10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________

Form 10-Q

R	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2011
OR
£	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from__________ to __________

Commission File No. 000-11174

_______________

Warwick Valley Telephone Company

(Exact name of registrant as specified in its charter)

New York	14-1160510
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
47 Main Street
Warwick, New York	10990
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone, including area code: (845) 986-8080   

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES R    NO £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES R    NO £

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

Large accelerated filer  £	Accelerated filer  R
Non-accelerated filer  £  (Do not check if a smaller reporting company)	Smaller reporting company  £

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). YES £    NO R

The number of shares of Warwick Valley Telephone Company common stock outstanding as of November 3, 2011 was 5,757,439.

Index to Form 10-Q

Part I          Financial Information
Item 1.  Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2011 (unaudited) and December 31, 2010 (audited)	3
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010 (unaudited)	4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 (unaudited)	5
Notes to Condensed Consolidated Financial Statements	6
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.  Quantitative and Qualitative Disclosures about Market Risk	26
Item 4.  Controls and Procedures	26
Part II – Other Information
Item 5.  Other Information	26
Item 6.  Exhibits	27

2

Part I – Financial Information

Item 1.  Financial Statements

WARWICK VALLEY TELEPHONE COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in thousands except share and per share amounts)

	September 30,				December 31,
	2011				2010
	(Unaudited)
Assets
Current assets
Cash and cash equivalents		$	4,909			$	10,899
Cash held in escrow - restricted			3,351				0
Short term investments			258				2,636
Accounts receivable - net of allowance for uncollectibles - $483 and $350 in 2011 and 2010, respectively			2,949				2,451
Other accounts receivable			288				94
Materials and supplies			1,205				986
Prepaid expenses			752				538
Prepaid income taxes			1,993				0
Total current assets			15,705				17,604
Property, plant and equipment, net			26,303				27,258
Unamortized debt issuance costs			64				21
Intangible assets, net			8,315				217
Investments			4,547				7,681
Goodwill			8,299				0
Other assets			322				294
Total assets		$	63,555			$	53,075
Liabilities and Shareholders' Equity
Current liabilities
Short-term borrowings		$	9,000			$	0
Accounts payable			1,897				1,174
Current maturities of long-term debt			1,519				1,519
Amounts due in connection with business acquisition			6,018				0
Advance billing and payments			392				397
Customer deposits			87				56
Deferred income taxes			0				38
Accrued taxes			513				1,041
Pension and postretirement benefit obligations			529				529
Other accrued expenses			2,028				2,262
Total current liabilities			21,983				7,016
Long-term debt, net of current maturities			0				1,139
Amounts due in connection with business acquisition			1,000				0
Deferred income taxes			2,412				1,941
Pension and postretirement benefit obligations			6,277				6,554
Total liabilities			31,672				16,650
Commitments and contingencies
Shareholders' equity
Preferred shares - $100 par value; authorized and issued shares of 5,000;
$0.01 par value authorized and unissued shares of 10,000,000			500				500
Common stock - $0.01 par value; authorized shares of 10,000,000 issued 6,218,654 and 6,054,741 shares at September 30, 2011 and December 31, 2010, respectively			62				60
Treasury stock - at cost, 733,694 and 635,189 shares of common stock at September 30, 2011 and December 31, 2010, respectively			(6,244	)			(4,770	)
Additional paid in capital			6,020				4,063
Accumulated other comprehensive loss			(2,463	)			(2,784	)
Retained earnings			34,008				39,356
Total shareholders' equity			31,883				36,425
Total liabilities and shareholders' equity		$	63,555			$	53,075
Please see accompanying condensed notes, which are an integral part of the condensed consolidated financial statements.

3

WARWICK VALLEY TELEPHONE COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

($ in thousands except share and per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Operating revenues	$	6,829		$	6,250		$	18,818		$	18,197
Operating expenses
Cost of services and products (exclusive of
depreciation and amortization expense)		4,024			2,940			10,215			8,747
Selling, general and administrative expenses		4,883			3,566			12,471			9,908
Depreciation and amortization		1,365			1,370			4,103			4,210
Total operating expenses		10,272			7,876			26,789			22,865
Operating loss		(3,443	)		(1,626	)		(7,971	)		(4,668	)
Other income (expense)
Interest income (expense)		(55	)		37			4			23
Income from equity method investment		1,328			3,362			6,744			9,105
Other income (expense), net		31			81			46			212
Total other income (expense)		1,304			3,480			6,794			9,340
Income (loss) before income taxes		(2,139	)		1,854			(1,177	)		4,672
Income taxes (benefit)		(450	)		588			(120	)		1,585
Net income (loss)		(1,689	)		1,266			(1,057	)		3,087
Preferred dividends		6			6			19			19
Income (loss) applicable to common stock	$	(1,695	)	$	1,260		$	(1,076	)	$	3,068
Basic earnings (loss) per share	$	(0.31	)	$	0.24		$	(0.20	)	$	0.57
Diluted earnings (loss) per share	$	(0.31	)	$	0.23		$	(0.20	)	$	0.57
Weighted average shares of common stock
used to calculate earnings per share
Basic		5,424,927			5,362,433			5,408,603			5,360,485
Diluted		5,424,927			5,407,192			5,408,603			5,401,531
Dividends declared per common share	$	0.26		$	0.24		$	0.78		$	0.72

Please see accompanying condensed notes, which are an integral part of the condensed consolidated financial statements.

4

WARWICK VALLEY TELEPHONE COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

($ in thousands)

	Nine Months Ended
	September 30,
	2011			2010
CASH FLOW FROM OPERATING ACTIVITIES
Net Income (loss)	$	(1,057	)	$	3,087
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,103			4,210
Stock-based compensation expense		821			252
Deferred income taxes		433			140
Income from equity investments, net of distributions		3,134			217
Changes in assets and liabilities, net of effects of business acquisition
Accounts receivable		361			358
Other accounts receivable		(194	)		84
Materials and supplies		16			(44	)
Prepaid income taxes		(1,993	)		451
Prepaid expenses		(139	)		(198	)
Other assets		(91	)		(33	)
Accounts payable		194			(89	)
Customers' deposits		(36	)		(36	)
Advance billing and payment		(55	)		55
Accrued taxes		(528	)		46
Pension and postretirement benefit obligations		13			133
Other accrued expenses		(371	)		540
Net cash provided by operating activities		4,611			9,173
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures		(1,939	)		(951	)
Purchase of intangibles		(55	)		(33	)
Sale of short-term investments		2,409			0
Purchase of short-term investments		0			(1,752	)
Business acquisition, net of cash acquired		(10,250	)		0
Net cash used in investing activities		(9,835	)		(2,736	)
CASH FLOW FROM FINANCING ACTIVITIES
Repayment of long-term debt		(1,139	)		(1,139	)
Repayment of capital leases		(649	)		0
Proceeds from notes payable		9,000			0
Increase in restricted cash		(3,351	)		0
Exercise of stock options		1,138			36
Treasury stock purchases		(1,474	)		(17	)
Dividends (Common and Preferred)		(4,291	)		(3,915	)
Net cash provided by/(used) in financing activities		(766	)		(5,035	)
Net change in cash and cash equivalents		(5,990	)		1,402
Cash and cash equivalents at beginning of period		10,899			9,286
Cash and cash equivalents at end of period	$	4,909		$	10,688
Supplemental disclosure of non-cash investing and financing activities:
Amounts due in connection with business acquisition	$	7,340		$	–

Please see accompanying condensed notes, which are an integral part of the condensed consolidated financial statements.

5

WARWICK VALLEY TELEPHONE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

($ in thousands except share and per share amounts)

NOTE 1:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Warwick Valley Telephone Company (the “Company”) is a full-service telecommunications company.  As a regional Incumbent Local Exchange Carrier operating in southern Orange County, New York and northern New Jersey, the Company provides its historic local and toll telephone service to residential and business customers, Internet high speed broadband service, video service and DIRECTV.  Through its acquisitions of the Alteva (see Note 2) and USA Datanet businesses, the Company delivers cloud-based Unified Communications solutions including Voice over Internet Protocol (“VoIP”), hosted Microsoft Communication Services, fixed mobile convergence and advanced voice applications for a broad customer base including enterprise customers, small and medium-sized busineses and other business customers.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of the Company’s management, all adjustments consisting only of normal recurring adjustments considered necessary for fair presentation have been included.  Operating results and cash flows for the nine-month period ended September 30, 2011 are not necessarily indicative of the results that may be expected for the entire year.

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

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and any disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period.  Actual results could differ from those estimates.  The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended December 31, 2010.

NOTE 2:  BUSINESS ACQUISITION

On August 5, 2011, Warwick Valley Networks, Inc. (“WVN”), a wholly-owned subsidiary of the Company, purchased substantially all of the assets and assumed certain of the liabilities of Alteva, LLC (“Alteva”), a cloud-based Unified Communications solutions provider and enterprise hosted VoIP provider, in exchange for cash and stock with an estimated value of approximately $17,590 pursuant to the terms of the asset purchase agreement between the Company and Alteva (the “Alteva Agreement”).  The issuance of the Company’s common stock contemplated under the Alteva Agreement was subject to regulatory approval by the New York State Public Service Commission (“PSC”) and the New Jersey Board of Public Utilities (“BPU”), both of which have  approved the transaction (see Note 19). The assets acquired included Alteva’s VoIP line of business, which provides communication services for commercial customers and unified communication lines of business.  This acquisition extends the Company’s VoIP services to New Jersey, Pennsylvania and various other states and continues the Company’s corporate strategy to expand its business beyond its regulated franchise area.

Pursuant to the Alteva Agreement, WVN purchased substantially all of the assets of Alteva.  WVN assumed only certain of Alteva’s liabilities, including certain of its contracts, debt owed under specified capital leases and certain accounts payable.

In exchange for the assets purchased and the liabilities assumed from Alteva, WVN made the following payments:

· $10,250 in cash  was paid to Alteva; and

· $4,000 in cash was placed in escrow, which amount is to be (i) returned to the WVN upon the issuance of unregistered shares of the Company’s common stock, having a value of approximately $4,000, upon receipt of the PSC and the BPU approvals, or (ii) be released to Alteva in the event that the PSC and BPU approvals were not received prior to December 3, 2011, in which case WVN was to pay Alteva $4,000 cash in lieu of the Company’s common stock.

As of October 21, 2011, the Company has obtained the necessary approvals from the PSC and BPU.  As a result, the Company issued 272,479 shares of common stock to the members of Alteva as of October 21, 2011 and $3,351 of the remaining amount placed in escrow will be returned to WVN.  (See Note 19).

6

WARWICK VALLEY TELEPHONE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

($ in thousands except share and per share amounts)

The results of Alteva’s operations have been included in the Company’s consolidated financial statements since August 5, 2011.

The Company’s use of funds to acquire certain assets of Alteva consisted of the following:

Cash (1)	$	10,250
Cash in escrow (2)		4,000
Contingent consideration (3)		2,000
Hold-back payable (4)		750
Working capital payable adjustment (5)		590
Total consideration	$	17,590

1) $ 5,000 of this amount was borrowed from CoBank, ACB (see Note 7).

2) Cash placed in escrow, pending issuance of 272,479 shares of the Company’s common stock.  This amount was borrowed from Provident Bank (see Note 7).

3) Up to a total of $2,000 in cash is payable to Alteva on August 5, 2012 and 2013 (or prior to January 1, 2013 depending on certain tax law changes), if certain performance-based conditions are satisfied.

4) This hold-back amount, withheld at closing, is payable on August 5, 2012, less any amounts offset against such amount pursuant to the terms of the Alteva Agreement.

5) This is the estimated additional working capital adjustment payable to Alteva based on preliminary calculations.

The preliminary estimated purchase price has been allocated as follows:

Accounts receivable, net	$	818
Other receivables - cash		41
Inventory		235
Prepaid expenses		63
Other assets		12
Property, plant and equipment		865
Intangible assets		8,367
Goodwill		8,299
Total assets acquired		18,700
Capital leases		(671	)
Accounts payable		(185	)
Accrued expenses		(137	)
Customer deposits		(67	)
Deferred revenue, net		(50	)
Total liabilities assumed		(1,110	)
Total	$	17,590

The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date. The excess of the purchase consideration over the fair value of the net assets acquired has been allocated to goodwill.  The preliminary purchase price allocation may be adjusted after obtaining more information regarding, among other things, valuations of assets acquired, liabilities assumed, and revisions of preliminary estimates and finalization of the working capital adjustment.  The preliminary purchase price may also be adjusted for the valuation of the put option the members of Alteva have under the Lock-up and Put Agreement (as defined below).

The Company entered into a Lock-up and Put Agreement, effective October 21, 2011, with the members of Alteva (the “Lock-up and Put Agreement)” pursuant to which each of the members agreed to certain restrictions on their ability to sell shares of the Company’s common stock they will be issued in connection with the Alteva Agreement (the “Alteva Shares”).  Under the Lock-up and Put Agreement, each member of Alteva may transfer to any of the permitted transferees up to 50% of their Alteva Shares between October 21, 2012 and December 14, 2012.  The members of Alteva may sell their remaining Alteva Shares without restriction beginning on December 15, 2012.  In addition, the Lock-up and Put Agreement gives each member of Alteva the option to sell their Alteva Shares to the Company within a certain prescribed time period at a predetermined price (the “Put”).  The Alteva members may exercise their Put with respect to half of their Alteva Shares within a 60-day period commencing on October 21, 2012 and the other half within a 60-day period commencing on December 15, 2012.  The purchase price of the Put will be the greater of (i) the closing price of the Company’s common stock on the date of exercise of the Put or (ii) $11.74.  The Lock-up and Put Agreement also includes a purchase price protection for the Alteva selling shareholders.  The purchase price protection provides that if the price of the Company’s common stock for the 30 trading days immediately prior to October 21, 2012 or December 15, 2012 (but excluding the three trading days prior to and after the record date for any cash dividend declared by the Company) (the “Release Date Price”) is less than $11.74, then the Company will issue to the Alteva members the aggregate number of shares of the Company’s common stock equal to the difference between $1,600 and the market value of 50% of the aggregate Alteva Shares on October 21, 2012 or December 15, 2012, or 100% of the aggregate Alteva Shares if the Release Date Price is less than $11.74 on both dates.

