizations to construct or expand our networks.

Some jurisdictions where we may provide service require license or franchise fees based on a percent of certain revenues. There are no assurances that jurisdictions that do not currently impose fees will not seek to impose fees in the future. The Telecom Act requires jurisdictions to charge nondiscriminatory fees to all telecom providers, but it is uncertain how quickly this requirement will be implemented by particular jurisdictions in our edge-out markets, especially regarding materially lower fees that may be charged to incumbent local exchange carriers.

MANAGEMENT

The following table identifies the executive officers and current directors of Madison River Communications, and their ages as of December 20, 2004.

Currently, two of our directors, Messrs. Cole and Perry, are designees of the affiliates of Madison Dearborn Partners, two of our directors, Messrs. DiSabato and Mehra, are designees of the affiliates of Goldman, Sachs & Co. and one of our directors, Mr. Pelson, is a designee of the affiliates of Providence Equity Partners. As described below under “—Election of Directors,” prior to the consummation of this offering, we will enter into a stockholders’ agreement with the existing sponsors pursuant to which each existing sponsor will have the right to designate up to two individuals who will be among the slate of nominees for election to the board of directors based on their ownership percentage of our outstanding shares of common stock. Pursuant to these rights, following consummation of this offering, we anticipate that each of our existing sponsors will have the right to designate one such individual to the board, with the affiliates of Providence Equity Partners opting initially not to designate any such nominee. Accordingly, it is expected that one of the current director designees of the affiliates of Madison Dearborn Partners, one of the director designees of the affiliates of Goldman, Sachs & Co. and Mr. Pelson will resign from the board effective as of the closing date of this offering.



Name	Age	Position
J. Stephen Vanderwoude	60	Managing Director—Chairman of the Board and Chief Executive Officer
Paul H. Sunu	48	Managing Director—Chief Financial Officer and Secretary; Director
Kenneth W. Amburn	62	Managing Director—Chief Operating Officer
Bruce J. Becker	58	Managing Director—Chief Technology Officer
Michael T. Skrivan	50	Managing Director—Revenues
John T. Hogshire	43	Vice President and Controller
Matt L. Springer	41	Vice President—General Counsel and Assistant Secretary
Karen D. Turner	36	Vice President—Administration
John R. Whitener	41	Vice President and Treasurer
Peter W. Chehayl	57	Director
Michael P. Cole	32	Director
Joseph P. DiSabato	38	Director
Richard A. May	60	Director
Sanjeev K. Mehra	46	Director
Edward W. Mullinix, Jr.	51	Director
Mark A. Pelson	42	Director
James N. Perry, Jr.	44	Director

The following sets forth certain biographical information with respect to the members of our Board of Directors and our executive officers:

Mr. J. Stephen Vanderwoude has been the Managing Director—Chairman of the Board and Chief Executive Officer of Madison River Communications since December 2004. Mr. Vanderwoude, a founding member of Madison River Telephone in 1996, also serves as Managing Director—Chairman and Chief Executive Officer of Madison River Telephone, a position he has served since 1996. He has over 35 years of telecommunications experience, including serving as President and Chief Operating Officer and a Director of Centel Corporation and President and Chief Operating Officer of the Local Telecommunications division of Sprint Corporation. He is currently a director of Centennial Communications Corp., First Midwest Bancorp and the United States Telecom Association.

Mr. Paul H. Sunu has been the Managing Director—Chief Financial Officer and Secretary and a director of Madison River Communications since December 2004. Mr. Sunu, a founding member of Madison River Telephone in 1996, also serves as Managing Director—Chief Financial Officer and Secretary of Madison River Telephone. Mr. Sunu has served as a Managing Director of Madison River Telephone since 1996. Mr. Sunu is a

certified public accountant and a member of the Illinois Bar with 23 years of experience in finance, tax, treasury, securities and law.

Mr. Kenneth W. Amburn has been the Managing Director—Chief Operating Officer of Madison River Communications since December 2004. Mr. Amburn also serves as a Managing Director—Chief Operating Officer of Madison River Telephone. Mr. Amburn joined Madison River Telephone in 1998 and has served in various management capacities culminating with his appointment as Chief Operating Officer in 2000. He has over 39 years of telecommunications experience, including serving in executive operating capacities with Centel-Texas, Network Construction Services and Citizens Utilities.

Mr. Bruce J. Becker has been the Managing Director—Chief Technology Officer of Madison River Communications since December 2004. Mr. Becker also serves as Managing Director—Chief Technology Officer of Madison River Telephone. Mr. Becker has served as a Managing Director of Madison River Telephone since joining the Company in October 1998. He has over 40 years of telecommunications experience, including serving in executive operating capacities with ICG Telecommunications and Centel Corporation.

Mr. Michael T. Skrivan has been the Managing Director—Revenues of Madison River Communications since December 2004. Mr. Skrivan has served in various management capacities since joining Madison River Telephone in May 1999 culminating with his appointment as Managing Director—Revenues for Madison River Telephone in 2000. Prior to joining Madison River Telephone, Mr. Skrivan was a founding member in the consulting firm of Harris, Skrivan & Associates, LLC, which provides regulatory and financial services to local exchange carriers from October 1995 to May 1999. Mr. Skrivan is a member of the Telecom Policy Committee of the United States Telecom Association.

Mr. John T. Hogshire has been Vice President and Controller of Madison River Communications since December 2004. Mr. Hogshire has been Vice President and Controller of Madison River Telephone since 1999. He has been employed by Madison River Telephone since 1998.

Mr. Matt L. Springer has been Vice President—General Counsel and Assistant Secretary of Madison River Communications since December 2004. Mr. Springer has been Vice President, General Counsel and Assistant Secretary of Madison River Telephone since January 2000. From October 1994 to December 1999, he was Assistant General Counsel to RTFC.

Ms. Karen D. Turner has been Vice President—Administration of Madison River Communications since December 2004. From September 2001 to August 2004, Ms. Turner served in various financial services management positions for Progress Energy, Inc., an electric utility company. From May 1998 to September 2001, Ms. Turner was employed at Madison River Telephone, serving as an accounting manager from May 1998 to June 2000 and as Treasurer from June 2000 to September 2001.

Mr. John R. Whitener has been Vice President and Treasurer of Madison River Communications since December 2004. Mr. Whitener has been Vice President and Treasurer of Madison River Telephone since September 2001. He served as Vice President of Financial Reporting of Madison River Telephone from April 2000 to September 2001. From 1998 to 2000, Mr. Whitener was a senior manager at Deloitte & Touche LLP.

Mr. Peter W. Chehayl has been a director of Madison River Communications since December 2004 and a member of the Board of Managers of Madison River Telephone since May 2004. Mr. Chehayl served as the Senior Vice President, Treasurer and Chief Financial Officer of Centennial Communications Corp. from January 1999 until August 2002. Prior to joining Centennial Communications Corp., Mr. Chehayl was the Vice President and Treasurer of 360 Communications Company (now a subsidiary of ALLTEL Corporation) since 1996. From 1991 to 1996, he served as Vice President—Capital Markets at Sprint Corporation.

Mr. Michael P. Cole has been a director of Madison River Communications since December 2004 and a member of the Board of Managers of Madison River Telephone since December 2003. Mr. Cole is also a director of Madison Dearborn Partners LLC focusing on investments in the media and communications industries. Mr. Cole joined Madison Dearborn Partners LLC in August 1997, and has served as a director since October 2003.

Mr. Cole is currently a member of the board of directors of Omne Holdings, Ltd., MessageLabs Group Limited and the Chicago Entrepreneurial Center within the Chicagoland Chamber of Commerce.

Mr. Joseph P. DiSabato has been a director of Madison River Communications since December 2004 and a member of the Board of Managers of Madison River Telephone since 1997. Mr. DiSabato is a Managing Director of Goldman, Sachs & Co. in the Principal Investment Area of its Merchant Banking Division, where he has been employed since 1994. Mr. DiSabato serves as a director of several privately held companies on behalf of Goldman, Sachs & Co.

Mr. Richard A. May has been a director of Madison River Communications since December 2004 and a member of the Board of Managers of Madison River Telephone since February 2004. Until April 2004, Mr. May was the Chairman and Chief Executive Officer of Great Lakes REIT, a position he held since he co-founded the real estate investment trust in 1992.

Mr. Sanjeev K. Mehra has been a director of Madison River Communications since December 2004 and a member of the Board of Managers of Madison River Telephone since 1996. Mr. Mehra joined Goldman, Sachs & Co. in 1986, and has served since 1996 as a Managing Director in the Principal Investment Area of its Merchant Banking Division and serves on the Principal Investment Area Investment Committee. Mr. Mehra is a director of Burger King Corporation, Hexcel Corporation, Nalco Holding Company and various privately held companies and is a member of the Board of Trustees of Trout Unlimited.

Mr. Edward W. Mullinix, Jr. has been a director of Madison River Communications since December 2004 and a member of the Board of Managers of Madison River Telephone since May 2004. Mr. Mullinix has served as Executive Vice President and Chief Financial Officer of The Haskell Company since November 2000. From 1999 to November 2000, Mr. Mullinix served as President and Chief Operating Officer of Paging Network, Inc. He currently serves as a director for Daniel, Inc. and member of United Way of Northeast Florida’s finance committee.

Mr. Mark A. Pelson has been a director of Madison River Communications since December 2004 and a member of the Board of Managers of Madison River Telephone since 1999. Mr. Pelson is a Managing Director of Providence Equity Partners, where he has been employed since 1996. Mr. Pelson is currently also a director of Consolidated Communications, Inc. and several privately held companies. Mr. Pelson has informed us that he intends to resign his positions with Madison River Communications and Madison River Telephone upon consummation of this offering.

Mr. James N. Perry, Jr. has been a director of Madison River Communications since December 2004 and a member of the Board of Managers of Madison River Telephone since 1996. Mr. Perry is currently a Managing Director of Madison Dearborn Partners LLC, which he co-founded in 1993. From 1985 to 1993, Mr. Perry was at First Chicago Venture Capital, the predecessor firm to Madison Dearborn Partners LLC, where he most recently served as Senior Investment Manager. He currently serves on the boards of directors of Band-X Limited, Cbeyond Communications, LLC and Looking Glass Networks, LLC.

Election of Directors

Madison River Communications’ certificate of incorporation and bylaws provide that our board of directors will consist of not less than five nor more than fifteen members, the exact number of which will be fixed from time to time by our board. Upon the closing of this offering, the size of our board will be fixed at ten directors. Each of Messrs. is an independent director in accordance with the independence requirements of the Nasdaq National Market.

existing sponsor owns at least 12.5% of the total outstanding shares of common stock of Madison River Communications on a fully diluted basis and one individual so long as such existing sponsor owns at least (i) 50% of the shares of common stock of Madison River Communications which such existing sponsor owned immediately following the consummation of this offering (or immediately following the closing of any sale pursuant to the exercise of the underwriters’ over-allotment option) or (ii) 5.0% of the total outstanding shares of common stock of Madison River Communications on a fully diluted basis. As a result, following consummation of this offering, we anticipate that affiliates of each of Madison Dearborn Partners, Goldman, Sachs & Co. and Providence Equity Partners will have the right to designate one such nominee for election to Madison River Communications’ board of directors, with the affiliates of Providence Equity Partners opting initially not to designate any such nominee.

Upon the closing of this offering, Mr. Vanderwoude, the Chief Executive Officer of Madison River Communications, will serve as the Chairman of Madison River Communications. We expect that the right to be elected as the Chairman of Madison River Communications will also be provided to Mr. Vanderwoude pursuant to an amendment to his employment agreement.

The nomination of directors will be determined by a majority of our independent directors in accordance with Nasdaq rules. Our directors will be elected by our stockholders each year at our annual meeting. Our directors are elected to serve one-year terms.

Committees of the Board

Prior to the consummation of this offering, we plan to establish an audit committee and a compensation committee.

Audit Committee

The audit committee will be comprised of not fewer than three directors elected by a majority of the board. The audit committee will oversee our accounting and financial reporting processes, as well as the audits of our financial statements, including retaining and discharging our auditors. Our audit committee will comply with the independence requirements of the Nasdaq National Market and the rules of the SEC under the Securities Exchange Act of 1934, as amended. It is expected that the audit committee will be comprised of Messrs. , and .

Compensation Committee

The compensation committee will be comprised of not fewer than three directors elected by a majority of the board. The compensation committee will be responsible for determining salaries, incentives and other forms of compensation for officers and other employees and administering our various incentive compensation and benefit plans. Our compensation committee will comply with the independence requirements of the Nasdaq National Market. It is expected that the compensation committee will be comprised of Messrs. , and .

Compensation Committee Interlocks and Insider Participation

None of our executive officers will serve as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee.

J. Stephen Vanderwoude, our Chief Executive Officer, participated in deliberations of the Board of Managers of Madison River Telephone concerning executive officer compensation during fiscal year 2003 and 2004, except for deliberations concerning his own compensation.

Compensation of Directors

After the consummation of this offering, we will pay each of our independent directors $15,000 per year and $1,500 for each meeting of the board of directors or any committee of the board that he or she attends. We also plan to grant stock options and/or restricted common stock to independent directors under our Omnibus Stock Plan.

Compensation of Executive Officers

The following table sets forth certain information concerning the compensation of the chief executive officer and each of the four most highly compensated executive officers of Madison River Telephone during the fiscal years ended December 31, 2004, 2003 and 2002. These individuals are referred to as the “named executive officers.”

Summary Compensation Table


	Annual Compensation							Long-term Compensation Awards	All Other Compensation(2)
Name	Year	Salary		Bonus		Other Annual Compensation(1)		Securities Underlying Unit Option Grants	All Other Compensation(2)
J. Stephen Vanderwoude	2004	$	286,496	$	300,000	$	5,515	—	$	6,585
(Chairman and CEO)	2003		284,275		380,000		1,800	—		6,209
	2002		285,425		250,000		1,818	—		5,500

Paul H. Sunu	2004		226,056		439,441		4,895	—		6,150
(Chief Financial Officer and Secretary)	2003		224,498		510,524		2,520	—		6,000
(Chief Financial Officer and Secretary)	2002		225,111		198,398		1,818	—		5,500

Kenneth W. Amburn	2004		180,000		90,000		—	—		6,472
(Chief Operating Officer)	2003		180,000		88,000		—	—		6,322
(Chief Operating Officer)	2002		180,000		70,000		—	—		6,514

Bruce J. Becker	2004		180,000		93,728		—	—		—
(Chief Technology Officer)	2003		180,000		111,657		—	—		—
(Chief Technology Officer)	2002		180,000		58,398		—	—		—

Michael T. Skrivan	2004		180,000		70,000		—	—		6,150
(Managing Director—Revenues)	2003		180,000		88,000		—	—		6,000
(Managing Director—Revenues)	2002		160,000		60,000		—	—		5,500

(1)

Other annual compensation consists of an auto allowance.

(2)

Includes matching contributions for the 401(k) savings plan and group term life insurance premiums paid on behalf of certain officers

Employee Benefit Plans

401(k) Savings Plans

In 1998, we established a 401(k) savings plan covering substantially all of our employees, except for employees of Gulf Telephone Company that have their own 401(k) savings plan, that meet certain age and employment criteria. Pursuant to the plans, eligible employees may elect to reduce their current compensation up to certain dollar amounts that do not exceed legislated maximums. We have agreed to contribute an amount equal to 50% of employee contributions for the first 6% of compensation contributed on behalf of all participants. We made matching contributions to these plans of approximately $0.8 million, $0.7 million and $0.9 million in 2004, 2003 and 2002, respectively. The 401(k) plan is intended to qualify under Section 401 of the Internal Revenue Code of 1986, as amended, so that contributions by employees or by us to the plan, and income earned on plan contributions, are not taxable to employees until withdrawn and our contributions are deductible by us when made.

Long-Term Incentive Plan

In 1998, we adopted a long-term incentive plan arrangement which provides for annual incentive awards for certain employees as approved by the Board of Managers of Madison River Telephone. Under the terms of the plan, annual awards are expensed over the succeeding 12 months after the award is determined. The incentive awards vest automatically at the time of a qualified event as defined under the plan. No incentive awards are vested at this time. Vested awards are payable under certain circumstances as defined under the long-term incentive plan arrangement. We recognized compensation expense of $2.9 million, $5.4 million and $5.3 million in the years ended December 31, 2004, 2003 and 2002, respectively, related to the long-term incentive awards.

2005 Omnibus Stock Plan

Prior to the consummation of this offering, we intend to adopt a new 2005 Omnibus Stock Plan, or the Omnibus Plan, which will replace our existing long-term incentive plan for grants of equity-based compensation following the consummation of this offering. There are several types of awards that may be granted under the Omnibus Plan: stock options (including both incentive stock options, or ISOs, within the meaning of Section 422 of the Internal Revenue Code and nonqualified options, which are options that do not qualify as ISOs), stock appreciation rights, restricted stock, phantom stock, stock bonus awards, and other equity-based awards valued in whole or in part by reference to, or otherwise based on, our common stock. A total of shares of common stock will be reserved for issuance under the Omnibus Plan, subject to equitable adjustment upon certain corporate transactions or events. Shares subject to an award that remain unissued upon the cancellation or termination of the award will again become available for award under the Omnibus Plan, as shall any shares subject to an award that are retained by us as payment of the exercise price or tax withholding obligations and previously owned shares surrendered to us as payment of the exercise price of an option or to satisfy tax withholding obligations. In addition, to the extent an award is paid or settled in cash, the number of shares previously subject to the award shall again be available for grants pursuant to the Omnibus Plan.

The Omnibus Plan will be administered by our compensation committee. Our officers, employees and non-employee directors and third-party consultants are eligible to receive awards under the Omnibus Plan in the discretion of the compensation committee. The compensation committee will have the responsibility for interpreting the plan and determining all of the terms and conditions of awards made under the plan, including when they will become exercisable or otherwise vest. The compensation committee has the authority to accelerate the exercisability and/or vesting of any outstanding award at such times and under such circumstances as it deems appropriate. The Omnibus Plan may be amended by our board, subject to stockholder approval where necessary to satisfy legal or regulatory requirements. The Omnibus Plan will terminate not later than the tenth anniversary of its adoption. Awards granted before the termination of the Omnibus Plan may extend beyond that date in accordance with their terms.

The Omnibus Plan is intended to permit the grant of performance-based compensation within the meaning of Section 162(m) of the Internal Revenue Code, which generally limits the deduction that we may take for compensation of our five most senior executive officers. Under Section 162(m), certain compensation, including compensation based on the attainment of performance goals, will not be subject to this limitation if certain requirements are met. The vesting of awards that are intended to qualify as performance based compensation will be based upon business criteria as established by the compensation committee from time to time.

To date, no awards have been granted under the Omnibus Plan. Inasmuch as awards under the Omnibus Plan will be granted at the sole discretion of our compensation committee, it is not possible at this time to determine either the persons who will receive awards under the Omnibus Plan or the amount of any such awards. On the date of effectiveness of the registration statement of which this prospectus forms a part, we intend to file a registration statement on Form S-8 covering the shares of our common stock reserved for issuance under the Omnibus Plan and our existing equity incentive plans.

Pension Plan

In May 1998, we adopted a noncontributory defined benefit pension plan, which was transferred to us from our subsidiary, Mebtel, Inc. The plan covers all full-time employees, except employees of Gulf Coast Services, who have met certain age and service requirements and provides benefits based upon the participants’ final average compensation and years of service. Further accrual of benefits under the pension plan were frozen effective February 28, 2003 for all eligible employees except employees subject to collective bargaining agreements. We have a continued obligation to fund the plan and our policy is to comply with the funding requirements of the Employee Retirement Income Security Act of 1974, as amended.

Employment Agreements

Madison River Telephone has entered into employment agreements with Messrs. Vanderwoude, Sunu, Becker, Amburn and Skrivan. The agreements provide for employment of each executive through December 31, 2005. The agreements are subject to termination by either party (with or without cause) at any time subject to applicable notice provisions. If the executive’s employment is terminated by Madison River Telephone other than for cause, or due to his death or disability, or the executive terminates his employment for good reason, the executive is entitled to receive his continued base salary for six months after the date of termination, plus his bonus on a pro rata basis. The executive will also be entitled to receive a cash lump sum equal to any compensation payments deferred by the executive and any unpaid amounts in respect of any bonus for the fiscal year prior to the year of termination. In some instances, these payments could total in excess of $100,000. The agreements provide that the executives may not disclose any confidential information while employed by Madison River Telephone or thereafter. The agreements also provide that the executive will not compete with Madison River Telephone during their employment or for a period of up to a maximum of 15 months following termination of employment. Additionally, the agreements prohibit the executives for a period of 15 months from soliciting for employment any person who at any time during the executive’s employment was an employee of Madison River Telephone. Under the agreements, Madison River Telephone is obligated to indemnify the executives for all expenses, liabilities and losses reasonably incurred by them in connection with their employment.

On December 31, 2003, Mr. Sunu’s employment agreement was amended to, among other things, provide a special award payable to Mr. Sunu in installments on each December 31 of 2003 through 2007, so long as Mr. Sunu remains employed by Madison River Telephone on the date of payment for each such annual bonus. Accordingly, Mr. Sunu received installment payments for 2003 and 2004 in accordance with the amended agreement. These payments are included in the amount of bonus reported for Mr. Sunu in the summary compensation table above. On February 2, 2005, we agreed to pay a cash bonus in the amount of $665,000 to Mr. Sunu on the date of consummation of this offering. The payment is intended to reward Mr. Sunu for his efforts in connection with the completion of the transactions and his past service to us, including his efforts in negotiating various debt refinancings which led to a substantial increase in our liquidity. We intend to amend Mr. Sunu’s employment agreement to eliminate the remaining installment payments under the special award payable to him in 2005 through 2007 under the employment agreement effective upon payment of the $665,000 bonus.