7

WARWICK VALLEY TELEPHONE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

($ in thousands except share and per share amounts)

The Company will record the valuation as an estimated contingent liability using a binomial method based on significant inputs not observed in the market and thus will represent a Level 3 instrument.  Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect the Company’s own assumptions in measuring fair value.  The final purchase price allocation and its effect on results of operations may differ significantly from the amounts included herein.  The Company is in the process of obtaining third-party valuations of the assets acquired, liabilities assumed and the Lock-up and Put Agreement; thus, the allocation of the purchase price is subject to adjustment.

The $8,367 of acquired intangible assets assigned to customer lists has a weighted-average useful life of approximately seven years.  The Company recorded $8,250 in goodwill and for tax purposes intangibles will be amortized over 15 years.

The Company incurred $669 of acquisition-related costs as general and administrative expenses in the Consolidated Statements of Operations in the three and nine-month periods ended September 30, 2011.  The revenue from Alteva included in the Company’s statement of operations for the three months and nine months ended September 30, 2011 was $1,117 and net loss before income taxes was $273.

The following unaudited pro forma condensed consolidated results of operations for the Company for the three and nine months ended September 30, 2011 and 2010, respectively, assume that the purchase of certain assets and the assumption of certain liabilities of Alteva occurred January 1, 2011 and 2010.  The unaudited pro forma information presents the combined operating results of the acquired Alteva business and the Company, with the results prior to the date of the Alteva Agreement adjusted for amortization of intangibles and depreciation of fixed assets, based on the preliminary purchase price allocation and the elimination of acquisition related costs.

The unaudited pro forma results shown in the table below do not purport to be indicative of the results that would have been obtained if the Alteva Agreement did not occur as of January 1, 2011 nor does the unaudited pro forma data intend to be a projection of results that may be obtained in the future.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Operating revenues	$	7,471		$	7,752		$	22,879		$	22,630
Operating expenses
Cost of services and products (exclusive of
depreciation and amortization expense)		4,083			3,547			11,707			10,546
Selling, general and administrative expenses		4,856			4,402			14,765			12,318
Depreciation and amortization		1,762			1,749			5,242			5,350
Total operating expenses		10,701			9,698			31,714			28,214
Operating loss		(3,230	)		(1,946	)		(8,835	)		(5,584	)
Other income (expense)		725			3,426			6,040			9,175
Income (loss) before income taxes	$	(2,505	)	$	1,480		$	(2,795	)	$	3,591
Basic earnings (loss) per share	$	(0.36	)	$	0.16		$	(0.47	)	$	0.35
Dilluted earnings (loss) per share	$	(0.36	)	$	0.16		$	(0.47	)	$	0.35

8

WARWICK VALLEY TELEPHONE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

($ in thousands except share and per share amounts)

NOTE 3:  RECENT ACCOUNTING PRONOUNCEMENTS

In May 2011, an accounting standards update regarding fair value measurement was issued. This standards update was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards.  This standards update also changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements.  This standards update becomes effective for annual periods beginning after December 15, 2011.  The Company does not believe this will have a material impact on its consolidated financial statements.

In June 2011, an accounting standards update regarding the presentation of comprehensive income was issued.  This standards update was issued to increase the prominence of items reported in other comprehensive income and requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  This standards update becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The Company does not believe this will have a material impact on its consolidated financial statements.

In September 2011, an accounting standards update regarding the testing of goodwill for impairment was issued. The amendment allows a company to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount to determine whether it is necessary to perform the two-step goodwill impairment test. This amendment becomes effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and earlier adoption is permitted.  The Company does not believe this will have a material impact on its disclosures or consolidated financial statements.

NOTE 4:  INVESTMENTS

The following is a summary of the Company’s short-term investments classified as available for sale at September 30, 2011 and December 31, 2010:

			Unrealized			Fair Value
	Amortized		Gains			Carrying
	Cost		(Losses)			Value
September 30, 2011
Bank certificate of deposit	$	258	$	0		$	258
December 31, 2010
Bank certificate of deposit	$	257	$	0		$	257
Corporate bonds		2,143		(44	)		2,099
Foreign bonds		284		(4	)		280
	$	2,684	$	(48	)	$	2,636

NOTE 5:  FAIR VALUE

The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of September 30, 2011:

	Level 1 (1)		Level 2 (2)		Level 3 (3)		Total
Short-term investments	$	258	$	0	$	0	$	258

9

WARWICK VALLEY TELEPHONE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

($ in thousands except share and per share amounts)

The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of December 31, 2010:

	Level 1 (1)		Level 2 (2)		Level 3 (3)		Total
Short-term investments	$	257	$	2,379	$	0	$	2,636

(1) Quoted prices in active markets for identical assets or liabilities.

(2) Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.  Short-term investments classified as Level 2 are comprised of corporate and municipal bonds.

(3) Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

NOTE 6:  GOODWILL AND INTANGIBLE ASSETS

The following table presents details of the Company’s goodwill:

	Amount
Balance as of December 31, 2010	$	0
Goodwill acquired in Alteva aquistion		8,299
Balance as of September 30, 2011	$	8,299

The Company performs an annual goodwill impairment test during the fourth quarter of the fiscal year and when triggering events are present.

The following table presents details of the Company’s total purchased intangible assets:

	Estimated	Gross		Accumulated			Net
	Useful Lives	Value		Amortization			Value
As of September 30, 2011
Customer contracts acquired in Alteva acquisition	7 years	$	8,367	$	(199	)	$	8,168
Telephone seat licenses	5 years		339		(192	)		147
Total		$	8,706	$	(391	)	$	8,315

	Estimated	Gross		Accumulated			Net
	Useful Lives	Value		Amortization			Value
As of December 31, 2010
Telephone seat licenses	5 years	$	318	$	(101	)	$	217
Total		$	318	$	(101	)	$	217

Telephone seat licenses are user licenses that are assigned to each telephone set placed in service at the customer’s location.   The amortization expense is recorded in the Consolidated Statements of Operations under depreciation and amortization in the amount of $290 and $43 for the nine months ended September 30, 2011 and 2010, respectively, and $257 and $14 for the three months ended September 30, 2011 and 2010, respectively.

10

WARWICK VALLEY TELEPHONE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

($ in thousands except share and per share amounts)

NOTE 7:  DEBT OBLIGATIONS

Debt obligations consisted of the following:

	September 30,		September 30,
	2011		2010
Long-term debt (current maturities):
CoBank ACB, unsecured term credit facility	$	1,519	$	2,658
Short-term debt:
Cobank ACB promissory note		5,000		-
Provident Bank credit line		4,000		-
		9,000		-
Total debt obligations	$	10,519	$	2,658

Long-term debt:

As of September 30, 2011, $1,519 in principal amount was outstanding under the CoBank, ACB term credit facility. The final payment is due July 20, 2012.   We are required to make interest and outstanding principal payments in quarterly installments under the CoBank, ACB term credit facility.  The interest rate on the outstanding amount is variable and as of September 30, 2011 the rate was 2.87%.

Short-term borrowings:

On August 3, 2011, the Company entered into a supplement to our master loan agreement with CoBank, ACB.  The supplement provides for a revolving loan facility in the principal amount of $5,000 (the “CoBank Revolving Loan”).  Also on August 3, 2011, the Company drew down the entire $5,000 principal amount of the CoBank Revolving Loan to fund a portion of the purchase price of the Alteva acquisition.  The CoBank Revolving Loan becomes due and payable on August 2, 2012.  The CoBank Revolving Loan incurs interest at a variable rate determined by CoBank, ACB or, if selected by the Company, at LIBOR plus 3.50%.  Interest is payable quarterly in arrears.  The interest rate on the outstanding amount is variable and, as of September 30, 2011, the rate was 3.75%.  The Company paid CoBank, ACB a $50 origination fee in connection with the CoBank Revolving Loan.   Under the terms of the CoBank revolving loan, the Company is required to comply with certain loan covenants, which include, but are not limited to, the achievement of certain financial ratios, as set forth in the agreement, as well as certain financial reporting requirements.  As of September 30, 2011, the Company was in compliance with all loan covenants.

The Company has an unsecured line of credit in the amount of $4,000 with Provident Bank (the “Bank”) and on August 1, 2011, the Company drew down its entire $4,000 line of credit with Provident Bank.  The Bank line of credit becomes due and payable on July 31, 2012.   Pursuant to the terms of the Alteva Agreement, the proceeds from this line of credit were deposited in an escrow account, of which, $3,351 is expected to be returned to the Company.   Any borrowings under this line of credit are on a demand basis without restrictions, and at a variable lending rate.  The interest rate on the outstanding amount is variable and as of September 30, 2011 the rate was 2.5% and the Company was in compliance with all loan covenants. The Company had no outstanding balance on this facility at December 31, 2010.

11

WARWICK VALLEY TELEPHONE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

($ in thousands except share and per share amounts)

NOTE 8:  EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share are computed by dividing net income (loss) applicable to common shares by the weighted average number of common shares outstanding during the period.  Diluted earnings per share are computed by dividing net income applicable to common shares by the weighted average number of common shares adjusted to include the effect of potentially dilutive securities.  Potentially dilutive securities include incremental shares issuable upon exercise of outstanding stock options and shares of unvested restricted stock.  Diluted earnings per share exclude all dilutive securities if their effect is anti-dilutive.

The weighted average number of shares of common stock used in diluted earnings per share for the three and nine months ended September 30, 2011 and 2010 is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011 (1)		2010		2011 (1)		2010
Weighted average shares of common stock
used in basic earnings per share		5,424,927		5,362,433		5,408,603		5,360,485
Effects of stock options		0		26,687		0		24,634
Effects of restricted stock		0		18,072		0		16,412
		5,424,927		5,407,192		5,408,603		5,401,531

(1) Basic and diluted weighted average shares were the same for the three months and nine months ended September 30, 2011 because the effects of the potentially diluted securities were anti-dilutive and they were excluded from the calculation.

NOTE 9:  COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) consisted of the following for the three and nine months ended September 30, 2011 and 2010:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2011			2010		2011			2010
Net income (loss) for the period	$	(1,689	)	$	1,266	$	(1,057	)	$	3,087
Other comprehensive income (loss), net of taxes
Pension and postretirement benefit plans		97			120		290			360
Unrealized gain (loss) on investments		23			73		32			(18	)
Other comprehensive income		120			193		322			342
Total comprehensive income (loss)	$	(1,569	)	$	1,459	$	(735	)	$	3,429

NOTE 10:  SEGMENT INFORMATION

The Company’s segments are strategic business units that offer different products and services and are managed as Telephone and Online services.  The Company evaluates the performance of the segments based upon factors such as revenue growth, expense containment, market share and operating results.

The Telephone segment provides telecommunications services including local, network access, wholesale, conferencing, long distance services, wireless and directory services.  The Online segment provides high speed and dial-up Internet services, VoIP, DIRECTV and video.  The Company’s Alteva and USA Datanet businesses are part of the Online segment.

The Company evaluates depreciation, amortization, impairment charges and interest expense on a total company basis because the Company does not allocate assets or debt to specific segments.  As a result, these items, along with other non-operating income or expenses, are not assigned to any segment.  Therefore, the segment results presented below are not necessarily indicative of the results of operations these segments would have achieved had they operated as stand-alone entities during the periods presented.

12

WARWICK VALLEY TELEPHONE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

($ in thousands except share and per share amounts)

Segment income statement information for the nine months ended September 30, 2011 and 2010 is set forth below:

	2011			2010
Segment operating revenues
Telephone	$	14,727		$	14,402
Online		6,027			5,352
Eliminations		(1,936	)		(1,557	)
Total operating revenues	$	18,818		$	18,197
Segment operating expenses, exclusive of depreciation and amortization
Telephone	$	17,238		$	14,388
Online		7,174			5,613
Eliminations		(1,726	)		(1,346	)
Total operating expenses, exclusive of depreciation and amortization	$	22,686		$	18,655
Segment operating loss, exclusive of depreciation and amortization
Telephone	$	(2,511	)	$	14
Online		(1,147	)		(261	)
Eliminations		(210	)		(211	)
Total operating loss, exclusive of depreciation and amortization	$	(3,868	)	$	(458	)

The following table reconciles segment operating loss to net income before taxes for the nine months ended September 30, 2011 and 2010:

	2011			2010
Operating loss	$	(3,868	)	$	(458	)
Total depreciation and amortization		(4,103	)		(4,210	)
Interest income (expense), net		4			23
Income from equity investments, net		6,744			9,105
Other income, net		46			212
Income (loss) before income taxes	$	(1,177	)	$	4,672

Certain regulatory revenue, which includes Universal Service Funds (“USF”) and National Exchange Carrier Association (“NECA”) pool settlements, accounted for 12% and 16% of the Company’s revenues for the nine months ended September 30, 2011 and 2010, respectively.  Accounts receivable for certain regulatory revenue represents 7% and 12% of consolidated accounts receivable at September 30, 2011 and 2010, respectively.  Accounts payable for certain carrier costs represents 16% and 18% of consolidated accounts payable at September 30, 2011 and 2010, respectively.

13

WARWICK VALLEY TELEPHONE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

($ in thousands except share and per share amounts)

Segment income statement information for the three months ended September 30, 2011 and 2010 is set forth below:

	2011			2010
Segment operating revenues
Telephone	$	4,881		$	5,149
Online		2,618			1,748
Eliminations		(670	)		(647	)
Total operating revenues	$	6,829		$	6,250
Segment operating expenses, exclusive of depreciation and amortization
Telephone	$	7,146		$	5,022
Online		2,986			2,061
Eliminations		(1,225	)		(577	)
Total operating expenses, exclusive of depreciation and amortization	$	8,907		$	6,506
Segment operating loss, exclusive of depreciation and amortization
Telephone	$	(2,265	)	$	127
Online		(368	)		(313	)
Eliminations		555			(70	)
Total operating loss, exclusive of depreciation and amortization	$	(2,078	)	$	(256	)

The following table reconciles segment operating loss to net income before taxes for the three months ended September 30, 2011 and 2010:

		2,011			2010
Operating loss	$	(2,078	)	$	(256	)
Total depreciation and amortization		(1,365	)		(1,370	)
Interest income (expense), net		(55	)		37
Income from equity investments, net		1,328			3,362
Other (expenses) income, net		31			81
Income (loss) before income taxes	$	(2,139	)	$	1,854

Certain regulatory revenue, which includes USF and NECA pool settlements, accounts for 9% and 18% of the Company’s revenues for the three months ended September 30, 2011 and 2010, respectively.