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SECURITY OWNERSHIP

OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial ownership of our common stock after giving effect to the reorganization transactions by:

each person known by us to beneficially own 5% or more of our common stock;

each member of our board of directors;

each of our named executive officers;

all directors and executive officers as a group; and

the selling stockholders.

Beneficial ownership is determined according to the rules of the SEC and generally means that a person has beneficial ownership of a security if he or she possesses sole or shared voting or investment power of that security, and includes options that are currently exercisable or exercisable within 60 days. Each director, officer or 5% or more stockholder, as the case may be, has furnished us with information with respect to beneficial ownership. Except as otherwise indicated, we believe that the beneficial owners of common stock listed below, based on the information each of them has given to us, have sole investment and voting power with respect to their shares, except where community property laws may apply.

The following table lists applicable percentage ownership based on shares of common stock outstanding after giving effect to the reorganization transactions. The following table also lists applicable percentage ownership based on shares of common stock outstanding after completion of this offering. Except as noted below, this table does not take into account the underwriters’ over-allotment option.

Shares Offered Hereby

Shares Beneficially Owned

After this Offering

Shares Beneficially
Owned Prior to
this Offering

Assuming
No Exercise
of Over-
Allotment
Option

Assuming
Full Exercise
of Over-
Allotment
Option

Assuming No
Exercise of Over-
Allotment Option

Assuming Full
Exercise of Over-
Allotment Option

Name(1)

Number

Madison Dearborn Partners, LLC(2)

The Goldman Sachs Group, Inc.(3)

Providence Equity Partners(4)

Daniel M. Bryant(5)

G. Allan Bryant(6)

J. Stephen Vanderwoude

Paul H. Sunu

Kenneth W. Amburn

Bruce J. Becker

Michael T. Skrivan

Peter W. Chehayl

Michael P. Cole

Joseph P. DiSabato(3)

Richard A. May

Sanjeev K. Mehra(3)

Edward Mullinix

Mark A. Pelson(4)(7)

James N. Perry, Jr.

James D. Ogg

All directors and executive officers as a group (17 persons)

Represents less than one percent (1%).

(1)

Unless otherwise indicated, the address of each beneficial owner is c/o Madison River Communications, 103 South Fifth Street, Mebane, North Carolina 27302.

(2)

Includes shares which Madison Dearborn Capital Partners, L.P. has the right to acquire upon conversion of a note payable from Madison River Telephone. Madison Dearborn Partners LLC and certain of its affiliates may be deemed to own beneficially and indirectly in the aggregate shares of common stock which are owned directly or indirectly by investment partnerships, of which affiliates of Madison Dearborn Partners, LLC is the general partner or managing general partner. We

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refer to these investment partnerships as the MDP Funds. Madison Dearborn Partners, LLC is an affiliate of each of the MDP Funds. The MDP Funds and their respective beneficial ownership of shares of our common stock are: (a) shares held by Madison Dearborn Capital Partners II, L.P.; (b) shares held by Madison Dearborn Capital Partners III, L.P.; (c) shares held by Madison Dearborn Special Equity III, L.P.; (d) shares held by Madison Dearborn Special Advisors Fund I, LLC; and (e) shares held by Madison Dearborn Special Co-Invest Partners I. Our directors Michael P. Cole and James N. Perry, Jr. are managing directors of Madison Dearborn Partners LLC. Messrs. Cole and Perry and Madison Dearborn Partners LLC each disclaims beneficial ownership of the shares owned directly or indirectly by the MDP Funds, except to the extent of their pecuniary interest therein, if any. The address for Madison Dearborn Partners LLC and each of the MDP Funds is Three First National Plaza, Suite 3800, Chicago, Illinois 60602.

(3)

The Goldman Sachs Group, Inc., which we refer to as GS Group, Goldman, Sachs & Co., which we refer to as Goldman Sachs and which is one of the underwriters for this offering, and certain of their affiliates, may be deemed to own beneficially and indirectly in the aggregate shares of common stock which are owned directly or indirectly by investment partnerships, of which affiliates of Goldman Sachs and GS Group are the general partner or managing general partner. We refer to these investment partnerships as the GS Limited Partnerships. Goldman Sachs is an affiliate of each of, and the investment manager for certain of, the GS Limited Partnerships. The GS Limited Partnerships and their respective beneficial ownership of shares of our common stock are: (a) GS Capital Partners II, L.P. shares, (b) GSCP II Mad River Holding, L.P. shares, (c) GSCP II Germany Mad River Holding, L.P. shares, (d) GSCP II Offshore Mad River Holding, L.P. shares, (e) Bridge Street Fund 1997, L.P. shares, and (f) Stone Street Fund 1997, L.P. shares. Our directors Joseph P. DiSabato and Sanjeev K. Mehra are managing directors of Goldman Sachs. Messrs. DiSabato and Mehra, Goldman Sachs and GS Group each disclaims beneficial ownership of the shares owned directly or indirectly by the GS Limited Partnerships, except to the extent of their pecuniary interest therein, if any. The address for GS Group, Goldman Sachs and the GS Limited Partnerships is 85 Broad Street, New York, New York 10004.

(4)

Includes shares held by Providence Equity Partners, L.P. and shares held by Providence Equity Partners II L.P. Providence Equity Partners L.L.C. is the general partner of each of these entities and has the sole power to direct the voting and disposition of the shares. As a result, each of the entities may be deemed to share beneficial ownership of the shares owned by the others. Each of the entities disclaims this beneficial ownership. Jonathan M. Nelson, by virtue of his ownership interest in, and as managing member of, Providence Equity Partners, L.L.C. may also be deemed to possess indirect beneficial ownership of the securities owned by these entities. He disclaims such beneficial ownership except to the extent of his pecuniary interest in those securities. Glenn M. Creamer and Paul J. Salem are the remaining voting members of Providence Equity Partners, L.L.C., but neither has a voting interest sufficient, by itself, to either direct or prevent the voting or disposition of the shares deemed to be owned by Providence Equity Partners, L.L.C. The address of Providence Equity and Mr. Nelson is c/o Providence Equity Partners, Inc., 50 Kennedy Plaza, 18th Floor, Providence, Rhode Island 02903.

(5)

Includes shares held by Daniel M. Bryant and shares held by The Michael E. Bryant Life Trust of which Daniel M. Bryant is a trustee. Daniel M. Bryant disclaims beneficial ownership of the units held by The Michael E. Bryant Life Trust. The address for Daniel M. Bryant is .

(6)

Includes shares held by G. Allan Bryant and shares held by The Michael E. Bryant Life Trust of which G. Allan Bryant is a trustee. G. Allan Bryant disclaims beneficial ownership of the units held by The Michael E. Bryant Life Trust. The address for G. Allan Bryant is .

(7)

Mr. Pelson is a Managing Director of Providence Equity Partners and holds a minority interest in the Providence Equity funds that own shares of common stock. As result, Mr. Pelson may be deemed to share beneficial ownership of the shares owned by Providence Equity Partners. Mr. Pelson disclaims this beneficial ownership. Mr. Pelson will resign as a director of Madison River Communications and Madison River Telephone effective on the closing of this offering.

Each of the GS Limited Partnerships is a selling stockholder in this offering and an affiliate of Goldman Sachs, a broker-dealer and an underwriter participating in this offering. The GS Limited Partnerships have advised Madison River Communications that they purchased their interests in Madison River Telephone in the ordinary course of business, and at the time of the purchase of the securities, the GS Limited Partnerships had no agreements or understandings, directly or indirectly with any person to distribute the securities other than the registration rights agreement among Madison River Telephone, the GS Limited Partnerships and certain other equity holders. The selling stockholders in this offering may be deemed to be underwriters.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Reorganization Transactions

As part of the reorganization transactions, certain direct and indirect holders of membership units in Madison River Telephone will receive shares of common stock in Madison River Communications in direct or indirect exchange for their outstanding membership units in Madison River Telephone. The number of shares of common stock to be issued in the reorganization transactions was determined by negotiations between the holders of the outstanding membership units in Madison River Telephone in consultation with our financial advisors. In the reorganization transactions, our existing sponsors, the Coastal shareholders and our existing management investors will receive the following number of shares of common stock:


Related Party		Shares of Common Stock
Affiliates of Madison Dearborn Partners (1)
Affiliates of Goldman, Sachs & Co.
Affiliates of Providence Equity Partners
Daniel M. Bryant (2)
G. Allan Bryant (2)
The Michael E. Bryant Life Trust (2)
J. Stephen Vanderwoude (3)
Paul H. Sunu (3)
Bruce J. Becker (3)

(1)

Includes the shares issuable in respect of the 392,610 Class A units issued upon conversion of the note payable described in “—Madison Dearborn Capital Partners, L.P. Convertible Note.”

(2)

Daniel M. Bryant, G. Allan Bryant and The Michael E. Bryant Life Trust are collectively the Coastal shareholders.

(3)

Shares issued to Messrs. Vanderwoude, Sunu and Becker include , and shares of restricted stock issued in respect of Class D units, a portion of which remain subject to vesting.

Stockholders’ Agreement

Prior to the consummation of this offering, we will enter into a stockholders’ agreement with the existing sponsors pursuant to which each existing sponsor will have the right to designate two individuals who will be among the slate of nominees for election to Madison River Communications’ board of directors so long as such existing sponsor owns at least 12.5% of the total outstanding shares of common stock of Madison River Communications on a fully diluted basis and one individual so long as such existing sponsor owns at least (i) 50% of the shares of common stock of Madison River Communications which such existing sponsor owned immediately following the consummation of this offering (or immediately following the closing of any sale pursuant to the exercise of the underwriters’ over-allotment option) or (ii) 5.0% of the total outstanding shares of common stock of Madison River Communications on a fully diluted basis. As a result, we anticipate that affiliates of each of Madison Dearborn Partners, Goldman, Sachs & Co. and Providence Equity Partners will have the right to designate one nominee to Madison River Communications’ board upon the closing of this offering, with the affiliates of Providence Equity Partners opting initially not to designate one such nominee.

Registration Rights Agreement

Effective upon the consummation of this offering, Madison River Communications and the existing equity investors will enter into a registration rights agreement, pursuant to which Madison River Communications will provide these persons certain demand, piggyback and shelf registration rights with respect to the shares of common stock owned by these persons following this offering. These shares are referred to as registrable securities. Pursuant to the demand registration rights, the holders of a majority of the registrable securities held

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by (i) affiliates of Madison Dearborn Partners, (ii) affiliates of Goldman, Sachs & Co. and (iii) affiliates of Providence Equity Partners each may require us to file up to two long-form registration statements and an unlimited number of short-form registration statements. These demand registration rights are exercisable at any time following the consummation of this offering. However, pursuant to the lock-up provisions described under “Underwriting-Lock-Up Arrangements,” we have agreed not to file, and the existing sponsors have agreed not to cause us to file, a registration statement that would cover these registrable securities for a period of 180 days after the date of the final prospectus for this offering without first obtaining the prior written consent of Lehman Brothers Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated on behalf of the underwriters. We will not be obligated to effect any demand registration within 180 days after the effective date of a previous demand registration. We have agreed to pay all costs and expenses in connection with each such registration, except underwriting discounts and commissions applicable to the securities sold.