NOTE 11:  MATERIALS AND SUPPLIES

Material and supplies are carried at average cost.  As of September 30, 2011 and December 31, 2010, material and supplies consisted of the following:

		2011		2010
Inventory for outside plant	$	339	$	368
Inventory for inside plant		287		295
Inventory for online equipment		494		227
Inventory for video equipment		68		72
Inventory for equipment held for sale or lease		17		24
	$	1,205	$	986

14

WARWICK VALLEY TELEPHONE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

($ in thousands except share and per share amounts)

NOTE 12:  PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are carried at cost, consisting of the following as of September 30, 2011 and December 31, 2010:

	2011		2010
Land, buildings and other support equipment	$	10,476	$	9,677
Network communications equipment		35,858		35,131
Telephone plant		30,410		29,847
Online plant		6,883		7,113
Plant in service		83,627		81,768
Plant under construction		1,088		108
		84,715		81,876
Less:  Accumulated depreciation		58,412		54,618
Property, plant and equipment, net	$	26,303	$	27,258

NOTE 13:  ORANGE COUNTY-POUGHKEEPSIE LIMITED PARTNERSHIP

The Company is a limited partner in the Orange County-Poughkeepsie Limited Partnership (“O-P”) and had a 8.108% equity interest as of September 30, 2011 and 2010, which is accounted for under the equity method of accounting.  The majority owner and general partner is Verizon Wireless of the East LP.

On May 26, 2011, the Company entered into an agreement with Verizon Wireless of the East LP, the general partner and a limited partner, and Cellco Partnership, the other limited partner, in the O-P to make certain changes to the O-P partnership agreement which, among other things, specifies that the O-P will provide 4G cellular services (the “4G Agreement”).  The 4G Agreement provides that the O-P’s business will be converted from a wholesale business to a retail business.  The 4G Agreement provides for guaranteed annual cash distributions to the Company from the O-P through 2013.  For 2011, annual cash distributions from the O-P will be $13,600 and for 2012 and 2013 the annual cash distribution will be $13,000.  Annual cash distributions will be paid in equal quarterly amounts.  The 4G Agreement also gives the Company the right (the “Put”) to require one of the O-P’s limited partners to purchase all the Company’s ownership interest in the O-P during April 2013 or April 2014 for an amount equal to the greater of (a) $50,000 or (b) the product of five (5) times 0.081081 times the O-P’s EBITDA, as defined in the 4G Agreement for the calendar year preceding the exercise of the Put.

The conversion of the O-P from a wholesale business to a retail business pursuant to the 4G Agreement will increase the cellular service costs and operating expenses incurred by the O-P, which is expected to cause a subsequent reduction in the O-P’s net income due primarily to the inclusion of sales and marketing expenses.  Although the Company’s share of the O-P net income recorded in the Company’s income statement is expected to decrease, the annual cash distributions the Company receives from the O-P will remain unchanged pursuant to the terms of the 4G Agreement.  Regardless of the O-P’s net income, pursuant to the 4G Agreement, the Company will receive from the O-P an annual cash distribution of $13,600 in 2011 and annual cash distributions of $13,000 in 2012 and 2013.

Pursuant to the equity method accounting of the Company’s investment income, the Company is required to record the income from the O-P as an increase to the Company’s investment account.  The Company is required to apply the cash payments made under the 4G Agreement as a return on its investment when received.  Under equity method accounting, the Company currently reports as income its proportionate share of the O-P income, which is less than the guaranteed cash distributions it receives from the O-P.   The cash distributions the Company receives from the O-P that are in excess of the Company’s proportionate share of the O-P income is applied to its investment account.  As a result of receiving the fixed guaranteed cash distributions from the O-P in excess of the Company’s proportionate share of the O-P income, the investment account is expected to be reduced to zero within the first six months of 2012. Thereafter, the Company will record the fixed guaranteed cash distributions that are received from the O-P in excess of the proportionate share of the O-P income directly to the Company’s statement of operations as other income.

The following is a summary of the Company’s investment in O-P as of:

	September 30,			December 31,
	2011			2010
Investment, beginning of period	$	7,681		$	7,669
Income from equity method investment		6,744			12,578
Cash distributions		(9,878	)		(12,566	)
	$	4,547		$	7,681

15

WARWICK VALLEY TELEPHONE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

($ in thousands except share and per share amounts)

The following summarizes the income statement (unaudited) for the nine months ended September 30, 2011 and 2010 that the O-P provided to the Company:

		2011(1)		2010
Net sales	$	193,208	$	137,110
Cellular service cost		73,123		16,193
Operating expenses		36,925		9,290
Operating income		83,160		111,627
Other income		15		675
Net income	$	83,175	$	112,302
Company share	$	6,744	$	9,105

(1) The nine months ended September 30, 2011 income statement represents four months of the O-P operating as a wholesale business and five months of the O-P operating as a retail business in accordance with Amendment 6 to the O-P Limited Partnership Agreement effective May 1, 2011.

The following summarizes the income statement (unaudited) for the three months ended September 30, 2011 and 2010 that O-P provided to the Company:

		2011		2010
Net sales	$	77,043	$	49,925
Cellular service cost		40,615		5,524
Operating expenses		20,057		3,176
Operating income		16,371		41,225
Other income		1		244
Net income	$	16,372	$	41,469
Company share	$	1,328	$	3,362

The following summarizes the balance sheet as of September 30, 2011(unaudited) and December 31, 2010 that O-P provided to the Company:

		2011		2010
Current assets	$	25,397	$	10,916
Property, plant and equipment, net		38,418		34,294
Total assets	$	63,815	$	45,210
Total liabilities	$	49,888	$	818
Partners' capital		13,927		44,392
Total liabilities and partners' capital	$	63,815	$	45,210

16

WARWICK VALLEY TELEPHONE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

($ in thousands except share and per share amounts)

NOTE 14:  PENSION AND POSTRETIREMENT OBLIGATIONS

The components of net periodic cost (gain) for the nine months ended September 30, 2011 and 2010 are as follows:

	Pension Benefits						Postretirement Benefits
	2011			2010			2011			2010
Service cost	$	0		$	0		$	8		$	30
Interest cost		652			656			184			180
Expected return on plan assets		(615	)		(613	)		(121	)		(121	)
Amortization of transition asset		0			0			21			21
Amortization of prior service cost		42			42			(248	)		(247	)
Amortization of net loss		654			663			71			75
Net periodic benefit cost (gain)	$	733		$	748		$	(85	)	$	(62	)

The components of net periodic cost (gain) for the three months ended September 30, 2011 and 2010 are as follows:

	Pension Benefits						Postretirement Benefits
	2011			2010			2011			2010
Service cost	$	0		$	0		$	2		$	11
Interest cost		217			217			61			61
Expected return on plan assets		(205	)		(204	)		(40	)		(42	)
Amortization of transition asset		0			0			7			7
Amortizaton of prior service cost		14			14			(83	)		(82	)
Amortization of net loss		218			221			24			25
Net periodic benefit cost (gain)	$	244		$	248		$	(29	)	$	(20	)

The Company expects to contribute a total of $529 to its pension and postretirement benefit plans in 2011.   For the nine months ended September 30, 2011, the Company has contributed $397 of this amount to its pension and postretirement benefit plans.

NOTE 15:  INCOME TAXES

Generally for interim tax reporting, one overall estimated annual effective tax rate is computed for tax jurisdictions not subject to valuation allowance and applied to the year to date ordinary income (loss).

The accounting standard regarding accounting for uncertainty in income taxes requires uncertain tax positions to be classified as non-current income tax liabilities unless expected to be paid within one year.  As of September 30, 2011, the Company has no liability for unrecognized tax benefits.

The Company and its subsidiaries file a U.S. federal consolidated income tax return.   The U.S. federal statute of limitations remains open for the years 2007 and thereafter.

17

WARWICK VALLEY TELEPHONE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

($ in thousands except share and per share amounts)

NOTE 16:  SHAREHOLDERS’ EQUITY

The Company has 10,000,000 authorized shares of common stock at a par value of $0.01; 5,000 authorized Preferred Shares at a par value of $100; and 10,000,000 authorized shares of preferred stock at a par value of $0.01.

A summary of the changes to shareholders’ equity for the nine months ended September 30, 2011 and 2010 is provided below:

	2011			2010
Shareholders' equity, beginning of period	$	36,425		$	37,905
Net income (loss)		(1,057	)		3,087
Dividends paid on common stock		(4,273	)		(3,896	)
Dividends paid on preferred stock		(19	)		(19	)
Stock and stock option compensation		821			252
Treasury stock purchases		(1,474	)		(17	)
Exercise of stock options		1,138			36
Changes in unrealized gain (loss) on investments		32			(18	)
Changes in pension and postretirement benefit plans		290			360
Shareholders' equity, end of period	$	31,883		$	37,690

NOTE 17:  STOCK BASED COMPENSATION

The Company adopted and, at the annual meeting held on April 29, 2011, its shareholders approved the Amended and Restated 2008 Long-Term Incentive Plan (the “Amended and Restated LTIP”) to assist the Company and its affiliates in attracting, motivating and retaining selected individuals to serve as employees, directors, consultants and advisors of the Company and its affiliates by providing incentives to such individuals through the ownership and performance of the Company’s common stock.  The Amended and Restated LTIP increases the total number of shares authorized under the Amended and Restated LTIP from 500,000 shares to 1,100,000 shares of common stock and is subject to receiving approval from the PSC and the BPU.  Shares available for grant under the Amended and Restated LTIP may be either authorized but unissued shares or shares that have been reacquired by the Company and designated as treasury shares.  As of September 30, 2011, 134,095 shares of common stock were available for grant under the Amended and Restated LTIP.  The Amended and Restated LTIP permits the issuance by the Company of awards in the form of stock options, stock appreciation rights, restricted stock and restricted stock units and performance shares.  The exercise price per share of the Company’s common stock purchasable under any stock option or stock appreciation right may not be less than 100% of the fair market value of one share of common stock on the date of grant.  The term of any stock option or stock appreciation may not exceed ten years.  The Amended and Restated LTIP also provides plan participants with a cashless mechanism to exercise their stock options.  As of September 30, 2011, the Company purchased treasury stock of $1,477 as a result of plan participants using the cashless mechanism when exercising stock options.  Issued restricted stock, stock options and restricted stock units are subject to vesting restrictions.

Restricted Common Stock Awards

The following table summarizes the restricted common stock activity with certain eligible participants during the nine months ended September 30, 2011:

					Grant Date
	Date Issued	Shares			Fair Value per Share
Restricted stock granted	1/6/2011		10,573		$	14.16
Restricted stock granted	2/25/2011		19,861		$	14.70
Restricted stock granted	3/9/2011		25,542		$	14.85
Restricted stock granted	4/29/2011		200		$	15.00
Restricted stock granted	6/15/2011		2,500		$	14.80
Restricted stock granted	8/3/2011		217		$	13.92
Restricted stock granted	8/8/2011		2,000		$	13.65
Forfeited			(29	)	$	12.78
Total restricted stock granted			60,864

18

WARWICK VALLEY TELEPHONE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

($ in thousands except share and per share amounts)

Stock-based compensation expense for restricted stock awards was $578 and $200 for the nine months ended September 30, 2011 and 2010, respectively, and $130 and $71 for in the three months ended September 30, 2011 and 2010, respectively.  Restricted stock awards are amortized over their respective vesting periods of two or three years.  The Company records stock-based compensation for grants of restricted stock awards on a straight-line basis.  The Company has determined expected forfeitures based on recent activity and is recognizing compensation expense only for those restricted common shares expected to vest.

The following table summarizes the restricted common stock activity during the nine-month periods ended September 30, 2011 and 2010:

	2011					2010
				Grant Date Weighted Average Price per Share					Grant Date Weighted Average Price per Share
Unvested Shares	Shares					Shares
Balance - Beginning of period		47,373		$	12.64		21,626		$	11.03
Granted		60,893			14.64		35,004			13.22
Vested		(37,052	)		13.05		(7,346	)		10.69
Forfeited		(29	)		12.78		(300	)		12.78
Balance - End of period		71,185		$	14.13		48,984		$	12.65

The total fair value of restricted stock vested during the nine-month periods ended September 30, 2011 and 2010 was $484 and $78, respectively.

Stock Options

The following tables summarize stock option activity for the nine-month periods ended September 30, 2011 and 2010, along with stock options exercisable at the end of the period:

	2011					2010
Options	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding - beginning of period		160,733		$	11.33		123,631		$	10.76
Stock options granted		148,381			14.83		43,768			12.88
Exercised		(103,319	)		11.01		(3,333	)		10.78
Forfeited		0			0.00		0			0.00
Outstanding - end of period		205,795		$	13.89		164,066		$	11.31
Vested and expected to vest at September 30		205,795					164,066
Exercisable at September 30		70,740					63,155

19

WARWICK VALLEY TELEPHONE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

($ in thousands except share and per share amounts)

Stock options vest over a three-year period.  The following table summarizes information about fixed-price stock options outstanding at September 30, 2011:

			Weighted		Weighted Average
			Average		Remaining		Aggregate
	Shares		Exercise		Contractual		Instrinsic
Exercise Price Per Share	Outstanding		Price		Life (Years)		Value
$10.78		15,166	$	10.78		6.9		29
$10.02		4,051		10.02		7.4		11
$11.20		7,517		11.20		7.5		11
$12.97		7,000		12.97		8.1		0
$12.76		1,000		12.76		8.2		0
$12.88		22,680		12.88		8.5		0
$14.70		19,761		14.70		9.4		0
$14.85		128,620		14.85		9.4		0
		205,795	$	11.31		9.0	$	51
Exercisable at September 30, 2011		70,740	$	13.58		8.3	$	0

Stock-based compensation expense for stock option awards was $243 and $52 for the nine months ended September 30, 2011 and 2010, respectively, and $65 and $17 for the three months ended September 30, 2011 and 2010, respectively.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day, September 30, 2011, and the exercise price times the number of shares) that would have been received by the option holders had all the option holders exercised in-the-money stock options on September 30, 2011. This amount changes based on the fair market value of the Company’s common stock.

The fair value of the above stock-based option awards was estimated using the Black-Scholes model with the following weighted-average assumptions for the nine months ended September 30, 2011 and 2010:

Options	2011			2010
Expected life (in years)		10			10
Interest rate		3.40	%		3.78	%
Volatility		32.77	%		31.70	%
Dividend yield		7.00	%		6.83	%
Weighted-average fair value per share at grant date	$	2.16		$	1.92

The following table sets forth the total stock-based compensation expense resulting from stock options and restricted stock granted to employees, as well as the effects of the acceleration of the vesting of stock options and restricted stock which had been granted to the former Chief Financial Officer in the amount of $345, which are included in the Company’s consolidated statements of income for the three and nine month periods ended September 30, 2011:

	Three Months				Nine Months
Stock-Based Compensation Expense	2011		2010		2011		2010
Cost of services and products	$	17	$	1	$	51	$	4
Selling, general and administrative expenses		178		87		770		248
	$	195	$	88	$	821	$	252

As of September 30, 2011, $915 of total unrecognized compensation expense related to stock options and restricted common stock is expected to be recognized over a weighted average period of approximately 1.3 years.