The registration rights agreement will replace the existing registration rights agreement between Madison River Telephone and certain of the existing equity investors, which contemplated a public offering of equity securities of Madison River Telephone. Upon the effectiveness of the registration rights agreement, the existing registration rights agreement will be terminated.

Coastal Shareholders

On April 10, 2002, Madison River Telephone announced the completion of an agreement with the Coastal shareholders, which, among other things, modified certain provisions of the shareholders’ agreement that was entered into when Coastal Communications, Inc. acquired Coastal Utilities, Inc. in March 2000. Under the terms of the agreement, the Coastal shareholders exchanged all of their series B stock and 40% of their series A stock in Coastal Communications, Inc. for 18.0 million Class A units in Madison River Telephone valued at $1 per unit and three term notes issued by Madison River Telephone in the aggregate principal amount of $20 million, payable over eight years and bearing interest at approximately 8.4% per annum. In addition, Coastal Communications, Inc. redeemed 30 shares of series A stock retained by the Coastal shareholders for $33,333.33 per share, or approximately $1.0 million, at the closing of the transaction. Coastal Communications, Inc. redeemed an additional 30 shares of series A stock in June 2003 for approximately $1.0 million and in July 2004 for approximately $1.0 million. Under the terms of Coastal Communications, Inc.’s amended shareholders’ agreement, the Coastal shareholders have the right to require Coastal Communications, Inc. to redeem their remaining 90 shares of series A stock in increments not to exceed 30 shares at $33,333.33 per share, or an aggregate value of $1.0 million, in any thirteen-month period. Under the terms of agreement, we may at any time require the Coastal shareholders to sell their shares of series A stock to us for a purchase price of $33,333.33 per share, or an aggregate of $3.0 million. At the closing of this offering, we will repurchase the remaining 90 shares of series A stock held by the Coastal shareholders out of the proceeds of this offering and the new credit facilities and cash on hand.

On November 24, 2004, Madison River Telephone entered into an agreement with the Coastal shareholders to repay the notes owed to them, plus accrued and unpaid interest thereon, in exchange for $20 million in cash plus 2,000,000 newly issued Madison River Telephone Class A units, representing an approximately 1% ownership interest in Madison River Telephone. The terms of the agreement were determined by negotiations between us and the Coastal shareholders in consultation with our respective financial advisors. This transaction closed on December 22, 2004. On the closing date of this transaction, the total accrued and unpaid interest on the notes was $1.9 million. As of December 31, 2004, the newly issued Madison River Telephone Class A units were valued at approximately $1.6 million.

Madison Dearborn Capital Partners, L.P. Convertible Note

In April 1997, Madison River Telephone issued to Madison Dearborn Capital Partners, L.P., one of our existing sponsors, a note payable of $0.4 million that bears interest at 8.0% per annum and is due on demand. The principal amount and unpaid interest are due in October 2011. The note is unsecured and, at any time prior to

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the payment of the entire principal amount, Madison Dearborn Capital Partners, L.P. may convert all unpaid principal and accrued interest into Class A units in Madison River Telephone. We believe that the terms of the note payable are comparable to those that could have been obtained from unaffiliated parties. At December 20, 2004, the unpaid principal on the note was $392,610 and the unpaid interest on the note was $365,093. In connection with the transactions, the note, including all accrued and unpaid interest, will be converted pursuant to its terms into 392,610 Class A units, which will then be converted into shares of common stock of Madison River Communications pursuant to the reorganization transactions. Based on a public offering price of $ per share, the mid-point of the range shown on the cover of this prospectus, the aggregate value of the shares of common stock to be received in exchange for the Class A units is $ .

Loans to Related Parties

On January 4, 2002, ORVS Madison River sold its interest in Madison River Telephone, which consisted of 5,550,253.16 Class A units at December 31, 2001, to certain members of management and to Madison River Telephone for approximately $1.21 to $1.23 per unit. Madison River Telephone repurchased 1,632,427.40 of these Class A units and retired them. Members of management purchasing Class A units from ORVS Madison River were J. Stephen Vanderwoude (2,489,450.97 units), James D. Ogg (544,142.74 units), Paul H. Sunu (462,521.37 units) and Bruce J. Becker (421,710.68 units). The terms of the transaction were determined by negotiations by the parties in consultation with their respective financial advisors. To finance a portion of their purchase of Class A units from ORVS Madison River, Mr. Sunu, Mr. Ogg and Mr. Becker each borrowed $466,700, or a total of $1.4 million, from Madison River Capital. The loans, payable on demand, bear interest at 5% per annum and are secured by the respective individual’s Class A interests purchased. As of December 31, 2004, $1.4 million remained outstanding under these loans. We intend to call these loans due in connection with consummation of this offering.

Mr. Sunu also had a loan payable to Madison River Telephone the proceeds of which were used to purchase 250,000 Class A units in Madison River Telephone. The loan, payable on demand, bore interest at 5% and was secured by Mr. Sunu’s Class A interests. The loan, which totaled $145,500 as of December 31, 2003, was repaid in full in December 2004.

Cash Bonuses

In September 2002, we agreed to pay Mr. Sunu a bonus in the amount of $435,000 in connection with his efforts in consummating the transactions with the Coastal shareholders on April 10, 2002 described above. The bonus is only payable in the event that a liquidity event with respect to Madison River Telephone occurs and the existing sponsors receive a return of their capital contribution with respect to their Class A units in Madison River Telephone plus an 8% rate of return. We expect that the consummation of this offering will satisfy the conditions to the payment of the bonus.

On February 2, 2005, we agreed to pay a cash bonus in the amount of $665,000 to Mr. Sunu on the date of consummation of this offering. The payment is intended to reward Mr. Sunu for his efforts in connection with the completion of the transactions and his past service to us, including his efforts in negotiating various debt refinancings which led to a substantial increase in our liquidity.

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DESCRIPTION OF NEW CREDIT FACILITIES

Concurrently with the closing of this offering, Madison River Capital, LLC will enter into a credit agreement governing the new credit facilities with a syndicate of lenders. Madison River Capital, LLC has received a commitment letter and a summary of terms and conditions from Merrill Lynch Capital Corporation (together with its affiliates referred to as “Merrill Lynch”), Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman Sachs Credit Partners L.P., (together with its affiliates referred to as “Goldman Sachs”), Lehman Commercial Paper Inc., (together with its affiliates referred to as “Lehman”) and Lehman Brothers Inc. pursuant to which each of Merrill Lynch, Goldman Sachs and Lehman have agreed to provide up to one-third of the principal amount of the new credit facilities, subject to the terms and conditions set forth in the commitment letter and the summary of terms and conditions. Each of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman, Sachs & Co. and Lehman Brothers Inc. are acting as underwriters in this offering. This offering is conditioned upon the closing of the new credit facilities.

The following is a description of the general terms that are contemplated to be included in the new credit facilities. The definitive documentation for the new credit facilities continues to be negotiated and may contain provisions different from those set forth below. This information relating to the new credit facilities is qualified in its entirety by reference to the complete text of the documents entered into or to be entered into in connection with the new credit facilities.

The new credit facilities will provide for borrowings of (1) up to $525.0 million to be provided by Merrill Lynch, Goldman Sachs and Lehman and (2) up to $55.6 million expected to be provided by the RTFC as follows:

a new revolving credit facility providing for up to $75.0 million in senior secured revolving loans outstanding at any time;

a term loan B facility providing for senior secured term loans in an aggregate principal amount of up to $450.0 million (subject to reduction based on the amount of the term loan C facility described below);

a term loan C facility providing for senior secured term loans in an aggregate principal amount of up to $50.0 million to be provided by the RTFC, the lender under our existing credit facilities (which shall reduce the term loan B facility on a dollar-for-dollar basis); and

a term loan D facility providing for senior secured term loans in an aggregate amount of up to $5.6 million to be provided by the RTFC to finance the required purchase of subordinated capital certificates in connection with the funding of the term loan C and D facilities.

The new revolving credit facility will have a swingline subfacility in an amount to be determined and a letter of credit subfacility in an amount to be determined, which will allow issuances of letters of credit for our account.

Upon the consummation of the transactions, we expect to have a total of $455.6 million of senior debt outstanding under the new term loan facilities and no borrowings outstanding under the new revolving credit facility. We expect to borrow under the new revolving credit facility from time to time as needed to provide for our working capital and general corporate needs.

Availability

The availability of, and the commitments to extend credit under, the new credit facilities will be subject to various customary conditions precedent. If the new credit facilities have not closed by April 30, 2005, the lenders’ commitments set forth in the commitment letter and summary of terms and conditions will terminate.

In addition, as a condition to borrowing under the term loan C and D facilities, we are required to invest up to $5.6 million, or approximately 10% of the loans under the term loan C and D facilities, in subordinated capital certificates to be issued to us by the RTFC. The RTFC will redeem the subordinated capital certificates in proportion to our principal repayments under the term loan C and D facilities.

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Interest Rates and Fees

Borrowings under the revolving credit facility and term loan B Facility will bear interest, at our option, at either (a) a base rate, as such term will be defined in the new credit facilities, plus an applicable margin or (b) the London inter-bank offered rate, or LIBOR, plus an applicable margin. The base rate applicable margin and the LIBOR applicable margin will be between 1.00% and 1.75% and 1.75% and 2.50%, respectively, based on the credit ratings assigned to the new credit facilities at closing.

Borrowings under the term loan C and term loan D facilities are expected to bear interest at a fixed interest rate of 5.15% through August 15, 2006 and thereafter, at our option, at either (a) a fixed rate or (b) the RTFC’s prevailing base variable interest rate plus 0.50%.

We will pay certain future fees with respect to the loans under the new credit facilities, including:

in respect of the revolving credit facility, a commitment fee of 0.50% per annum of any unused amounts;

a commission on the aggregate face amount of all outstanding letters of credit at a rate per annum equal to the applicable margin for borrowings under the revolving credit facility that bear interest at LIBOR and an issuing fee on the face amount of each letter of credit equal to 0.25% per annum; and

customary annual administration fees.

Maturity

The new credit facilities will mature and terminate on the date that is seven years after the closing of the new credit facilities.

Mandatory Prepayments

Subject to certain conditions and exceptions, we will be required to first prepay borrowings under the term loan B and term loan C facilities on a pro rata basis and then repay borrowings under the revolving credit facility and/or reduce revolving credit facility commitments with:

100% of the net proceeds from certain dispositions of assets;

100% of the net proceeds from certain debt issuances;

50% of our annual excess cash flow, as such term will be defined in the new credit facilities, subject to reduction based on our total leverage ratio; and

during any “Dividend Suspension Period” (as defined below), on a quarterly basis, 50% of the increase in the “Restricted Payments Basket Amount” (as defined below) during such period.

Voluntary Prepayments

The new credit facilities will permit reductions of commitments and voluntary prepayments of loans without penalty or premium, other than standard breakage costs.