20

WARWICK VALLEY TELEPHONE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

($ in thousands except share and per share amounts)

NOTE 18: COMMITMENTS AND CONTINGENICES

In conjunction with the recent business acquisition (see Note 2) the Company has assumed various contingent liabilities as of September 30, 2011.  Pursuant to the Alteva Agreement, the seller shall be paid additional consideration up to $2,000 if certain performance-based conditions are met as of the earn-out calculation dates of August 5, 2012 and August 5, 2013 (or prior to January 1, 2013 depending on certain tax law changes). In addition, at the time of the closing on the Alteva Agreement the Company withheld $750 as security of any future claims against the seller.  Such amount is payable on August 5, 2012, less any amounts offset against the holdback amount pursuant to the terms of the Alteva Agreement.

In connection with the Alteva Agreement, the Company placed cash in the amount of $4,000 in escrow, pending the issuance of 272,479 shares of the Company’s common stock. The issuance of the shares of common stock is contingent upon receipt by the Company of certain approvals of the PSC and BPU.  Such approvals have been received as of October 21, 2011 (see Note 19).

The Alteva Agreement provides for the payment to the seller of a working capital adjustment based on actual amount of working capital, as defined, as of August 5, 2011 compared to the target working capital.  As of September 30, 2011 the Company estimated this liability to be $590, of which $322 has been advanced to the seller.  However, it is subject to an independent audit to be completed within 145 days of closing.

As of September 30, 2011, the estimated fair value of the aforementioned amount have been recorded as “amounts due in connection with business acquisition” in the accompanying condensed consolidated balance sheet.

Effective October 21, 2011, the Company entered into a Lock-Up and Put Agreement with the members of Alteva (the “Lock-up and Put Agreement) pursuant to which each of the members of Alteva agreed to certain restrictions on their ability to sell the shares of the Company’s common stock they were issued in connection with the Alteva Agreement (the “Alteva Shares”).  Under the Lock-up and Put Agreement, each member of Alteva may transfer to any of the permitted transferees up to 50% of their Alteva Shares between October 21, 2012 and December 14, 2012.  The members of Alteva may sell their remaining Alteva Shares without restriction beginning on December 15, 2012.  In addition, the Lock-up and Put Agreement gives each member of Alteva the option to sell their Alteva Shares to the Company within a certain prescribed time period at a certain prescribed price (the “Put”).  The Alteva members may exercise their Put with respect to half of their Alteva Shares within a 60-day period commencing on October 21, 2012 and the other half within a 60-day period commencing on December 15, 2012.  The purchase price of the Put will be the greater of (i) the closing price of the Company’s common stock on the date of exercise of the Put or (ii) $11.74.  The Lock-up and Put Agreement also includes a purchase price protection for the Alteva selling shareholders.  The purchase price protection provides that if the price of the Company’s common stock for the 30 trading days immediately prior to October 21, 2012 or December 15, 2012 (but excluding the three trading days prior to and after the record date for any cash dividend declared by the Company) (the “Release Date Price”) is less than $11.74, then the Company will issue to the Alteva members the aggregate number of shares of the Company’s common stock equal to the difference between $1,600 and the market value of 50% of the aggregate Alteva Shares on October 21, 2012 or December 15, 2012 or 100% of the aggregate Alteva Shares if the Release Date Price is less than $11.74 on both dates.

The Company will record the valuation as an estimated contingent liability using a binomial method based on significant inputs not observed in the market and thus will represent a Level 3 instrument.  Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect the Company’s own assumptions in measuring fair value.  The final purchase price allocation and its effect on results of operations may differ significantly from the amounts included herein.  The Company is in the process of obtaining third-party valuations of the assets acquired, liabilities assumed and the Lock-up and Put Agreement; thus, the allocation of the purchase price is subject to adjustment.

The Company has entered into two-year employment agreement with its Executive Vice President and Chief Operating Officer, its Executive Vice President and Chief Sales Officer, and its Executive Vice President and Chief Network Officer. Their annual salaries per the agreements are $235, $180 and $180, respectively.

NOTE 19:  SUBSEQUENT EVENTS

On October 21, 2011, the PSC approved the Company’s petition for authority to issue common stock as partial consideration for the purchase of the assets of Alteva.  On September 22, 2011, the BPU also approved the Company’s petition for authority to issue stock.

As of October 21, 2011, the Company issued a total of 272,479 shares of common stock to the members of Alteva in connection with the Lock-up and Put Agreement signed by the members of Alteva, LLC with the Company effective as of October 21,2011.

On October 25, 2011, the Company’s Board of Directors declared a regular quarterly dividend of $.26 per share of the Company’s common stock and $1.25 per share of the Company’s preferred stock.  The dividends are payable on December 27, 2011 to the shareholders of record on December 16, 2011.

On November 3, 2011, Alteva LLC, received a notice of a patent infringement lawsuit from Klausner Technologies, Inc. The Company is gathering information in order to respond to this lawsuit on behalf of Alteva, LLC and believes this suit is without merit.

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

CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words “believes,” “anticipates,” “intends,” “expects” and words of similar import, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others the following: general economic and business conditions, both nationally and in the geographic regions in which we operate; industry capacity; demographic changes; technological changes and changes in consumer demand; existing governmental regulations and changes in or the failure to comply with, governmental regulations; legislative proposals relating to the businesses in which we operate; reductions in cash distributions from the O-P; competition; or the loss of any significant ability to attract and retain qualified personnel. Given these uncertainties, current and prospective investors should be cautioned in their reliance on such forward-looking statements. Except as required by law, we disclaim any obligation to update any such factors or to publicly announce the results of any revision to any of the forward-looking statements contained herein to reflect future events or developments.  For a further discussion of the matters described above, see Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010.

This discussion and analysis provides information about the important aspects of our operations and investments, both at the consolidated and segment levels, and includes discussions of our results of operations, financial position and sources and uses of cash.  The presentation of dollar amounts in this discussion is in thousands.  This discussion and analysis should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and our Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2010.

Overview

Revenues increased 9% to $6,829 for the three months ended September 30, 2011, in comparison to $6,250 for the three months ended September 30, 2010, which includes additional revenue from the acquisition of substantially all of the assets of Alteva, LLC on August 5, 2011.  Operating expense increased 30% to $10,272 for the three months ended September 30, 2011, in comparison to $7,876 for the three months ended September 30, 2010.   The increase in operating expense was primarily attributable to the expenses we incurred to purchase substantially all of the assets of Alteva, LLC, and includes the additional operating expenses of Alteva, LLC during the period.  During the three-month period ended September 30, 2011, we had a net loss of $1,689, compared to net income of $1,266 for the three-month period ended September 30, 2010.   This decrease of $2,955 in income was primarily attributable to the increase in operating expenses and lower Orange County-Poughkeepsie Limited Partnership (“O-P”) earnings associated with Amendment 6 to the O-P Limited Partnership Agreement entered into effective May 1, 2011.

On May 26, 2011, we entered into an agreement with Verizon Wireless of the East LP, the general partner and a limited partner, and Cellco Partnership, the other limited partner, in the O-P to make certain changes to the O-P partnership agreement which, among other things, specifies that the O-P will provide 4G cellular services (the “4G Agreement”).  The conversion of the O-P from a wholesale business to a retail business pursuant to the 4G Agreement increased the cellular service costs and sales and marketing expenses incurred by the O-P, which  caused a subsequent reduction in the O-P’s net income.  However, although our share of the O-P net income recorded in our income statement decreased as a result of the conversion to a retail business, the annual cash distributions we receive from the O-P will remain unchanged pursuant to the terms of the 4G Agreement.  Regardless of the O-P’s net income, pursuant to the 4G Agreement, we will receive from the O-P an annual cash distribution of $13,600 in 2011 and annual cash distributions of $13,000 in 2012 and 2013.

On August 5, 2011, we, through our wholly-owned subsidiary purchased substantially all of the assets and assumed certain of the liabilities of Alteva, LLC, a cloud-based Unified Communications solutions provider and enterprise hosted Voice over Internet Protocol (“VoIP”) provider in exchange for cash and stock with a estimated combined value of approximately $17 million.  In exchange for the assets purchased from Alteva, LLC, we made the following payments at closing:

· $10,250 in cash was paid to Alteva, LLC; and

· $4,000 in cash was placed in escrow, which amount was to be (i) returned to us upon the issuance of unregistered shares of our common stock having a value of approximately $4,000 upon receipt of New York Public Service Commission (“PSC”) and New Jersey Board of Public Utilities (“BPU”) approvals, or (ii) be released to Alteva, LLC in the event that PSC and BPU approvals were not received prior to December 3, 2011, in which case we were to pay Alteva, LLC $4,000 cash in lieu of our common stock.

We obtained the necessary approvals from the PSC and BPU and, as of October 21, 2011, we issued 272,479 shares of our common stock to the members of Alteva, LLC.  In connection with such issuance, the members of Alteva, LLC will enter into Lock-Up and Put Agreements with us effective as of October 21, 2011.  As a result, $3,351 of the amount placed in escrow will be returned to us.  The remainder of the escrow account was used to pay down certain capital lease obligations that we assumed from Alteva, LLC.

We financed $5,000 of the purchase price by drawing down our entire $5,000 revolving loan facility with CoBank, ACB.  We financed the $4,000 placed in escrow by drawing down our entire $4,000 line of credit with Provident Bank.

In addition, up to a total of $2,000 in cash is payable to Alteva, LLC, on August 5, 2012 and 2013 (or prior to January 1, 2013 depending on certain tax law changes), if certain performance-based conditions are satisfied.  There will also be a post-closing working capital adjustment to the purchase price.  We also withheld $750 from the purchase price as security for a potential working capital adjustment, the payment of certain liabilities and for possible indemnification claims.  On August 5, 2012, we will pay to Alteva, LLC the sum of $750, less any amounts offset against such amount pursuant to the terms of our agreement with Alteva, LLC.

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Our preliminary computation of the post-closing working capital adjustment as compared to the target of $55 pursuant to our agreement with Alteva, LLC will increase the purchase price by $590.  The calculation is subject to an independent audit and is to be completed within 145 days of closing.

While we currently have a working capital deficit of $6 million, we believe this working capital deficiency is short-term in nature as we expect to repay a portion of the Provident Bank line of credit with the return of the escrow funds and apply cash distributions received from the O-P to reduce our outstanding short-term obligations within the next 3 months.

We are a full-service telecommunications company.  As a regional Incumbent Local Exchange Carrier operating in southern Orange County, New York and northern New Jersey, we provide our historic local and toll telephone service to residential and business customers, Internet high speed broadband service, video service and DIRECTV.  Through our Alteva and USA Datanet businesses, we deliver cloud-based Unified Communications (“UC”) solutions including Voice over Internet Protocol (“VoIP”), hosted Microsoft Communication Services, fixed mobile convergence and advanced voice applications for the desktop.  By combining voice service with Microsoft Communications Services products, customers receive a true, high-quality, voice-enabled UC solution that easily integrates with existing business applications.

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

Results of operations for the three months ended September 30, 2011 and 2010

OPERATING REVENUES

Operating revenues for the three-month period ended September 30, 2011 increased by $579 or 9% to $6,829 from $6,250 for the same period in 2010.  This increase was due primarily to:

· An increase in data services revenue of $972 or 57% that was primarily associated with an increase in hosted internet protocol (“IP”) products of $1,153 mainly due to additional revenue from the acquisition of certain assets of Alteva, LLC, offset by decreased revenue for high-speed broadband and landline video services of $162 attributable to losses in landline video services due to customers switching to our DIRECTV services or to a competitor.

· An increase in wholesale services of $326 or 97% due to increases in usage by wholesale customers.

· An increase in local network service revenue of $64 or 9% associated with rate increases in July 2011 for New Jersey customers and November 2010 for New York customers offset by access line loss attributable to competitive landline telephone service and wireless substitution.

Partially offset by:

· A decrease in network access revenue of $647 or 27% due mainly to lower revenues of $538 associated with Universal Service Funds (“USF”), lower end user regulatory revenues of $37 attributable to loss of access lines, and lower billing to carriers of $101 offset  by the increased revenues associated primarily with the additional sales of special circuits of $28.

· A decrease in long distance revenue of $92 or 18% due mainly to the effect of customers switching to our promotional prices, declining minutes of use, and access line loss attributable to competitive landline telephone service and wireless substitution.

· A decrease in directory services of $41 or 17% due primarily to lower sales of yellow page advertising.

OPERATING EXPENSES

Total operating expenses for the three-month period ended September 30, 2011 increased $2,396 or 30% to $10,272 from $7,876 for the same period in 2010.  This increase was due primarily to:

· Cost of services and products increased $1,084 primarily due to an increase of $1,033 attributable to volume-driven circuit costs and access charges, and installation costs for our hosted IP product associated with the integration of Alteva, LLC’s assets.

· Selling, general and administrative expenses increased $1,317 or 37% due mainly to increases in compensation and benefits of $310, increased product advertising costs of $275 and higher professional fees of $572, which includes expenses associated with the purchase of certain assets of Alteva, LLC, and higher regulatory fees of $107 associated with USF.

· Depreciation and amortization expense had a net decrease of $5 primarily associated with the decrease in our fixed assets in 2010, which was related to our landline video business and includes amortization of $199 for customer lists associated with the asset purchase of Alteva, LLC.

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OTHER INCOME (EXPENSE)

Total other income (expense) for the three-month period ended September 30, 2011 decreased $2,176 or 63% to $1,304 from $3,480 for the same period in 2010.  This decrease is due mainly to:

· A decrease in equity method investments of $2,034 from lower O-P earnings as a result of the transition of the O-P from a wholesale business to a retail business pursuant to the 4G Agreement, and an increase in other expense of $92, mainly associated with the loss on the sale of bonds and lower dividend income of $109.