Payment of Dividends

The new credit facilities will generally restrict the amount of dividends we may pay at any time to the “Restricted Payments Basket Amount,” which shall be equal to (1) the sum of Available Cash for the Reference Period most recently ended plus $50 million minus (2) the aggregate amount of dividends paid by Madison River Communications on its common stock during the Reference Period, subject to suspension during any Dividend Suspension Period.

As used above and below under “Financial Covenants,” the following terms have the following meanings:

“Adjusted EBITDA” means:

(1)

consolidated net income, determined in accordance with generally accepted accounting principles in effect from time to time; plus

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(2)

the following items, to the extent deducted in determining consolidated net income:

(a)

Consolidated Interest Expense;

(b)

provision for income taxes;

(c)

depreciation and amortization expense;

(d)

costs and expenses related to the transactions, including related bonuses;

(e)

unrealized losses on financial derivatives recognized in accordance with SFAS No. 133;

(f)

non-cash, stock-based compensation expense;

(g)

extraordinary or unusual losses (including extraordinary or unusual losses on permitted sales of assets and casualty events);

(h)

losses on sales of assets other than in the ordinary course of business;

(i)

other non-recurring or unusual costs, expenses or losses, including, without limitation, costs, expenses or losses relating to securities offerings, investments or acquisitions, incurred after the closing date for the new credit facilities to the extent not exceeding, in the aggregate, $10.0 million;

(j)

compensation expense arising from deemed dividends, the payment of dividends or the equivalent on shares of Madison River Communications common stock issued under its Omnibus Stock Plan, any other incentive stock plans or Madison River Telephone’s long-term incentive plans; and

(k)

all other non-cash items that reduce such consolidated net income for which no cash is expected to be paid in the twelve months following the date of determination; minus

(3)

the following items, to the extent included in determining consolidated net income:

(a)

unrealized gains on financial derivatives recognized in accordance with SFAS No. 133;

(b)

extraordinary or unusual gains (including extraordinary or unusual gains on permitted sales of assets and casualty events);

(c)

gains on sales of assets other than in the ordinary course of business; and

(d)

all other non-cash income, other than the accrual of revenue in the ordinary course of business (including the non-cash portion of any Rural Telephone Bank or RTFC patronage capital allocation).

(1)

Adjusted EBITDA for such Reference Period minus

(2)

to the extent not deducted in the determination of Adjusted EBITDA, the sum of the following:

(a)

Consolidated Cash Interest Expense;

(b)

Cash Capital Expenditures;

(c)

all scheduled and voluntary (but not mandatory) principal repayments in respect of debt of Madison River Communications or its subsidiaries made during such Reference Period, excluding (A) debt repayments made with the proceeds of debt, equity, capital contributions, asset sales or exchanges or casualty (including insurance, eminent domain and condemnation) proceeds and (B) repayments of revolving debt; and

(d)

cash taxes paid during such Reference Period, excluding any cash taxes paid in respect of the Coastal and Gulf Tax Disputes.

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“Consolidated Cash Interest Expense” means, for any Reference Period, Consolidated Interest Expense for such period, excluding:

(1)

any amounts not payable or paid in cash in such period or any subsequent period;

(2)

any fees, expenses, premiums or penalties payable on or before the closing date in connection with the transactions;

(3)

any interest or premiums payable with respect to the existing notes; and

(4)

any interest, fees or penalties payable in connection with the Coastal and Gulf Tax Disputes.

“Dividend Suspension Period” means any period during which the “total leverage ratio” (as defined below) is greater than 5.10 to 1.00.

Covenants

The new credit facilities will contain customary affirmative covenants. Our new credit facilities will also contain negative covenants that limit or restrict our ability, subject to exceptions, to:

create liens and further negative pledges;

make investments;

incur debt and guarantees;

merge or sell assets;

make acquisitions;

change the nature of our business;

make restricted payments (subject to the exception for dividends described above);

prepay or repurchase subordinated debt; and

engage in certain transactions with affiliates.

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In addition, our new credit facilities will contain financial covenants which will require:

as of the end of the most recently ended four fiscal quarter period, a maximum ratio of total net debt (defined as total debt less cash) to Adjusted EBITDA (“total leverage ratio”) of not greater than 5.50 to 1.00; and

for the four-quarter period ended on the last day of any fiscal quarter, a minimum ratio of Adjusted EBITDA to the sum of Cash Interest Expense and cash taxes (other than cash taxes in respect of the Coastal and Gulf Tax Disputes taxes) (“fixed charge coverage ratio”) of not less than 2.25 to 1.00 through the end of the third fiscal quarter of 2007 and thereafter of not less than 2.00 to 1.00.

Guarantees

Madison River Communications, Madison River Telephone and each of Madison River Capital, LLC’s current and future first tier or direct domestic subsidiaries will guarantee the obligations of Madison River Capital, LLC under the new credit facilities, to the extent permitted by applicable law, rule and regulation.

Collateral

The new credit facilities, and the guarantees thereof, will be secured by, to the extent permitted by applicable law, rule and regulation, (1) a perfected security interest in all of the capital stock or equity interests of subsidiaries and intercompany notes directly owned by Madison River Communications and each guarantor (limited to 65% of the shares of any first tier non-domestic subsidiaries) and (2) a perfected lien on, and security interests in, substantially all of the tangible and intangible assets and properties of Madison River Communications and each guarantor, subject to exceptions to be agreed.

Events of Default

The new credit facilities will contain customary events of default.

Interest Rate Hedge

The new credit facilities will require us to hedge 50% of the obligations under the term loan facilities for a period of not less than three years from the closing date of our new credit facilities.

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DESCRIPTION OF CAPITAL STOCK

The following descriptions are summaries of the material provisions of the certificate of incorporation and bylaws of Madison River Communications as each will be in effect upon the closing of this offering. They may not contain all of the information that is important to you. The following descriptions are qualified in their entirety by reference to the provisions of the certificate of incorporation and bylaws of Madison River Communications, copies of the forms of which have been filed as exhibits to the registration statement of which this prospectus forms a part.

Authorized Capitalization

Madison River Communications’ authorized capital structure consists of:

authorized shares of common stock, par value $0.01 per share; and

authorized shares of preferred stock, par value $0.01 per share;

Upon the closing of this offering, there will be shares of common stock issued and outstanding and no shares of preferred stock issued and outstanding.

Common Stock

Voting Rights

The holders of our common stock are entitled to one vote for each share held of record on each matter submitted to a vote of stockholders, including the election of directors.

Madison River Communications’ certificate of incorporation and bylaws provide that its board of directors will consist of not less than five nor more than fifteen members, the exact number of which will be fixed from time to time by the board. Upon the closing of this offering, the size of our board will be fixed at seven directors. Prior to the consummation of this offering, we will enter into a stockholders’ agreement with the existing sponsors pursuant to which each existing sponsor will have the right to designate two individuals who will be among Madison River Communications’ slate of nominees for election to the board of directors of Madison River Communications so long as such holder owns at least 12.5% of the total outstanding shares of common stock of Madison River Communications on a fully diluted basis and one individual so long as such holder owns at least (i) 50% of the shares of common stock of Madison River Communications which such existing sponsor owned immediately following the consummation of this offering (or immediately following the closing of any sale pursuant to the exercise of the underwriters’ over-allotment option) or (ii) 5.0% of the total outstanding shares of common stock of Madison River Communications on a fully diluted basis.

Upon the closing of this offering, Mr. Vanderwoude, the Chief Executive Officer of Madison River Communications, will serve as the Chairman of Madison River Communications. We expect that the right to be elected as the Chairman of Madison River Communications will be provided to Mr. Vanderwoude pursuant to an amendment to his employment agreement.

Our directors will be elected each year by our stockholders at our annual meeting. Our directors are elected to serve one-year terms.

Generally, except for charter and bylaw amendments requiring a supermajority vote as described below, all matters to be voted on by stockholders must be approved by a majority or, in the case of election of directors, by a plurality of the votes entitled to be cast by all shares of common stock present in person or represented by proxy, subject to any voting rights granted to holders of any preferred stock.

Dividends

Subject to any preferential dividend rights of holders of outstanding preferred stock, holders of shares of common stock are entitled to such dividends as may be declared by Madison River Communications’ board of directors from time to time out of legally available funds. Dividends on the common stock are not cumulative.

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Upon completion of this offering, the board of directors of Madison River Communications will adopt a dividend policy that reflects an intention to distribute a substantial portion of the cash generated by our business in excess of operating needs, interest and principal payments on our indebtedness, capital expenditures, taxes and future reserves, if any, as regular quarterly dividends to Madison River Communications’ stockholders. In accordance with our dividend policy, we currently intend to pay an initial dividend of $ per share on or about , 2005 and to continue to pay quarterly dividends at an annual rate of $ per share for the first full year following the closing of this offering, but only if and to the extent dividends are declared by our board of directors and permitted by applicable law and by the terms of our new credit facilities. Dividend payments are not guaranteed, and our board of directors may decide, in its absolute discretion, at any time and for any reason, not to pay dividends. See “Dividend Policy and Restrictions.”

Rights Upon Liquidation

In the event of any liquidation, dissolution or winding-up of Madison River Communications’ affairs, the holders of Madison River Communications’ common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding.

Other matters

Holders of common stock have no conversion, preemptive or other subscription rights and there are no redemption rights or sinking fund provisions with respect to the common stock. All outstanding shares of common stock are, and the shares of common stock to be sold in this offering when issued and paid for will be, validly issued, fully paid and non-assessable.

Preferred Stock

Madison River Communications is authorized to issue up to million shares of preferred stock. Madison River Communications’ certificate of incorporation authorizes its board: to issue these shares in one or more series; to establish from time to time the number of shares to be included in each series; and to fix the rights, preferences and privileges of the shares of each wholly unissued series and any of its qualifications, limitations or restrictions. Madison River Communications’ board may increase or decrease the number of shares of any series, but not below the number of shares of that series then outstanding, without any further vote or action by stockholders of Madison River Communications. The board may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of common stock. There are currently no plans to issue any shares of preferred stock.

Anti-Takeover Effects of Various Provisions of Delaware Law and Madison River Communications’ Certificate of Incorporation and Bylaws

Madison River Communications’ certificate of incorporation and bylaws include a number of provisions that may have some anti-takeover effects. Provisions of Delaware law may have similar effects under Madison River Communications’ certificate of incorporation.

Delaware Anti-Takeover Statute. Madison River Communications is subject to Section 203 of the General Corporation Law of the State of Delaware. Subject to specific exceptions, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless:

the “business combination,” or the transaction in which the stockholder became an “interested stockholder” is approved by the board of directors prior to the date the “interested stockholder” attained that status;

upon consummation of the transaction that resulted in the stockholder becoming an “interested stockholder,” the “interested stockholder” owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding those shares owned by persons who are

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directors and also officers, and employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer); or

on or subsequent to the date a person became an “interested stockholder,” the “business combination” is approved by the board of directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock that is not owned by the “interested stockholder.”