O-P INCOME

We entered into the 4G Agreement on May 26, 2011.  The conversion of the O-P from a wholesale business to a retail business pursuant to the 4G Agreement will increase the cellular service costs and sales and marketing expenses incurred by the O-P, which is expected to cause a subsequent reduction in the O-P’s net income.  The 4G Agreement provides for guaranteed annual cash distributions to us from the O-P through 2013.  For 2011, annual cash distributions from the O-P will be $13,600 and for 2012 and 2013 the annual cash distribution will be $13,000.  Annual cash distributions will be paid in equal quarterly amounts.  The 4G Agreement also gives us the right (the “Put”) to require one of the O-P’s limited partners to purchase all of our ownership interest in the O-P during April 2013 or April 2014 for an amount equal to the greater of (a) $50,000 or (b) the product of five (5) times 0.081081 times the O-P’s EBITDA, as defined in the 4G Agreement,  for the calendar year preceding the exercise of the Put.

Under equity method accounting, we currently report as income our proportionate share of the O-P income, which is less than the guaranteed cash distributions that we receive from the O-P.   The cash distributions we receive from the O-P that are in excess of our proportionate share of the O-P income are applied to our investment  account.  As a result of receiving the fixed cash distributions from the O-P in excess of our proportionate share of the O-P income, our investment account is expected to be reduced to zero within the first six months of 2012.  Thereafter, once the investment account has been reduced to zero, we will record the fixed cash distributions that we receive from the O-P directly to our statement of operations as other income.

Results of operations for the nine months ended September 30, 2011 and 2010

OPERATING REVENUES

Operating revenues for the nine-month period ended September 30, 2011 increased by $621 or 3% to $18,818 from $18,197 during the same period in 2010.  This increase was due primarily to:

· An increase in data services revenue of $770 or 15% that was primarily associated with an increase in hosted IP products of $1,282 mainly due to the additional revenue from the acquisition of certain assets of Alteva, LLC and DIRECTV revenue of $169, offset by decreased revenue for high-speed broadband and landline video services of $670 caused by losses in landline video services due to customers switching to our DIRECTV services or to a competitor.

· An increase in wholesale services of $727 or 77% due to increases in usage by wholesale customers and new customer sales.

· An increase in local network service revenue of $196 or 9% associated with rate increases in July 2011 for New Jersey customers and November 2010 for New York customers offset by access line loss attributable to competitive landline telephone service and wireless substitution.

Partially offset by:

· A decrease in network access revenue of $640 or 10% due mainly to lower revenues of $684 associated with USF,  lower end user regulatory revenues of $134 attributable to loss of access lines, and lower billing to carriers of $195 offset  by the increased revenues associated primarily with the additional sales of special circuits of $373.

· A decrease in long distance revenue of $271 or 17% due mainly to the effect of customers switching to our promotional prices, declining minutes of use and access line loss attributable to competitive landline telephone service  and wireless substitution.

· A decrease in directory services of $113 or 14% due primarily to lower sales of yellow page advertising.

· A decrease in other services and sales revenue of $40 or 5% due primarily to lower revenue associated with private line revenue, circuit revenue, leased equipment, inside wire and other ancillary services.

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OPERATING EXPENSES

Total operating expenses for the nine-month period ended September 30, 2011 increased $3,924 or 17% to $26,789 from $22,865 during the same period in 2010.  This increase was due primarily to:

· Cost of services and products increased $1,468 or 17% primarily due to an increase of $1,686 attributable to volume-driven circuit costs and access charges, installation costs for our hosted IP product, primarily associated with the integration of Alteva, LLC’s assets and higher expense of $118 associated with the maintenance of our plant assets, offset by a decrease of $110 in costs associated with DIRECTV installations, $56 in lower costs for our directory campaign and $167 in decreased costs associated with our landline video product.

· Selling, general and administrative expenses increased $2,563 or 26% due mainly to the accelerated compensation expenses associated with the severance agreement with our former Chief Financial Officer and other increases in compensation and benefits of $1,770, increased product advertising costs of $130, higher professional fees of $764  which includes expenses associated with the acquisition of certain assets of Alteva, LLC, offset by lower maintenance costs of $103 and bad debt expense of $61.

· Depreciation and amortization expense had a net decreased of $107 or 3% primarily associated with the decrease in fixed assets, in 2010, related to our landline video business and includes amortization of $199 for customer lists associated with the asset purchase of Alteva, LLC.

OTHER INCOME (EXPENSE)

Total other income (expense) for the nine-month period ended September 30, 2011 decreased by $2,546 or 27% to $6,794 from $9,340 during the same period in 2010.  This decrease is due mainly to:

· A decrease in equity method investments of $2,361 from lower O-P earnings as a result of the transition of the O-P from a wholesale business to a retail business pursuant to the 4G Agreement as described under the heading “O-P Income” above and a decrease of $87, which is mainly associated with the reduction of estimated landline video settlement expenses in 2010, offset by higher interest and dividend income of $68 and lower interest expense on funded debt of $23.

LIQUIDITY AND CAPITAL RESOURCES

We had $5,167 of cash and cash equivalents and short-term investments available at September 30, 2011 as compared with $13,535 at December 31, 2010.  This decrease was primarily related to the purchase of certain assets of Alteva, LLC, reductions of accrued expenses, income taxes, and the additional purchase of network equipment, described below.  Our short-term investments include bank certificates of deposit.

While we currently have a working capital deficit of $6 million, we believe this working capital deficiency is short-term in nature as we expect to repay a portion of the Provident Bank line of credit with the return of the escrow funds and apply cash distributions received  from the O-P to reduce outstanding short-term obligations within the next 3 months.

We have a $4,000 line of credit with Provident Bank.  On August 1, 2011, we drew down our entire $4,000 line of credit with Provident Bank and placed the proceeds in an escrow account, pursuant to the terms of the agreement with Alteva, LLC.  We paid $649 of certain indebtedness of Alteva, LLC from the escrow account.  On October 21, 2011, the PSC approved the Company’s petition for authority to issue stock as partial consideration for the purchase of the assets of Alteva, LLC and on September 22, 2011, the BPU also approved the Company’s petition for authority to issue stock.  As a result, the balance of $3,351 which was placed in escrow will be returned to us.

As of September 30, 2011, $1,519 in principal amount was outstanding under the CoBank ACB term credit facility. The final payment is due July 20, 2012.   We are required to make interest and outstanding principal payments in quarterly installments under the CoBank ACB term credit facility.

On August 3, 2011, we entered into a supplement to our master loan agreement with CoBank, ACB.  The supplement provides for a $5,000 revolving loan facility in the principal amount of $5,000 (the “CoBank Revolving Loan”).  Also on August 3, 2011, we drew down the entire $5,000 principal amount of the CoBank Revolving Loan to fund a portion of the purchase price of the transaction with Alteva, LLC.  The CoBank Revolving Loan becomes due and payable on August 2, 2012.

The CoBank Revolving Loan incurs interest at a variable rate determined by CoBank, ACB or, if selected by us, at LIBOR plus 3.50%.  Interest is payable quarterly in arrears.  We paid CoBank, ACB a $50 origination fee in connection with the CoBank Revolving Loan.

CASH FROM OPERATING ACTIVITIES

Our source of funds continues to be primarily generated from cash distributions from the O-P which may differ from the income from equity method investments reported in our statement of operations as described under the heading “O-P Income” above.   For the nine months ended September 30, 2011, we recorded $6,744 of income from the O-P and $9,877 in cash distributions.   For the nine months ended September 30, 2010, we recorded $9,105 of income from the O-P and $9,322 in cash distributions.  For 2011, annual cash distributions from the O-P will be $13,600 pursuant to the 4G Agreement.  For the nine months ended September 30, 2011, net cash provided by operating activities was $4,611 as compared to $9,173 for the nine months ended September 30, 2010.  This decrease was primarily related to the reductions in net income, accrued expenses and income taxes during 2011.

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CASH FROM INVESTING ACTIVITIES

For the nine months ended September 30, 2011, net cash used in investing activities was $9,835 as compared to $2,736 for the nine months ended September 30, 2010. Capital expenditures totaled $1,939 during the nine months ended September 30, 2011 as compared to $951 for the corresponding period in 2010. Capital expenditures increased as a result of the purchase of certain network equipment for additional capacity and upgrades to outside plant facilities.  We do not expect to make additional capital expenditures during 2011 other than the usual and customary budgeted capital expenditures.   We sold all of our short-term corporate and municipal bonds in the amount of $2,409 during the nine months ended September 30, 2011 to fund a portion of the purchase price for the Alteva, LLC assets.  We used in total $10,250 for the acquisition of substantially all of the assets of Alteva, LLC.

CASH FROM FINANCING ACTIVITIES

Dividends declared on our common shares by the Board of Directors were $0.78 per share for the nine months ended September 30, 2011 and were $0.72 for the nine months ended September 30, 2010.  The total amount of dividends paid on our common shares by us for each of the nine-month periods ended September 30, 2011 and 2010 was $4,273 and $3,896, respectively.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2011, an accounting standards update regarding fair value measurement was issued.  This standards update was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards.  This standard update also changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements.  The amendment becomes effective for annual periods beginning after December 15, 2011.  We do not believe this will have a material impact on our consolidated financial statements.

In June 2011, an accounting standards update regarding the presentation of comprehensive income was issued.  This standards update was issued to increase the prominence of items reported in other comprehensive income and requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  This standards update becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  We do not believe this will have a material impact on our consolidated financial statements.

In September 2011, an accounting standards update regarding the testing of goodwill for impairment was issued. The amendment allows a company to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount to determine whether it is necessary to perform the two-step goodwill impairment test. This amendment becomes effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and earlier adoption is permitted.  We do not believe this will have a material impact on our disclosures or consolidated financial statements.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are not subject to any material market risk.  We do not hold or issue hedging instruments for any purposes or other financial instruments for trading purposes.  Our only assets exposed to market risk are our fixed income short-term investments and our exposure to changes in interest rates resulting from borrowing activities.  We had $258 of funds deposited in bank certificate of deposits at September 30, 2011.  In regards to our CoBank, ACB term loan, we have the option of choosing the following rate options:  Weekly Quoted Variable Rate, Long-Term Fixed Quote and a LIBOR Option.   Our exposure to changes in interest rates results from borrowing activities.  In the event interest rates were to increase or decrease by 1%, our yearly interest expense would increase or decrease by less than $0.09 million, assuming our average borrowing level remains constant, which would not materially affect our business or results of operations.

ITEM 4.  CONTROLS AND PROCEDURES

Our management, with the participation of our President and Chief Executive Officer (Principal Executive Officer) and our Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) have evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q.  Based upon this evaluation, our Principal Executive Officer and our Principal Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2011.

There were no changes in our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 5.  OTHER INFORMATION

Shareholders in 401(k) Plan

As of September 30, 2011, 0.7% of our outstanding common shares were held by employees in our 401(k) plan.  These percentages fluctuate quarterly.

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ITEM 6.  EXHIBITS

(2)	Plan of acquisition, reorganization, arrangement, liquidation or succession
	2.1	Asset Purchase Agreement by and among Warwick Valley Networks, Inc., Warwick Valley Telephone Company and Alteva, LLC dated as of July 14, 2011
	2.2	First Amendment to Asset Purchase Agreement by and among Warwick Valley Networks, Inc., Warwick Valley Telephone Company and Alteva, LLC dated as of August 5, 2011
(10)	Material contracts
	10.1	Second Supplement to the Master Loan Agreement dated as of August 3, 2011 by and between CoBank, ACB and Warwick Valley Telephone Company
	10.2	Promissory Note in the amount of $5,000,000 from Warwick Valley Telephone Company to CoBank, ACB dated August 3, 2011
	#10.3	Employment Agreement effective August 5, 2011 between Warwick Valley Telephone Company and David Cuthbert
(31)	Rule 13a-14(a)/15d-14(a) Certifications
	31.1	Rule 13a-14(a)/15d-14(a) Certification signed by Duane W. Albro, President, and Chief Executive Officer
	31.2	Rule 13a-14(a)/15d-14(a) Certification signed by Ralph Martucci, Jr., Executive Vice President, Chief Financial Officer and Treasurer
(32)	Section 1350 Certifications
	32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Duane W. Albro, President, and Chief Executive Officer
	32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Ralph Martucci, Jr., Executive Vice President, Chief Financial Officer and Treasurer

(101)	Interactive Data File
*	101.INS	XBRL Instance Document
*	101.SCH	XBRL Taxonomy Extension Schema Document
*	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
*	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
*	101.LAB	XBRL Taxonomy Extension Label Linkbase Document
*	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

#	Management contract or compensatory plan or arrangement.
*	Pursuant to Rule 406T of Regulation S-T, the information in this exhibit is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Warwick Valley Telephone Company                         ( Registrant)
Date:  November 9, 2011	By:	/s/ Duane W. Albro
		Duane W. Albro
		President and Chief Executive Officer
		(Principal Executive Officer)
Date: November 9, 2011	By:	/s/ Ralph Martucci, Jr.
		Ralph Martucci, Jr.
		Executive Vice President, Chief Financial Officer
		and Treasurer (Principal Financial and Accounting Officer)

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Index to Exhibits

2.1	Asset Purchase Agreement by and among Warwick Valley Networks, Inc., Warwick Valley Telephone Company and Alteva, LLC dated as of July 14, 2011
2.2	First Amendment to Asset Purchase Agreement by and among Warwick Valley Networks, Inc., Warwick Valley Telephone Company and Alteva, LLC dated as of August 5, 2011

10.1	Second Supplement to the Master Loan Agreement dated as of August 3, 2011 by and between CoBank, ACB and Warwick Valley Telephone Company
10.2	Promissory Note in the amount of $5,000,000 from Warwick Valley Telephone Company to CoBank, ACB dated August 3, 2011
10.3	Employment Agreement effective August 5, 2011 between Warwick Valley Telephone Company and David Cuthbert

31.1	Rule 13a-14(a)/15d-14(a) Certification signed by Duane W. Albro, President, and Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification signed by Ralph Martucci, Jr., Executive Vice President, Chief Financial Officer and Treasurer

32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Duane W. Albro, President, and Chief Executive Officer
32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Ralph Martucci, Jr., Executive Vice President, Chief Financial Officer and Treasurer

*	101.INS	XBRL Instance Document
*	101.SCH	XBRL Taxonomy Extension Schema Document
*	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
*	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
*	101.LAB	XBRL Taxonomy Extension Label Linkbase Document
*	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

* Pursuant to Rule 406T of Regulation S-T, the information in this exhibit is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

29

EX-2.1

Exhibit 2.1

ASSET PURCHASE AGREEMENT

BY AND AMONG

WARWICK VALLEY NETWORKS, INC.,

WARWICK VALLEY TELEPHONE COMPANY,

AND ALTEVA, LLC,

DATED JULY 14, 2011

TABLE OF CONTENTS

ARTICLE I Definitions		1
1.1	Definitions	1
1.2	Other Defined Terms.	7
ARTICLE II Sale and Transfer of Assets		10
2.1	Purchased Assets	10
2.2	Excluded Assets	12
2.3	Liabilities	12
ARTICLE III Purchase Price.		14
3.1	The Purchase Price	14
3.2	Payment of the Purchase Price	14
3.3	Allocation of Purchase Price	15
3.4	Working Capital Adjustment	15
3.5	Calculation of Additional Consideration	17
3.6	Holdback Amount	20
3.7	No Restrictions on Buyer’s Operation of the Business.	20
ARTICLE IV Closing.		20
4.1	Closing	20
4.2	Closing Actions and Deliveries	21
ARTICLE V Representations and Warranties of Seller		21
5.1	Organization; Subsidiaries; Ownership; Predecessors	21
5.2	Due Authorization; No Conflict	22
5.3	Financial Statements	22
5.4	Absence of Changes	23
5.5	Title to Assets; Condition	24
5.6	Real Property	24
5.7	Taxes	25
5.8	Insurance	25
5.9	Governmental Authorizations	26
5.10	Compliance with Laws	26
5.11	Environmental Matters	27
5.12	Litigation	27
5.13	Adequacy of Assets	27
5.14	Employee Benefit Plans	28
5.15	Employee Relations	29
5.16	Contractual Obligations	30
5.17	No Broker	30
5.18	Customer List	30

i

5.19	Intellectual Property	30
5.20	Accounts Receivable; Inventory	31
5.21	No Creation of Liens.	31
5.22	Telecom Law	31
5.23	Transactions with Related Parties	32
5.24	Privacy and Data Protection	33
5.25	Acquisition of Parent Shares	33
5.26	DISCLAIMER OF OTHER REPRESENTATIONS AND WARRANTIES.  .	34
ARTICLE VI Representations and Warranties of Buyer Parties		34
6.1	Organization and Good Standing	34
6.2	Due Authorization; No Conflict	34
6.3	No Brokers	35
6.4	Litigation	35
6.5	Capitalization	35
6.6	SEC Filings	36
6.7	Compliance With Laws	36
6.8	Financial Statements	37
6.9	Governmental Authorizations	37
6.10	Taxes	37
6.11	DISCLAIMER OF OTHER REPRESENTATIONS AND WARRANTIES..	38
ARTICLE VII Covenants and Agreements.		38
7.1	Buyer’s Investigation	38
7.2	Consents of Third Parties; Governmental Authorizations	39
7.3	Operations of the Business Prior to the Closing	39
7.4	Notification of Certain Matters	39
7.5	No Solicitation	40
7.6	Satisfaction of Closing Conditions	40
7.7	Employee Matters	40
7.8	Further Assurances	42
7.9	Transfer of Warranties	42
7.10	Bulk Sales Laws	42
7.11	Use of Name; Telephone Numbers	42
7.12	Prorations	43
7.13	Representation and Warranty Insurance	43
7.14	Restrictive Covenants	43
7.15	Accounts Receivable	45
7.16	Reporting of 2011 Revenues	45
ARTICLE VIII Conditions to Performance by Buyer		45
8.1	Representations and Warranties	46
8.2	Covenants and Agreements	46
8.3	Compliance Certificate	46
8.4	Absence of Litigation	46

ii

8.5	No Material Adverse Effect	46
8.6	Consents and Authorizations	46
8.7	Release of Encumbrances on the Purchased Assets	46
8.8	Other Closing Deliveries	47
8.9	Representation and Warranty Insurance.	47
ARTICLE IX Conditions to Performance by Seller		48
9.1	Representations and Warranties	48
9.2	Covenants and Agreements	48
9.3	Compliance Certificate.	48
9.4	Absence of Litigation	48
9.5	Consents and Authorizations	48
9.6	Representation and Warranty Insurance.	48
9.7	Other Closing Deliveries	48
ARTICLE X Termination		49
10.1	Termination	49
10.2	Notice of Termination; Effect of Termination	50
10.3	Return of Documentation	50
ARTICLE XI Indemnification		50
11.1	Survival of Representations and Warranties	50
11.2	Indemnification by Seller	51
11.3	Indemnification by Buyer Parties	51
11.4	Indemnification Procedures	52
11.5	Limitations.	53
11.6	Limited Right of Setoff	55
ARTICLE XII General Provisions		55
12.1	Expenses; Transfer Taxes	55
12.2	Entire Agreement; No Third Party Beneficiaries; Amendment	56
12.3	Severability	56
12.4	Waiver	56
12.5	Public Announcements	56
12.6	Successors and Assigns	57
12.7	Notice	57
12.8	Counterparts; Facsimile Signatures	58
12.9	Governing Law	58
12.10	Jurisdiction	58
12.11	Interpretation	58

iii

ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT  (this “Agreement”) is made and entered into this 14th day of July, 2011, by and among (i) WARWICK VALLEY NETWORKS, INC., a New York corporation (“Buyer”); (ii) WARWICK VALLEY TELEPHONE COMPANY, a New York corporation and the sole shareholder of Buyer (“Buyer Parent”); and (iii) ALTEVA, LLC, a New Jersey limited liability company (“Seller”).  Buyer and Buyer Parent are sometimes referred to herein individually as a “Buyer Party” and collectively as the “Buyer Parties.” Buyer, Buyer Parent, and Seller are sometimes referred to herein individually as a “Party” and collectively as the “Parties.”

WHEREAS, Seller desires to sell, and Buyer desires to purchase, substantially all of the assets of Seller that are used or held for use in connection with Seller’s business of providing communications products and services (the “Business”), upon the terms and subject to the conditions hereinafter set forth.

NOW, THEREFORE, in consideration of the premises and of the mutual covenants hereinafter set forth, the Parties hereby agree as follows:

ARTICLE I

Definitions.

1.1           Definitions.  The following terms shall have the meanings ascribed to such terms in this Section 1.1.

“Affiliate” means, with respect to a specified Person, a Person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with, the specified Person.  For purposes of this definition, the term “control” (including the terms “controlling,” “controlled by” and “under common control with”) means (a) the possession, directly or indirectly, of the power to vote more that 50% of the securities or other equity interests of a Person having ordinary voting power, or (b) the possession, directly or indirectly, of the power to direct or cause the direction of the management policies of a Person, by contract or otherwise. In addition to the foregoing, if the specified Person is an individual, the term “Affiliate” also includes (a) the individual’s spouse and (b) the members of the immediate family (including parents, and minor children) of the individual or of the individual’s spouse (intentionally excluding siblings and adult children).

“Business Day” means a day other than a Saturday, a Sunday or a day on which commercial banks are authorized or required to be closed in the State of New York.

“Closing” means the consummation of the transactions contemplated herein in accordance with Article IV.

“Closing Date” means the date on which the Closing occurs.

“Closing Date Working Capital” means the value, as of the Closing, of the portion of the Purchased Assets which would be identified current assets (including, without limitation, all unbilled amounts due from customers as of the Closing and all transferable prepaid assets and Customer Deposits properly identified as current assets), less the aggregate amount of current liabilities (including, without limitation, the Assumed Payables and Customer Deposits) included in the Assumed Liabilities, all as determined in accordance with GAAP and in accordance with the terms and conditions of, and subject to the adjustments described in, Section 3.4.

1

“COBRA” means health care continuation coverage required to be provided under Section 4980B of the Code and Sections 601-608 of ERISA or similar state laws.

“Code” means the Internal Revenue Code of 1986, as amended.

“Confidentiality Agreement” means that certain Mutual Non-Disclosure Agreement between Buyer Parent and Seller dated November 3, 2010, as amended.

“Contractual Obligation” means, with respect to any Person, any contract, agreement, deed, mortgage, lease or license, whether written or oral, which pertains to such Person or any material assets of such Person.

“Customer Deposits” means all customer deposits and prepayments received by Seller prior to the Closing for (i) license or maintenance fees for periods after the Closing Date, or (ii) services that will be performed or products that will be provided by Buyer after the Closing as part of the Assumed Liabilities.

“Debt” means, with respect to any Person at any date, all indebtedness of such Person and its Subsidiaries (whether secured or unsecured), including without limitation: (a) all obligations for borrowed money (whether current or non-current, short-term or long-term), including, without limitation, notes, loans, lines of credit, bonds, debentures, obligations in respect of letters of credit and bankers’ acceptances issued for the account of such Person and its Subsidiaries, and all associated Liabilities, (b) the outstanding indebtedness with respect to all equipment lease Contractual Obligations (capitalized or otherwise); (c) any payment obligations (whether or not contingent) with respect to acquisitions of assets or businesses in whatever form (including obligations with respect to non-compete, consulting or other arrangements), (d) all obligations with respect to the factoring and discounting of accounts receivable, (e) all obligations arising from cash/book overdrafts or negative cash balances, (f) all accrued but unpaid franchise, income, sales and excise Tax Liabilities, (g) all Liabilities secured by an Encumbrance on any property or asset owned by such Person or its Subsidiary, (h) all guarantees, including, without limitation, guaranties of payment, collection and performance, (i) all Liabilities for the deferred purchase price of property or services (including accounts payable and liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property), (j) all Liabilities relating to unfunded, vested benefits under any Employee Plan; and (k) all accrued interest, prepayment premiums and penalties related to any of the foregoing; provided that the amount of any of the foregoing obligations at any date shall be the outstanding balance or accrued value at such date, assuming the maximum Liability of any contingent obligations at such date.

“Earn-Out Calculation Date” means each of (i) the first anniversary of the Closing Date and (ii) the second anniversary of the Closing Date; provided, however, that if legislation has not been enacted, on or before December 31, 2012, that would result in the United States tax rate on long term capital gains remaining at 15% (or lower) for 2013, the second Earn-Out Calculation Date shall be November 30, 2012, and not the second anniversary of the Closing Date.

2

“Earn-Out EBITDA” means, as of an Earn-Out Calculation Date, the cumulative aggregate earnings deriving from Buyer’s conduct of the Business during the Earn-Out Period through such Earn-Out Calculation Date, before interest, taxes, depreciation and amortization, non-recurring or extraordinary gains or charges (including any gain or loss from the sale or disposition of assets outside the ordinary course of business), as all such items are determined in accordance with GAAP, if applicable, and as determined in accordance with the provisions of Section 3.5.

“Earn-Out Period” means the two year (or shorter) period beginning on the Closing Date and ending on the second Earn-Out Calculation Date.

 “Earn-Out Revenue” means, as of an Earn-Out Calculation Date, the cumulative aggregate gross revenues deriving from Buyer’s conduct of the Business during the Earn-Out Period through such Earn-Out Calculation Date, as determined in accordance with GAAP and the provisions of Section 3.5.

“Employee Plan” means any plan, program, agreement, policy or arrangement, whether or not reduced to writing, and whether covering a single individual or a group of individuals, that is (a) an employee welfare benefit plan within the meaning of Section 3(1) of ERISA, (b) an employee pension benefit plan within the meaning of Section 3(2) of ERISA, (c) a stock bonus, stock purchase, stock option, restricted stock, stock appreciation right, profit sharing or similar equity-based plan or agreement, or (d) any other deferred-compensation, retirement, severance, retention, employee benefit, change-in-control, leave, vacation, welfare-benefit, bonus, incentive, fringe-benefit or employment plan, program, agreement or arrangement.

“Encumbrance” means any lien, license to a third party, option, warrant, pledge, security interest, mortgage, right of way, easement, encroachment, community property interest, right of first offer or first refusal, buy/sell agreement or any other material restriction or covenant with respect to, or material condition governing the use, voting (in the case of any security or equity interest), transfer, receipt of income or exercise of any other material attribute of ownership.

“Environmental Law” means all Laws relating to the environment, natural resources, pollutants, contaminants, wastes, chemicals or public health and safety, including any Law pertaining to (a) treatment, storage, disposal, generation and transportation of toxic or hazardous substances or solid or hazardous waste, (b) air and water pollution, (c) groundwater and soil contamination, (d) the release or threatened release into the environment of toxic or hazardous substances or solid or hazardous waste, including emissions, discharges, injections, spills, escapes or dumping of pollutants, contaminants or chemicals, (e) manufacture, processing, use, distribution, treatment, storage, disposal, transportation or handling of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or oil or petroleum products or solid or hazardous waste, (f) underground and other storage tanks or vessels, abandoned, disposed or discarded barrels, containers and other closed receptacles, (g) public health and safety and (h) the protection of wild life, marine sanctuaries and wetlands, including all endangered and threatened species, including but not limited to the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Sec. 9601 et seq., the Hazardous Substances Transportation Act, 49 U.S.C. Sec. 5101 et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Sec. 6901 et seq., the Clean Water Act, 33 U.S.C. Sec. 1251 et seq., the Clean Air Act, 42 U.S.C. Sec. 7401 et seq., the Toxic Substances Control Act, 15 U.S.C. Sec. 2601 et seq., and the Oil Pollution Act of 1990, 33 U.S.C. Sec. 2701 et seq., and the regulations promulgated pursuant thereto, and all analogous state and local statutes and laws.

3

“ERISA” means the federal Employee Retirement Income Security Act of 1974, as amended.

“ERISA Affiliate” means any Person that is a member of a “controlled group of corporations” with, or is under “common control” with, or is a member of the same “affiliated service group” with Seller, as defined in Section 414 of the Code.

“Escrow Agent” means Sherman Silverstein, or any successor escrow agent appointed pursuant to the terms of the Escrow Agreement.

“Escrow Amount” means $4,000,000 less the Closing Date Lease Payment Amount.

“Escrow Release Date” means the date that is 120 days after the Closing Date.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“FCC” means the United States Federal Communications Commission.

“GAAP” means generally accepted accounting principles in the United States as set forth in pronouncements of the Financial Accounting Standards Board (and its predecessors) and the American Institute of Certified Public Accountants in effect on the date or period at issue, consistently maintained and applied throughout the periods referenced.

“Governmental Authority” means any domestic or foreign federal, state or local government, or political subdivision thereof, or any authority, agency or commission entitled to exercise any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power, any court or tribunal (or any department, bureau or division thereof), or any arbitrator or arbitral body.

“Governmental Authorization” means any approval, consent, ratification, waiver, license, permit, registration or other authorization issued, granted, given or otherwise made available by or under the authority of any Governmental Authority or pursuant to any Law, including without limitation, any bond, certificate of authority, accreditation, qualification, license, franchise, permit, order, registration, variance or privilege.

“Governmental Order” means any order, writ, judgment, injunction, decree, stipulation, ruling, determination or award entered by or with any Governmental Authority.