“Business combinations” include mergers, asset sales and other transactions resulting in a financial benefit to the “interested stockholder.” Subject to various exceptions, an “interested stockholder” is a person who, together with his or her affiliates and associates, owns, or within three years did own, 15% or more of the corporation’s outstanding voting stock. These restrictions could prohibit or delay the accomplishment of mergers or other takeover or change-in-control attempts with respect to Madison River Communications and, therefore, may discourage attempts to acquire Madison River Communications.

The board of directors of Madison River Communications has approved each of the existing equity investors as “interested stockholders” for purposes of Section 203 of the General Corporation Law of the State of Delaware.

In addition, various provisions of Madison River Communications’ certificate of incorporation and bylaws, which are summarized in the following paragraphs, may have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by stockholders.

Removal of Directors; Filling Vacancies. Any director may be removed for cause only by the affirmative vote of the holders of not less than two-thirds of the outstanding voting power of the outstanding common stock.

Madison River Communications’ certificate of incorporation provides that any vacancy of a directorship shall be filled by the remaining members of the board of directors, except that any vacancy resulting from the departure of an individual that was designated for election by an existing sponsor will be filled by a designee of such existing sponsor so long as the existing sponsor is then entitled to its nominee designation rights under the stockholders’ agreement.

The director removal and vacancy provisions will make it more difficult for a stockholder to remove incumbent directors and simultaneously gain control of the board by filling vacancies created by such removal with its own nominees.

No Cumulative Voting. The General Corporation Law of the State of Delaware provides that stockholders are denied the right to cumulate votes in the election of directors unless Madison River Communications’ certificate of incorporation provides otherwise. Madison River Communications’ certificate of incorporation does not expressly provide for cumulative voting.

No Stockholder Action by Written Consent; Calling of Special Meeting of Stockholders. Madison River Communications’ organizational documents prohibit stockholder action by written consent. The bylaws provide that special meetings of stockholders may be called only by Madison River Communications’ board of directors or the chairman of the board of directors.

Advance Notice Requirements for Stockholder Proposals and Director Nominations. Madison River Communications’ bylaws provide that stockholders seeking to bring business before or to nominate candidates for election as directors at an annual meeting of stockholders must provide timely notice of their proposal in writing to the corporate secretary. To be timely, a stockholder’s notice must be delivered or mailed and received at Madison River Communications’ principal executive offices not less than 90 nor more than 120 days in advance of the anniversary date of the immediately preceding annual meeting of stockholders. The bylaws also specify requirements as to the form and content of a stockholder’s notice. These provisions may impede stockholders’ ability to bring matters before an annual meeting of stockholders or make nominations for directors at an annual meeting of stockholders. Stockholder nominations for the election of directors at a special meeting or notice of other stockholder proposals must be received by the corporate secretary by the later of 10 days following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made or 90 days prior to the date that meeting is proposed to be held.

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Limitations on Liability and Indemnification of Officers and Directors. The General Corporation Law of the State of Delaware authorizes corporations to limit or eliminate the personal liability of directors to corporations and their stockholders for monetary damages for breaches of directors’ fiduciary duties as directors. As permitted by Delaware law, Madison River Communications’ organizational documents include provisions that eliminate the personal liability of directors for monetary damages for actions taken as a director, except for liability:

for breach of duty of loyalty;

for acts or omissions not in good faith or involving intentional misconduct or knowing violation of law;

under Section 174 of the General Corporation Law of the State of Delaware regarding unlawful dividends and stock repurchases; or

for any transaction from which the director derived an improper personal benefit.

Madison River Communications’ organizational documents provide that it must indemnify and advance reasonable expenses to its directors and officers to the fullest extent authorized by the General Corporation Law of the State of Delaware. Madison River Communications will also be expressly authorized to carry directors’ and officers’ insurance for its directors, officers and certain employees for some liabilities. We believe that these indemnification provisions and insurance will be useful to attract and retain qualified directors and executive officers.

The limitation of liability and indemnification provisions in Madison River Communications’ certificate of incorporation and bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duty. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit Madison River Communications and its stockholders. In addition, your investment may be adversely affected to the extent that, in a class action or direct suit, Madison River Communications pays the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.

There is currently no pending material litigation or proceeding involving any of Madison River Communications’ directors, officers or employees for which indemnification is sought.

Authorized but Unissued Shares. Madison River Communications’ authorized but unissued shares of common stock and preferred stock will be available for future issuance without your approval. Madison River Communications may use additional shares for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued shares of common stock and preferred stock could render more difficult or discourage an attempt to obtain control of Madison River Communications by means of a proxy contest, tender offer, merger or otherwise. If Madison River Communications issues such shares without stockholder approval and in violation of limitations imposed by or any stock exchange on which Madison River Communications’ stock may then be trading, the stock could be delisted.

Amendment of Bylaws and Certificate of Incorporation. Our certificate of incorporation generally requires the approval of not less than two-thirds of the voting power of all outstanding shares of common stock entitled to vote to amend any bylaws by stockholder action or the certificate of incorporation provisions described in this section.

Listing

We have applied to list our common stock on the Nasdaq National Market under the symbol “ MRCC.”

Transfer Agent and Registrar

American Stock Transfer & Trust Company will be the transfer agent and registrar for the shares of common stock.

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SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering there has been no public market for our common stock, and a significant public market for our common stock may never develop or be sustained after this offering. We cannot predict the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. As described below, only a limited number of shares will be available for sale shortly after this offering due to contractual and legal restrictions on resale. However, sales of our common stock in the public market after the restrictions lapse, or the perception that these sales may occur, could cause the market price of our common stock to decline.

Upon completion of this offering, we expect to have outstanding shares of common stock. The shares of common stock being sold in this offering (or shares if the underwriters exercise the over-allotment option in full) will be freely tradable without restriction or further registration under the Securities Act, unless the shares are held by “affiliates” of our company, as that term is defined in Rule 144 of the Securities Act. All remaining shares are eligible for public sale if registered under the Securities Act, or sold in accordance with Rule 144 or Rule 701 thereunder.

If permitted under our new credit facilities, we may issue shares of common stock from time to time as consideration for future acquisitions, investments or other corporate purposes. In the event any such acquisition, investment or other transaction is significant, the number of shares of common stock that we may issue may in turn be significant. In addition, we may also grant registration rights covering those shares of common stock issued in connection with any such acquisitions and investments.

Lock-Up Arrangements

We, our executive officers and directors and our existing stockholders have agreed, with specified exceptions, not to sell or transfer any of our common stock for 180 days after the date of this prospectus without first obtaining the written consent of Lehman Brothers Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated on behalf of the underwriters. Specifically, we and these other individuals have agreed not to directly or indirectly:

offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock, or any securities convertible into or excercisable or exchangeable for any shares of our common stock or any right to acquire shares of our common stock; or

enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock, whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise.

Notwithstanding the foregoing, if the 180^th day after the date of this prospectus occurs within 17 days following an earnings release by us or the occurrence of material news or a material event related to us, or if we intend to issue an earnings release within 16 days following the 180^th day, the 180-day period will be extended to the 18^th day following such earnings release or the occurrence of the material news or material event unless such extension is waived by Lehman Brothers Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated on behalf of the underwriters.

Rule 144

In general, under Rule 144, as currently in effect, a person or persons whose shares are aggregated who has beneficially owned restricted securities for at least one year, including the holding period of any holder who is not an affiliate, and who files a Form 144 with respect to this sale, is entitled to sell within any three-month

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period commencing 90 days after the date of this prospectus a number of shares of common stock that does not exceed the greater of:

1% of the then outstanding shares of our common stock, or approximately shares immediately after this offering; or

the average weekly trading volume during the four calendar weeks preceding the date of which notice of the sale is filed on Form 144.

Sales under Rule 144 are also subject to restrictions relating to manner of sale and the availability of current public information about us.

A person who is not deemed to have been our affiliate at any time during the 90 days immediately preceding a sale and who has beneficially owned his or her shares for at least two years, including the holding period of any prior owner who is not an affiliate, is entitled to sell these shares of common stock pursuant to Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information or notice requirements of Rule 144. Affiliates must always sell pursuant to Rule 144, even after the applicable holding periods have been satisfied.

Equity Compensation

We intend to file a registration statement on Form S-8 under the Securities Act covering the shares that will be reserved for issuance under our Omnibus Stock Plan. Accordingly, shares registered under this registration statement will, subject to Rule 144 provisions applicable to affiliates, be available for sale in the open market, unless these shares are subject to vesting restrictions with us or are otherwise subject to the contractual restrictions described above.

Registration Rights

Prior to the consummation of this offering, we and our existing equity investors will enter into an agreement pursuant to which we will provide these persons with certain demand, piggyback and shelf registration rights with respect to the shares of our common stock ( shares if the underwriters over-allotment option is exercised in full) held by them immediately following the consummation of this offering. See “Certain Relationships and Related Transactions.”

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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

The following is a discussion of the material U.S. federal income tax considerations generally applicable to the purchase, ownership and disposition of our common stock by U.S. Holders (as defined below) and Non-U.S. Holders (as defined below) and constitutes the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, our special counsel. This discussion deals only with our common stock held as capital assets by holders who purchase common stock in this offering. This discussion does not cover all aspects of U.S. federal income taxation that may be relevant to the purchase, ownership or disposition of our common stock by prospective investors in light of their particular circumstances. In particular, this discussion does not address all of the tax considerations that may be relevant to certain types of investors subject to special treatment under U.S. federal income tax laws, such as:

dealers in securities or currencies;

financial institutions;

regulated investment companies;

real estate investment trusts;

tax-exempt entities;

insurance companies;

persons holding common stock as part of a hedging, integrated, conversion or constructive sale transaction or a straddle;

traders in securities that elect to use a mark-to-market method of accounting for their securities holdings;

persons liable for alternative minimum tax;

U.S. expatriates;

partnerships or entities or arrangements treated as a partnership or other pass-through entity for U.S. federal tax purposes (or investors therein); or

U.S. Holders (as defined below) whose “functional currency” is not the U.S. dollar.

Furthermore, this discussion is based upon the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), the Treasury regulations promulgated thereunder and administrative and judicial interpretations thereof, all as of the date hereof. Such authorities may be repealed, revoked, modified or subject to differing interpretations, possibly on a retroactive basis, so as to result in U.S. federal income tax consequences different from those discussed below. We have not received a ruling from the Internal Revenue Service (the “IRS”) with respect to any of the matters discussed herein. This discussion does not address any state, local or non-U.S. tax considerations.

For purposes of this discussion, a “U.S. Holder” means a beneficial owner of our common stock that is for U.S. federal income tax purposes one of the following:

a citizen or an individual resident of the United States;

a corporation (or other entity taxable as a corporation) created or organized in or under the laws of the United States or any state thereof or the District of Columbia;

an estate the income of which is subject to U.S. federal income taxation regardless of its source; or

a trust if it (i) is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust or (ii) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

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If a partnership or other entity or arrangement treated as a partnership for U.S. federal income tax purposes holds our common stock, the U.S. federal income tax treatment of a partner in such partnership will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our common stock, we particularly urge you to consult your own tax advisors.

If you are considering the purchase of our common stock, we urge you to consult your own tax advisors concerning the particular U.S. federal income tax consequences to you of the purchase, ownership and disposition of our common stock, as well as any consequences to you arising under state, local and non-U.S. tax laws.

Consequences to U.S. Holders

The following discussion applies only to U.S. Holders.

Dividends

Distributions of cash or property that we pay in respect of our common stock will constitute dividends for U.S. federal income tax purposes to the extent paid out of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes) and will be includible in your gross income upon receipt. Distributions to you in excess of our earnings and profits will be treated first as a return of capital (with a corresponding reduction in your tax basis in the common stock) to the extent of your tax basis in the common stock on which the distribution was made, and then as capital gain from the sale or exchange of such common stock to the extent the distribution exceeds such basis. Provided that you satisfy certain holding period and other requirements, our distributions to you that are taxable as dividends generally will be, (i) if you are a corporation, eligible for the dividends received deduction, and (ii) if you are taxed as an individual, eligible to be treated as “qualified dividend income” (which is taxable at the rates generally applicable to long-term capital gains) in the case of dividends paid in taxable years beginning on or before December 31, 2008. Dividends received after 2008 will be taxable to individuals at ordinary income rates.

Sale, Exchange or Other Taxable Disposition of Common Stock

Upon the sale, exchange or other taxable disposition of shares of our common stock, you will recognize capital gain or loss equal to the difference between the amount realized on such sale, exchange or taxable disposition and your tax basis in the shares of common stock disposed. Such gain or loss generally will be long-term capital gain or loss if your holding period with respect to such common stock is more than one year at the time of its disposition. If you are an individual, any such long-term capital gain generally will be eligible for reduced rates of U.S. federal income taxation. The deductibility of capital losses is subject to limitations.

Information Reporting and Backup Withholding

In general, information will be reported to the IRS each year regarding the amount of any dividends on our common stock and the proceeds of any sale of our common stock paid to you during such year unless you are an exempt recipient (such as a corporation). A backup withholding tax will apply to such payments if you fail to provide your taxpayer identification number or to make required certifications or you have been notified by the IRS that you are subject to backup withholding. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your U.S. federal income tax liability provided the required information is timely furnished to the IRS.

Consequences to Non-U.S. Holders

The following discussion applies only to Non-U.S. Holders. A “Non-U.S. Holder” is a beneficial owner of our common stock (other than a partnership or an entity or arrangement treated as a partnership for U.S. federal income tax purposes) that is not a U.S. Holder. Special rules may apply to you if you are a “controlled foreign

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corporation” or a “passive foreign investment company” or are otherwise subject to special treatment under the Code. Any such holders should consult their own tax advisors to determine the U.S. federal income, state, local and non-U.S. tax consequences that may be relevant to them.

Dividends

Dividends paid to you (to the extent paid out of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes) generally will be subject to U.S. federal withholding tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. However, dividends that are effectively connected with a trade or business you conduct within the United States or, if certain tax treaties apply, are attributable to a permanent establishment you maintain in the United States, are not subject to the U.S. federal withholding tax, but instead are subject to U.S. federal income tax on a net income basis at the applicable graduated individual or corporate rates. Special certification and disclosure requirements must be satisfied for effectively connected income to be exempt from withholding. If you are a corporation, any such effectively connected dividends that you receive may be subject to an additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.

If you wish to claim the benefit of an applicable treaty rate for dividends paid on our common stock, you must provide the withholding agent with a properly executed IRS Form W-8BEN, claiming an exemption from or reduction in withholding under the applicable income tax treaty. In the case of common stock held by a foreign intermediary (other than a “qualified intermediary”), the intermediary generally must provide an IRS Form W-8IMY and attach thereto an appropriate certification by each beneficial owner for which it is receiving the dividends.

If you are eligible for a reduced rate of U.S. federal withholding tax pursuant to an applicable income tax treaty, you may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS.

Sale, Exchange or Other Taxable Disposition of Common Stock

You generally will not be subject to U.S. federal income tax with respect to gain recognized on a sale, exchange or other taxable disposition of shares of our common stock unless:

the gain is effectively connected with your conduct of a trade or business in the United States, or, if certain tax treaties apply, is attributable to a permanent establishment you maintain in the United States;

if you are an individual and hold shares of our common stock as a capital asset, you are present in the United States for 183 or more days in the taxable year of the sale, exchange or other taxable disposition, and you have a “tax home” in the United States; or

we are or have been a “United States real property holding corporation” for U.S. federal income tax purposes at any time during the shorter of the five-year period preceding such disposition and your holding period in the common stock, and (i) you beneficially own, or have owned, more than 5% of the total fair market value of our common stock at any time during the five-year period preceding such disposition, or (ii) our common stock has ceased to be traded on an established securities market prior to the beginning of the calendar year in which the sale or disposition occurs.

If you are an individual and are described in the first bullet above, you will be subject to tax on any gain derived from the sale, exchange or other taxable disposition under regular graduated U.S. federal income tax rates. If you are an individual and are described in the second bullet above, you will be subject to a flat 30% tax on any gain derived from the sale, exchange or other taxable disposition that may be offset by U.S. source capital losses (even though you are not considered a resident of the United States). If you are a corporation and are described in the first bullet above, you will be subject to tax on your gain under regular graduated U.S. federal

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income tax rates and, in addition, may be subject to the branch profits tax on your effectively connected earnings and profits for the taxable year, which would include such gain, at a rate of 30% or at such lower rate as may be specified by an applicable income tax treaty, subject to adjustments.

We believe that we are not, and we do not anticipate becoming, a “United States real property holding corporation” for U.S. federal income tax purposes. No assurances, however, can be given in this regard.

U.S. Federal Estate Tax

Shares of our common stock held by an individual Non-U.S. Holder at the time of his or her death will be included in such Non-U.S. Holder’s gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.

Information Reporting and Backup Withholding

You may be subject to information reporting and backup withholding with respect to any dividends on, and the proceeds from dispositions of, our common stock paid to you, unless you comply with certain reporting procedures (usually satisfied by providing an IRS Form W-8BEN) or otherwise establish an exemption. Additional rules relating to information reporting requirements and backup withholding with respect to the payment of proceeds from the disposition of shares of our common stock will apply as follows:

If the proceeds are paid to or through the U.S. office of a broker (U.S. or foreign), they generally will be subject to backup withholding and information reporting, unless you certify that you are not a U.S. person under penalties of perjury (usually on an IRS Form W-8BEN) or otherwise establish an exemption;

If the proceeds are paid to or through a non-U.S. office of a broker that is not a U.S. person and is not a foreign person with certain specified U.S. connections (a “U.S. Related Person”), they will not be subject to backup withholding or information reporting; or

If the proceeds are paid to or through a non-U.S. office of a broker that is a U.S. person or a U.S. Related Person, they generally will be subject to information reporting (but not backup withholding), unless you certify that you are not a U.S. person under penalties of perjury (usually on an IRS Form W-8BEN) or otherwise establish an exemption.

In addition, the amount of any dividends paid to you and the amount of tax, if any, withheld from such payment generally must be reported annually to you and the IRS. The IRS may make such information available under the provisions of an applicable income tax treaty to the tax authorities in the country in which you reside.

Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your U.S. federal income tax liability provided the required information is timely furnished by you to the IRS. Non-U.S. Holders should consult their own tax advisors regarding the filing of a U.S. tax return for claiming a refund of such backup withholding.

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UNDERWRITING

We intend to offer the shares through the underwriters. Lehman Brothers Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as representatives of the underwriters named below. Subject to the terms and conditions described in a purchase agreement among us and the underwriters, we have agreed to sell to the underwriters, and the underwriters severally have agreed to purchase from us, the number of shares set forth opposite their names below.


		Number of shares
Lehman Brothers Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Goldman, Sachs & Co.
J.P. Morgan Securities Inc.
Wachovia Capital Markets, LLC
Deutsche Bank Securities Inc.
Jefferies & Company, Inc.
Legg Mason Wood Walker, Incorporated

Total

The underwriters have agreed to purchase all of the shares sold pursuant to the purchase agreement if any of the shares are purchased. If an underwriter defaults, the purchase agreement provides that the purchase commitments of the nondefaulting underwriters may be increased or the purchase agreement may be terminated.

Indemnification

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments the underwriters may be required to make with respect to those liabilities.

The underwriters are offering the shares, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the shares, and other conditions contained in the purchase agreement, such as the receipt by the underwriters of officers’ certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.

Commissions and Discounts

The representatives have advised us that the underwriters propose initially to offer the shares to the public at the public offering price on the cover page of this prospectus and to dealers at that price less a concession not in excess of $ per share. The underwriters may allow, and the dealers may reallow, a discount not in excess of $ per share to other dealers. After the initial public offering, the public offering price, concession and discount may be changed.

The following table shows the public offering price, underwriting discount to be paid by us to the underwriters and proceeds before expenses to us. The information is presented assuming either no exercise or full exercise by the underwriters of the over-allotment option.


	Per share	Without Option	With Option
Public offering price	$	$	$
Underwriting discount	$	$	$
Proceeds, before expenses, to Madison River Communications	$	$	$
Proceeds, before expenses, to Selling Stockholders	$	$	$

The expenses of the offering, not including the underwriting discount, are estimated to be $ and are payable by us.

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Overallotment Option

We and the selling stockholders have granted an option to the underwriters to purchase up to additional shares at the public offering price less the underwriting discount. The underwriters may exercise this option for 30 days from the date of this prospectus solely to cover any overallotments. If the underwriters exercise this option, each will be obligated, subject to conditions contained in the purchase agreement, to purchase a number of additional shares proportionate to that underwriter’s initial amount reflected in the above table. Any shares of common stock sold in the offering to a stockholder (including shares sold as a result of the exercise of the underwriters’ overallotment option) generally will include a pro rata component of shares offered by Madison River Communications and shares offered by the selling stockholders.

No Sale of Similar Securities; Lock-Up Agreement

We, each of our executive officers, our directors and our existing stockholders have agreed, with some exceptions, not to directly or indirectly, without the prior written consent of Lehman Brothers Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated on behalf of the underwriters, for a period of 180 days after the date of this prospectus:

offer, pledge, sell or contract to sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock, or any securities convertible into or exercisable or exchangeable for any shares of our common stock or any right to acquire shares of our common stock; or

enter into any swap or other agreement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock, whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise.

Notwithstanding the foregoing, if the 180th day after the date of this prospectus occurs within 17 days following an earnings release by us or the occurrence of material news or a material event related to us, or if we intend to issue an earnings release within 16 days following the 180th day, the 180-day period will be extended to the 18th day following such earnings release or the occurrence of the material news or material event unless such extension is waived by Lehman Brothers Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated on behalf of the underwriters.

This lock-up provision applies to common stock and to securities convertible into or exchangeable or exercisable for or repayable with common stock. It also applies to common stock owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires power of disposition. Upon consummation of this offering, shares of common stock will be subject to the lock-up provision.