“Hazardous Substance” means (a) any petroleum or petroleum products, radioactive materials, asbestos in any form that is or could become friable, urea formaldehyde foam insulation, polychlorinated biphenyls, and (b) any chemicals, materials or substances defined as or included in the definition of “hazardous substances,” “hazardous waste,” “hazardous materials,” “extremely hazardous substances,” “restricted hazardous waste,” “toxic substances,” “toxic pollutants,” “contaminants” or “pollutants,” or words of similar import, under any applicable Environmental Law.

4

“Independent Accountant” means EisnerAmper LLP, independent certified public accountants.

“Key Employee(s)” means each of David Cuthbert, Louis Hayner and Mardoqueo Marquez.

“Key Principal(s)” means and refers to the Key Employees and William Bumbernick.

 “Knowledge” means, with respect to a Person, (i) the actual knowledge of such Person, and (ii) any information which the Person would be reasonably expected to obtain after conducting a reasonable investigation of the employees directly reporting to such Person concerning the matter at issue.  When used with respect to Seller, Knowledge means the Knowledge of each of the Key Principals.  When used with respect to any Buyer Party, Knowledge means the Knowledge of each of the executive officers of such Buyer Party.

“Law” means any foreign, federal, state or local law, statute, ordinance, common law ruling or regulation, or any Governmental Order, or any license, franchise, permit or similar right granted under any of the foregoing, or any similar provision having the force or effect of law, including, without limitation, any Telecomm Laws.

“Liability” means, with respect to any Person, any liability or obligation of such Person whether known or unknown, whether asserted or unasserted, whether determined, determinable or otherwise, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated and whether due or to become due.

“Material Adverse Effect” means any event, circumstance, change, occurrence or development, that (a) is materially adverse to, or could reasonably be expected to result in a material adverse effect on or a material adverse change in, the Business, Purchased Assets, properties, Liabilities, condition (financial or otherwise) or results of operations of Seller, or (b) prevents or materially delays or impairs the ability of Seller to perform any of its obligations under this Agreement or any other Transaction Document in a timely manner or to consummate the transactions contemplated by this Agreement or any other Transaction Document; provided, however, that no change or effect will be deemed to constitute, nor will be taken into account in determining whether there has been or may be, a Material Adverse Effect to the extent that it arises out of or relates to: (a) a general deterioration in the United States economy or in the industries in which the Business operates, (b) the outbreak or escalation of hostilities involving the United States, the declaration by the United States of a national emergency or war or the occurrence of any other calamity or crisis, including an act of terrorism, (c) the disclosure of the fact that Buyer is the prospective acquirer of the Business, (d) the announcement or pendency of the transactions contemplated hereby, (e) any change in accounting requirements or principles imposed upon the Business or any change in applicable laws, rules or regulations or the interpretation thereof, or (f) compliance with the terms of, or the taking of any action required by or permitted by, this Agreement.  References in this Agreement to dollar amount thresholds shall not be deemed to be evidence of materiality or of a Material Adverse Effect.

5

“Ordinary Course of Business” means an action taken by any Person in the ordinary course of such Person’s business which is consistent with the past customs and practices in frequency and amount of such Person.

“Organizational Documents” means, with respect to any Person (other than an individual), the certificate or articles of incorporation or organization, certificate of limited partnership and any joint venture, limited liability company, operating, voting or partnership agreement, by-laws, or similar documents, instruments or agreements relating to the organization or governance of such Person, in each case, as amended or supplemented.

“Parent Common Stock” means the common stock, par value $0.01 per share, of Buyer Parent.

“Permitted Liens” means (i) Encumbrances for Taxes not yet due and payable; (ii) Encumbrances that secure only Assumed Liabilities or that constitute Assumed Liabilities; and (iii) any recorded easement, covenant, zoning or other restriction on the Leased Premises that, together with all other Permitted Encumbrances, does not prohibit or impair the current use, occupancy, value or marketability of title of the property subject thereto; (iv) statutory or common law liens to secure landlords, lessors or renters under leases or rental agreements confined to the premises rented to the extent that no payment or performance under any such lease or rental agreement is in arrears or is otherwise due, (v) deposits or pledges made in connection with, or to secure payment of, worker's compensation, unemployment insurance, old age pension programs mandated under applicable Law, and (vi) statutory or common law liens in favor of carriers, warehousemen, mechanics and materialmen, statutory or common law liens to secure claims for labor, materials or supplies and other like liens, which secure obligations to the extent that payment thereof is not in arrears or otherwise due.

“Person” means any individual or corporation, association, partnership, limited liability company, joint venture, joint stock or other company, business trust, trust, organization, Governmental Authority or other entity of any kind.

“Proceeding” means any litigation, action, suit, mediation, arbitration, assessment, investigation, hearing, grievance or similar proceeding (in each case, whether civil, criminal, administrative or investigative) initiated, commenced, conducted, heard, or pending by or before any Governmental Authority, arbitrator or mediator.

“PSC Approval” means, collectively, any approval, consent, ratification, waiver, license, permit, registration or other authorization issued, granted, given or otherwise made available by or under the authority of the New York Public Service Commission and the New Jersey Board of Public Utilities for the issuance and use of Parent Common Stock as contemplated in Section 3.2(c).

“Securities Act” means the Securities Act of 1933, as amended.

“State PUC” means any state or local public service commission or similar state or local Governmental Authority that has authority over Seller.

“Subsidiary” means, with respect to any Person, any corporation, partnership, joint venture, limited liability company, trust or other legal entity of which such Person (either alone or through or together with any other Subsidiary) owns, directly or indirectly, more than fifty percent (50%) of the stock or other equity interests in such entity, or of which such Person is a general partner, manager or managing member.

6

“Tax” or “Taxes” means any federal, state, local or foreign net or gross income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Section 59A of the Code), customs duties, capital stock, franchise, profits, withholding, social security, unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, service, recording, import, export, estimated or other tax, fee or assessment of any kind whatsoever, including the Federal Universal Service Fund and other charges levied by the FCC, any State PUC or any public or private entity performing similar functions, whether computed on a separate, consolidated, unitary, combined or any other basis, including any interest, penalty or addition thereto, whether disputed or not and including any obligation to indemnify or otherwise assume or succeed to the tax Liability of any Person.

“Tax Return” means any return, declaration, report, claim for refund or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment or supplement thereof.

“Telecom Laws” means: (a) the Communications Act of 1934, as amended (including by the Telecommunications Act of 1996, as amended); (b) any state or local laws that govern the provision of telecommunications services; and (c) any applicable rules, regulations or policies administered or promulgated by the FCC or any State PUC with respect to the provision of telecommunications services.

“Transaction Documents” means this Agreement, the Lock-Up Agreement, the Employment Agreements, the Consulting Agreement, the Assumption Agreement, the Closing Statement, the Escrow Agreement, the General Assignment and Bill of Sale and all other written agreements, documents and certificates listed as closing deliveries in Article VIII or Article IX, that are executed and delivered at Closing.

“Treasury Regulations” means the final and temporary regulations of the U.S. Department of the Treasury promulgated under the Code.

1.2  Other Defined Terms.The following terms have the meanings defined for such terms in the Sections set forth below:

Accrued Vacation Credit	Section 7.7(b)
Acquisition Proposal	Section 7.5
Additional Consideration	Section 3.5
Agreement	Preamble
Allocation Schedule	Section 3.3
Alternate Cash Payment	Section 3.2(d)

7

Assigned Contracts	Section 2.3(a)(i)
Assumed Capital Lease Obligations	Section 2.3(a)(ii)
Assumed Liabilities	Section 2.3(a)
Assumed Payables	Section 2.3(a)(iii)
Assumption Agreement	Section 2.3(a)
Business	Recitals
Business Employees	Section 7.7(b)
Buyer	Preamble
Buyer Indemnitee	Section 11.2
Buyer Party	Preamble
Buyer Parent	Preamble
Buyer Required Consents and Authorizations	Section 6.2(b)
Charges	Section 7.12
Claim	Section 11.4(a)
Closing Date Deadline	Section 10.1(e)
Closing Date Lease Payment Amount	Section 2.3(c)
Closing Date Working Capital Statement	Section 3.4(a)
Closing Statement	Section 3.2(a)
Collection Period	Section 7.15
Company Benefit Plan	Section 5.14(a)
Company Data	Section 5.24(a)
Company Telecom Permits	Section 5.22(b)
Consulting Agreement	Section 7.7(a)
Customer Data	Section 5.24(a)
Customer List	Section 5.18
Deemed Acceptance	Section 11.4(a)
Designated Expenses	Section 3.5(c)
Disclosure Schedule	Article V
Dispute Notice	Section 11.4(a)
Employment Agreements	Section 7.7(a)
Employment Termination Date	Section 3.5(g)
Escrow Agreement	Section 3.2(d)
Exchange Act	Section 3.5(h)

8

Excluded Assets	Section 2.2
Excluded Liabilities	Section 2.3(b)
Existing Lease Assignments	Section 8.8(b)
Existing Leases	Section 5.6(b)
Final Resolution	Section 11.6
Financial Statements	Section 5.3(a)
Guaranteed Capital Leases	Section 2.3(c)
Holdback Amount	Section 3.2(b)
Holdback Period	Section 3.6
Indemnified Party	Section 11.4(a)
Indemnifying Party	Section 11.4(a)
Insurance Policy	Section 5.8
Interim Balance Sheet	Section 5.3(a)
Issue Date Price Per Share	Section 3.2(c)
Large Customer	Section 5.18
Leased Premises	Section 5.6(b)
Lock-Up Agreement	Section 3.2(c)
Losses	Section 11.2
Material Consents and Authorizations	Section 8.6
Minimum Claim Threshold	Section 11.5(a)
Minimum Cumulative EBITDA Amount	Section 3.5(b)
Minimum Cumulative Revenue Amount	Section 3.5(a)
Parent SEC Documents	Section 6.6
Parent Shares	Section 3.2(c)
Party	Preamble
Pre-Closing Activities	Section 7.1(b)
Pre-Sale Month End Date	Section 3.5(h)
Projections	Section 3.5(c)
Purchase Price	Section 3.1
Purchase Price Reduction Amount	Section 3.4(c)
Purchased Assets	Section 2.1
Representation and Warranty Insurance	Section 7.13
Representation Claim	Section 11.5(a)

9

Restricted Period	Section 7.14(b)
Restricted Persons	Section 7.14
Rule	Section 5.25
Sale Event	Section 3.5(h)
SEC	Section 6.6
Seller	Preamble
Seller Governmental Authorizations	Section 5.9(a)
Seller Indemnitee	Section 11.3
Seller Required Consents and Authorizations	Section 5.2(c)
Special Representations	Section 11.1
Target Working Capital	Section 3.4(c)
Tax Benefit	Section 11.5(d)
Territory	Section 7.14
Third Party Claim	Section 11.4(b)
Threshold	Section 11.5(a)
True-Up Credit	Section 7.16
Uncollected Receivables	Section 7.15
USAC	Section 2.2
WARN Act	Section 2.3(b)(ix)

ARTICLE II

Sale and Transfer of Assets.

2.1           Purchased Assets. Upon the terms and subject to the conditions of this Agreement, at the Closing, Seller shall sell, transfer, assign, convey and deliver to Buyer, and Buyer shall purchase, free and clear of all Encumbrances other than Permitted Liens, all of Seller’s right, title and interest in and to all of the assets and properties of Seller used or held for use in connection with the Business, real, personal and mixed, tangible and intangible, of every kid and description, wherever located, other than the Excluded Assets (collectively referred to herein as the “Purchased Assets”), including without limitation, all right, title and interest of Seller in, to and under:

(a)           all of Seller’s tangible personal property, including computer hardware, office and other equipment, accessories, machinery, furniture, fixtures, and vehicles, including without limitation those described in Schedule 2.1(a);

(b)           all inventory and supplies maintained by Seller in connection with the Business, including such inventory and supplies listed on Schedule 2.1(b) attached hereto (as updated in a schedule provided with the final Closing Date Working Capital Statement);

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(c)           all Governmental Authorizations necessary for or incident to the operation of the Business, to the extent assignable;

(d)           all of Seller’s rights under the Assigned Contracts;

(e)           all cash, bank deposits and cash equivalents of Seller, and all Customer Deposits, accounts receivable and notes receivable of Seller arising prior to the Closing Date;

(f)           all of Seller’s interest in and to (i) all patents, applications for patents, copyrights, license agreements, assumed names, trade names, trademark and/or service mark registrations, applications for trademark and/or service mark registrations, trademarks and service marks of Seller, as more particularly described in Schedule 2.1(f), and all variants thereof, including all of Seller’s rights to use the name “Alteva” to the exclusion of Seller; (ii) all of Seller’s interest in and to all of Seller’s customer base, and the right to do business with such customers, including and all of Seller’s rights in and to customer information, customer records, customer lists (including the Customer List), and candidate/prospect lists; (iii) all telephone numbers, fax numbers, telephone directory advertising, web sites, domain names, domain leases, and e-mail addresses used or held for use in the Business, all as identified on Schedule 2.1(f); (iv) all of Seller’s other proprietary information, including trade secrets, know-how, product designs and specifications, operating data and other information pertaining to the Business; and (v) the goodwill associated with the foregoing and the Business;

(g)           all of Seller’s business and operational records relating to the Business, including employee and personnel records (to the extent permitted under applicable Law), office and sales records, books of account, information relating to Seller’s intellectual property rights and the use thereof, blueprints, marketing strategies, business plans, studies, inventory lists and records, machinery and equipment records, mailing lists, sales and purchasing materials, quality control records and procedures, quotations, purchase orders, correspondence, sales brochures, advertising materials, samples and display materials (but expressly excluding Seller’s membership interest records, company minute books, bank account records and tax returns);

(h)           all claims of Seller against third parties relating exclusively to the Purchased Assets, whether choate or inchoate, known or unknown, contingent or non-contingent;

(i)           all rights of Seller relating to deposits and prepaid expenses relating to the Business, to the extent reflected in the Closing Date Working Capital Statement;

(j)           the leases and subleases of real property (together with any options to purchase the underlying property and leasehold improvements thereon, and in each case all other leasehold interests, rights, subleases, licenses, permits, deposits and profits appurtenant to or related to such leases and subleases) listed on Schedule 2.1(j) (each of which shall constitute an Assigned Contract); and

(k)           all warranties (express and implied) that continue in effect with respect to any Purchased Asset, to the extent assignable; and

(l)           all other assets of Seller, not described above, which are either (1) reflected on the Financial Statements and not disposed of by Seller in the Ordinary Course of Business between the date of the most recent Financial Statement and the Closing Date, or (2) acquired by Seller in the Ordinary Course of Business between the date of the most recent Financial Statement and the Closing Date.