Listing

We have applied to list our common stock on the Nasdaq National Market under the symbol “MRCC.”

NASD Regulations

Affiliates of Goldman, Sachs & Co., one of the underwriters participating in this offering, are some of our existing sponsors and are participating in this offering as selling stockholders. The National Association of Securities Dealers, Inc. (NASD) may view the participation of Goldman, Sachs & Co. as an underwriter in this offering as the distribution in a public offering of securities issued by a company with which Goldman, Sachs & Co. has a conflict of interest. In addition, the underwriters in this offering, together with their affiliates, may receive more than 10% of the proceeds of this offering, not including underwriting discounts and commissions. Accordingly, the offering is being made pursuant to the provisions of Conduct Rules 2710(h) and 2720 of the

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NASD. Those provisions require that the initial public offering price be no higher than that recommended by a “qualified independent underwriter” who must participate in the preparation of the registration statement and the prospectus, and who must exercise the usual standards of due diligence with respect thereto. is acting as a qualified independent underwriter in the offering, and the initial public offering price of the shares will not be higher than the price recommended by . We have agreed to indemnify against liabilities incurred in connection with acting as a qualified independent underwriter, including liabilities under the Securities Act. Two of our directors, Mr. Joseph P. DiSabato and Mr. Sanjeev K. Mehra, are employees of Goldman, Sachs & Co., one of the underwriters in this offering.

Discretionary Sales

With respect to those customer accounts over which the underwriters have discretionary control, the underwriters will not execute any transaction in the shares of common stock being offered in connection with this offering without first obtaining the prior specific written approval of such customer.

Price Stabilization and Short Positions and Penalty Bids

Until the distribution of the shares is completed, SEC rules may limit underwriters and selling group members from bidding for and purchasing our common stock. The underwriters may engage in stabilizing transactions, short sales and purchases to cover positions created by short sales, and penalty bids or purchases for the purpose of pegging, fixing or maintaining the price of the common stock, in accordance with Regulation M under the Securities Exchange Act of 1934:

Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.

A short position involves a sale by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates the syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares involved in the sales made by the underwriters is not greater than the number of shares that they may purchase in their option to purchase additional shares. In a naked short position, the number of shares involved is greater than the number of shares in their option to purchase additional shares. The underwriters may close out any covered short position by either exercising their option to purchase additional shares and/or purchasing shares in the open market. The underwriters may close out any naked short position by purchasing shares in the open market. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the option to purchase additional shares. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.

Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions.

Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of the common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time.

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Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor any of the underwriters make any representation that the representatives will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.

Electronic Distribution

A prospectus in electronic format may be made available on the Internet sites or through other online services maintained by one or more of the underwriters participating in this offering, or by their affiliates. In those cases, prospective investors may view offering terms online and depending upon the particular underwriter, prospective investors may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made on the same basis as other allocations.

Other than the prospectus in electronic format, the information on any underwriter’s web site and any information contained in any other web site maintained by an underwriter is not intended to be part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or any underwriter in its capacity as underwriter and should not be relied upon by investors.

Directed Share Program

At our request, the underwriters have reserved for sale at the initial public offering price, up to shares offered hereby for officers, directors, employees and certain other persons associated with us. The number of shares available for sale to the general public will be reduced to the extent these persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered hereby. The Directed Share Program will be arranged through one of our underwriters, Lehman Brothers Inc.

Relationships

Merrill Lynch, Pierce, Fenner & Smith Incorporated acts as lead arranger, co-syndication agent and joint bookrunner and an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated acts as a lender under the new credit facilities. An affiliate of Goldman, Sachs & Co. acts as lead arranger, co-syndication agent, joint bookrunner and a lender under the new credit facilities. Lehman Brothers Inc. acts as joint bookrunner and an affiliate of Lehman Brothers Inc. acts as collateral agent and a lender under the new credit facilities. In such capacity, these underwriters and the other underwriters participating in our new credit facilities will be able to enforce the restriction contained in the new credit facilities on our ability to pay dividends.

The Coastal facility was provided by an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated. Merrill Lynch, Pierce, Fenner & Smith Incorporated is one of the underwriters participating in this offering. The Coastal facility will be repaid using the proceeds of this offering, together with borrowings under the new credit facilities and cash on hand.

In the ordinary course of business, one or more of the underwriters and their affiliates have provided financial advisory, investment banking and general financing and banking services to us and certain of our affiliates for customary fees.

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LEGAL MATTERS

The validity of the shares of our common stock offered by this prospectus will be passed upon for us and the selling stockholders by Skadden, Arps, Slate, Meagher & Flom LLP, Chicago, Illinois. Certain legal matters relating to this offering will be passed upon for the underwriters by Shearman & Sterling LLP, New York, New York.

EXPERTS

Ernst & Young LLP, independent registered public accounting firm, have audited the consolidated financial statements of Madison River Telephone Company, LLC at December 31, 2004 and 2003, and for each of the three years in the period ended December 31, 2004, as set forth in their report. We have included these financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP’s report, given on their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

Madison River Communications has filed with the SEC a Registration Statement on Form S-1 under the Securities Act with respect to the common stock offered in this prospectus. This prospectus, filed as part of the registration statement, does not contain all of the information set forth in the registration statement and its exhibits and schedules, portions of which have been omitted as permitted by the rules and regulations of the SEC. For further information about us and our common stock, we refer you to the registration statement and to its exhibits and schedules. Statements in this prospectus about the contents of any contract, agreement or other document are not necessarily complete and, in each instance, we refer you to the copy of such contract, agreement or document filed as an exhibit to the registration statement, with each such statement being qualified in all respects by reference to the document to which it refers. Anyone may inspect the registration statement and its exhibits and schedules without charge at the Public Reference Room the SEC maintains at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain copies of all or any part of these materials from the SEC upon the payment of certain fees prescribed by the SEC. You may obtain further information about the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also inspect these reports and other information without charge at a website maintained by the SEC. The address of this site is http://www.sec.gov.

Upon completion of this offering, Madison River Communications will become subject to the informational requirements of the Securities Exchange Act of 1934 and will be required to file reports, proxy statements and other information with the SEC. You will be able to inspect and copy these reports, proxy statements and other information at the Public Reference Room of the SEC as described above or inspect them without charge at the SEC’s website.

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INDEX TO FINANCIAL STATEMENTS



Madison River Telephone Company, LLC Audited Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm		F-3
Consolidated Balance Sheets as of December 31, 2004 and 2003		F-4
Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002		F-6
Consolidated Statements of Redeemable Members’ Capital and Members’ Capital for the Years Ended December 31, 2004, 2003 and 2002		F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002		F-8
Notes to Consolidated Financial Statements		F-9

F-1

[THIS PAGE INTENTIONALLY LEFT BLANK]

F-2

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

The Board of Directors and Members

Madison River Telephone Company, LLC

We have audited the accompanying consolidated balance sheets of Madison River Telephone Company, LLC as of December 31, 2004 and 2003, and the related consolidated statements of operations, redeemable members’ capital and members’ capital, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Madison River Telephone Company, LLC at December 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Raleigh, North Carolina

February 18, 2005

F-3

Madison River Telephone Company, LLC

Consolidated Balance Sheets

(in thousands)


	December 31
	2004			2003
Assets
Current assets:
Cash and cash equivalents	$	34,559		$	28,143
Accounts receivable, less allowance for uncollectible accounts of $1,416 and $1,181 in 2004 and 2003, respectively		9,845			11,339
Receivables, primarily from interexchange carriers, less allowance for uncollectible accounts of $1,310 and $2,617 in 2004 and 2003, respectively		5,862			5,190
Inventories		644			1,327
Rural Telephone Finance Cooperative stock to be redeemed		469			1,354
Rural Telephone Finance Cooperative patronage capital receivable		2,910			2,975
Deferred income taxes		1,734			915
Other current assets		2,821			1,714

Total current assets		58,844			52,957

Telephone plant and equipment:
Land, buildings and general equipment		54,485			53,651
Central office equipment		165,744			157,572
Poles, wires, cables and conduit		237,509			230,772
Leasehold improvements		2,541			2,533
Software		18,522			18,600
Construction-in-progress		5,807			9,133

		484,608			472,261
Accumulated depreciation and amortization		(191,715	)		(150,727	)

Telephone plant and equipment, net		292,893			321,534

Other assets:
Rural Telephone Bank stock, at cost		10,079			10,079
Rural Telephone Finance Cooperative stock, at cost		42,190			42,659
Goodwill		366,332			366,332
Other assets		12,348			13,662

Total other assets		430,949			432,732

Total assets	$	782,686		$	807,223

See accompanying notes.

F-4

Madison River Telephone Company, LLC

Consolidated Balance Sheets

(in thousands)


	December 31
	2004			2003
Liabilities, redeemable members’ capital and members’ capital
Current liabilities:
Accounts payable	$	1,753		$	920
Accrued expenses		32,902			38,819
Advance billings and customer deposits		5,307			5,155
Other current liabilities		1,000			1,019
Current portion of long-term debt		9,385			9,371

Total current liabilities		50,347			55,284

Noncurrent liabilities:
Long-term debt		629,884			650,898
Deferred income taxes		40,032			45,482
Other liabilities		38,236			38,888

Total noncurrent liabilities		708,152			735,268

Total liabilities		758,499			790,552
Redeemable members’ capital:
Class A members		213,749			213,413
Members’ capital:
Class A members		19,560			18,000
Class B members		6			6
Class C members		5			5
Accumulated deficit		(204,940	)		(211,265	)
Accumulated other comprehensive loss		(4,193	)		(3,488	)

Total members’ capital		(189,562	)		(196,742	)

Total liabilities, redeemable members’ capital and members’ capital	$	782,686		$	807,223

See accompanying notes.

F-5

Madison River Telephone Company, LLC

Consolidated Statements of Operations

(in thousands)


	December 31
	2004			2003			2002
Operating revenues:
Local service	$	130,703		$	126,975		$	128,985
Long distance service		15,042			15,754			14,787
Internet and enhanced data service		20,705			16,252			13,497
Edge-out services		11,912			13,947			15,265
Miscellaneous telecommunications service and equipment		16,012			13,532			11,667

Total operating revenues		194,374			186,460			184,201

Operating expenses:
Cost of services and sales (exclusive of depreciation and amortization)		56,937			50,214			56,298
Depreciation and amortization		45,003			52,054			50,649
Selling, general and administrative expenses		38,339			42,438			45,702
Restructuring (benefit) charge		—			(718	)		2,694

Total operating expenses		140,279			143,988			155,343

Net operating income		54,095			42,472			28,858

Interest expense		(61,582	)		(64,441	)		(65,225	)
Other income (expense):
Net realized losses on marketable equity securities		—			(343	)		(3,985	)
Impairment charges on investments in unconsolidated subsidiaries		—			—			(2,098	)
Net gain on extinguishment of long-term debt		3,184			—			—
Other income, net		4,210			4,001			3,626

Dividends

Number of

Shares

Per

Share

Aggregate

Estimated dividends on our outstanding common stock

MADISON RIVER COMMUNICATIONS CORP S-1/A