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2.2           Excluded Assets.  Notwithstanding the provisions of Section 2.1, the Purchased Assets shall not include any of the right, title or interest of Seller in, to and under the following (herein referred to as the “Excluded Assets”):  (a) Seller’s minute books, membership interest books and other limited liability company records having to do with the organization and capitalization of Seller; (b) the Employee Plans; (c) the consideration delivered to Seller by Buyer pursuant to this Agreement; (d) all claims, deposits, prepayments, refunds, causes of action, choses in action, rights of recovery, rights of set off and rights of recoupment which do not relate specifically to the Purchased Assets; (e) all rights in and with respect to insurance policies of Seller, except for any proceeds of such insurance and claims therefor relating to the Purchased Assets; (f) all tax refunds attributable to the operations of Seller, including refunds on account of reports filed with, and payments made to, the Universal Service Administrative Company (“USAC”); and (g) the assets listed on Schedule 2.2 attached hereto.

2.3           Liabilities.

(a)           Subject to the terms and conditions of this Agreement, at the Closing, Buyer shall assume and agree to perform, pursuant to an assignment and assumption agreement in a form mutually acceptable to Buyer and Seller (the “Assumption Agreement”), only the following (collectively, the “Assumed Liabilities”):

(i)           the Liabilities of Seller under the Contractual Obligations identified on Schedule 2.3(a) (collectively, the “Assigned Contracts”) arising in the Ordinary Course of Business after the Closing Date (including, without limitation, any Liabilities relating to the Customer Deposits identified on Schedule 2.3(a) (as updated in a schedule provided with the final Closing Date Working Capital Statement) and relating to the Assigned Contracts), but excluding any Liability to the extent arising out of or relating to a breach, violation, default or failure to perform by Seller that occurred prior to the Closing Date;

(ii)           the Debt of Seller under the capital leases agreements included in the Assigned Contracts, as specifically identified as such on Schedule 2.3(a), as updated at Closing, if necessary, to add any capital lease agreements entered into, with Buyer’s written approval in accordance with Section 7.3, after the date of this Agreement but prior to the Closing Date (the “Assumed Capital Lease Obligations”), but excluding any Liability to the extent arising out of or relating to a breach, violation, default or failure to perform by Seller that occurred prior to the Closing Date; and

(iii)           any trade account payable (other than a trade account payable to any member or any Affiliate of Seller or any member of Seller) incurred by Seller in the Ordinary Course of Business and (A) reflected on the Interim Balance Sheet or (B) incurred after the date of  the Interim Balance Sheet and prior to the Closing Date, that remains unpaid at and is not delinquent as of the Closing Date, as set forth  in a schedule provided with the final Closing Date Working Capital Statement, as adjusted pursuant to Section 3.4 (collectively, the “Assumed Payables”).

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(b)           Except as contemplated by Section 2.3(a) and as expressly set forth in the Assumption Agreement, Buyer shall not assume, nor shall it agree to pay, perform or discharge, any Liability of Seller or any Affiliate of Seller, whether or not arising from or relating to the conduct of the Business and whether absolute, contingent, accrued, known or unknown (the “Excluded Liabilities”).  Without limiting the generality of the prior sentence, Excluded Liabilities shall include, without limitation:

(i)           except as set forth in Section 12.1 hereof, any Liability to pay any Taxes of Seller or any of its Affiliates, regardless of whether arising in connection with the consummation of the transactions contemplated hereby or otherwise;

(ii)           any Liability of Seller or its Affiliates for performance under the Transaction Documents;

(iii)           any Liability under any Assigned Contract to the extent arising and relating to a period  prior to the Closing Date or to the extent relating to any breach, violation, default or failure to perform by Seller that occurred prior to the Closing Date;

(iv)           any Liability (other than the Assumed Liabilities) otherwise relating to the Purchased Assets to the extent arising  and related to a period prior to the Closing Date;

(v)           any Liability relating to any Debt of Seller or its Affiliates (except for Debt of Seller under any Assumed Capital Lease Obligation specifically assumed under Section 2.3(a));

(vi)           any Liability of Seller with respect to any Proceeding;

(vii)           any Liability relating to the Excluded Assets;

(viii)           any Liability of Seller, any Affiliate or any ERISA Affiliate of either of them under any Employee Plan, provided, however, that Buyer acknowledges that Buyer will be responsible for offering COBRA continuation coverage to any “M&A qualified beneficiaries” who become entitled to COBRA continuation coverage as a result of the transactions contemplated by this Agreement, in accordance with Section 54.4980B-9 of the Treasury Regulations;

(ix)           any Liability arising out of or relating to Seller’s termination of Seller’s employees, either prior to or following the Closing Date, including but not limited to any Liability or obligation under the Worker Adjustment and Retraining Notification Act of 1988, as amended (the “WARN Act”) or any similar Law, and including any contractual claims for severance or similar obligations;

(x)           any Liability for any failure to comply with any Telecom Law;

(xi)           any Liability for any Federal Universal Service Fund contribution obligations for any period prior to the Closing Date; and

(xii)           any other Liability of Seller or its Affiliates that is not an Assumed Liability.

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(c)           Subject to the terms and conditions of this Agreement, at the Closing, Buyer shall (i) pay in full or (ii) otherwise arrange for the release of all personal guaranties of Seller’s Key Principals’ (and their respective spouses) with respect to, all Assumed Capital Lease Obligations guaranteed by any of the Key Principals or their respective spouses (the “Guaranteed Capital Leases”), which Guaranteed Capital Leases are identified as such on Schedule 2.3(a).  As used in this Agreement, “Closing Date Lease Payment Amount” means the aggregate amount that Buyer pays at Closing for purposes of paying in full, or obtaining any such release of guaranty under, the Guaranteed Capital Leases pursuant to this Section 2.3(c).

ARTICLE III

Purchase Price.

3.1           The Purchase Price.  The aggregate purchase price to be paid by Buyer for the Purchased Assets (the “Purchase Price”) shall be an amount equal to the sum of (a) $15,000,000, plus (b) the assumption of the Assumed Liabilities, plus (c) the Additional Consideration, if any, to be paid pursuant to Section 3.5.  Buyer Parent hereby guarantees, as surety, the full and timely payment, when due, of the Purchase Price, to the fullest and same extent as if Buyer Parent was a primary co-obligor with respect to such obligations.

3.2           Payment of the Purchase Price.  The Purchase Price shall be paid as follows:

(a)           At the Closing, Buyer shall pay to Seller by wire transfer of immediately available funds to an account designated in writing by Seller prior to the Closing Date an amount equal to (i) 11,000,000, less (ii) the Holdback Amount, less (iii) the amount that Seller is required to pay to Buyer, pursuant to Section 7.13, with respect to the Representation and Warranty Insurance, less  (iv) the outstanding balance of any Debt of Seller as of the Closing Date that is secured by any Encumbrances on the Purchased Assets (other than the Assumed Capital Leases), which amount shall be paid off at Closing by Buyer on behalf of Seller.  All closing payments shall be reflected on a closing statement to be executed by the Parties at Closing (the “Closing Statement”).

(b)           As security against any claims by Buyer for the working capital adjustments set forth in Section 3.4, at the Closing, Buyer shall withhold from the Purchase Price and hold, pursuant to Section 3.6, the sum of $750,000 (the “Holdback Amount”).

(c)            Subject to the receipt of the Lock-Up Agreement duly executed by Seller (and subject to the provisions of Section 3.2(d)), within five business days after receipt of the PSC Approval (or, if PSC Approval is received prior to Closing, at the Closing), Buyer shall deliver to Seller, in the form of stock certificates representing Parent Common Stock issued in the name of Seller, the number of shares of Parent Common Stock (the “Parent Shares”) equal to the greater of (i) the quotient obtained by dividing (A) $4,000,000 by (B) $14.68,  and (ii) the quotient obtained by dividing (A) $3,200,000 by (B) the Issue Date Price Per Share.  As used in this Agreement, the “Issue Date Price Per Share” shall mean the per share price equal to the average of the closing prices of Parent Common Stock reported on the Nasdaq Stock Market for the 30 trading days immediately prior to the date the Parent Shares are issued and delivered to Seller pursuant to this Section 3.2(c) but excluding the three trading days prior to and after the record date, and the record date, for any cash dividend declared by Buyer Parent on the Parent Common Stock.  As a condition to, and prior to, the issuance of Parent Shares to Seller, Seller and Buyer Parent shall execute and deliver a Lock-Up and Put Agreement, in substantially the form attached hereto as Exhibit 3.2(c) (the “Lock-Up Agreement”).  Seller shall hold the Parent Shares subject to, and in accordance with the terms and conditions of, the Lock-Up Agreement.

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(d)           Notwithstanding the provisions of Section 3.2(c), if Buyer has not received the PSC Approval on or before the Escrow Release Date, then Buyer shall pay to Seller, in lieu of the Parent Shares, cash or immediately available funds in the amount of $4,000,000 (the “Alternate Cash Payment”), which Alternate Cash Payment shall be paid by (i) the Escrow Agent delivering to Seller the Escrow Amount, plus any interest earned thereon, pursuant to the terms and conditions of an Escrow Agreement in substantially the form attached hereto as Exhibit 3.2(d), that Seller, Buyer and Escrow Agent shall enter into at the Closing (the “Escrow Agreement”); and (ii) Buyer delivering to Seller, in immediately available funds, the balance of the Alternate Cash Payment.  Upon delivery of the Alternate Cash Payment to Seller pursuant to this Section 3.2(d) and the Escrow Agreement, Buyer and Buyer Parent shall have no further obligation to deliver the Parent Shares to Seller.  At the Closing, as security for the potential payment of the Alternate Cash Payment, Buyer shall deliver to the Escrow Agent, in cash or immediately available funds, the Escrow Amount, which Escrow Agent shall hold and distribute in accordance with the terms of the Escrow Agreement.

3.3            Allocation of Purchase Price.  The Parties agree to the allocation of the Purchase Price among the Purchased Assets as indicated on Schedule 3.3 attached hereto for tax reporting purposes (the “Allocation Schedule”).  If the Purchase Price is adjusted or increased pursuant to Section 3.4 or Section 3.5 of if an indemnification payment is made pursuant to the provisions of this Agreement, then Buyer shall adjust the Allocation Schedule to reflect such adjustment or payment in accordance with the nature of each such adjustment or payment and in a manner consistent with Code Section 1060 and the Treasury Regulations thereunder and shall deliver the Allocation Schedule as so revised to Seller.  Any adjustment(s) to the Allocation Schedule shall be final unless Seller objects in writing within 30 days of the delivery of the notification of any adjustment(s) to the Allocation Schedule.  In the event of an objection, Buyer and Seller shall work cooperatively to reach mutual agreement on any adjustment(s) to the Allocation Schedule.  Seller and Buyer and their respective Affiliates shall report, act and file all Tax Returns (including, but not limited to, IRS Form 8594) in all respects and for all purposes consistent with the Allocation Schedule (as such Allocation Schedule may be adjusted pursuant to this Section 3.3).  No Party shall take any position in any Tax matter (whether in audit, Tax Returns, or otherwise with any Governmental Authority) that is inconsistent with such allocation unless required to do so by applicable Law.

3.4           Working Capital Adjustment.  The Purchase Price shall be adjusted in accordance with the following procedures:

(a)           Buyer shall cause WithumSmith+Brown, PC to prepare, after completion of the Collection Period but within 145 days following the Closing Date, a statement of Closing Date Working Capital as at the Closing Date, together with a written report setting forth its determination of the adjustment, if any, to the Purchase Price in accordance with this Section 3.4 (collectively, the “Closing Date Working Capital Statement”).  The Closing Date Working Capital Statement shall be prepared in accordance with GAAP and in a manner consistent with Seller’s preparation of the Financial Statements and Seller’s application of GAAP in connection with such preparation.  Buyer shall pay the fees and expenses of WithumSmith+Brown, PC in preparing the Closing Date Working Capital Statement.  The Parties agree that, for purposes of calculating the Closing Date Working Capital, (i) the value of Seller’s inventory, if any, shall be determined based on a physical inventory conducted by Buyer and Seller as of a date reasonably proximate to the Closing Date, as determined by Buyer and Seller; (ii) in lieu of any other reserve for doubtful accounts that would otherwise be set forth in the Closing Date Working Capital Statement, all Uncollected Receivables shall be excluded from the Closing Date Working Capital (unless any such Uncollected Receivables are collected by Buyer prior to the final determination of the Closing Date Working Capital Statement, in which case the amount so collected shall be included in Closing Date Working Capital); (iii) the amount of the Assumed Payables shall include accounts payable or other Liabilities of Seller accrued prior to and properly payable as of Closing that Buyer pays or otherwise satisfies, whether or not such accounts payable or Liabilities are identified on Schedule 2.3(a); and (iv) no portion of the Assumed Capital Lease Obligations shall be included as a current Liability on the Closing Date Working Capital Statement.

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(b)           Within 30 days after receipt of the Closing Date Working Capital Statement, provided that Seller shall received from Buyer and its accountants all information, books and records reasonably requested Seller in order to review and assess the Closing Date Working Capital Statement, Seller shall submit to Buyer, Seller’s written exceptions thereto.  If no such written exceptions are so delivered to Buyer within such 30 day period, then the determination by WithumSmith+Brown, PC of the Closing Date Working Capital and the adjustment, if any, to the Purchase Price set forth in the Closing Date Working Capital Statement shall be final and binding upon the Parties for all purposes.  However, if written exceptions to the Closing Date Working Capital Statement are so delivered to Buyer, and such exceptions are not resolved by mutual agreement between Buyer and Seller within 30 days after receipt thereof by Buyer, then the differences between them shall be arbitrated by the Independent Accountant, whose decision shall be final and binding on the Parties for all purposes.  The expenses of the Independent Accountant in connection with such arbitration shall be borne by Buyer and Seller in proportion to the manner by which the amount that is subject to such arbitration is determined in favor of, or adversely to, each Party.  Buyer and Seller shall each bear all expenses of their respective certified public accountants.

(c)           If, on the basis of the Closing Date Working Capital Statement (as adjusted and as finally determined in accordance with the above-described procedures), the Closing Date Working Capital is less than $55,000 (the “Target Working Capital”), the Purchase Price (and the Holdback Amount) shall be reduced on a dollar-for-dollar basis by an amount equal to the difference between the Target Working Capital and the Closing Date Working Capital (the “Purchase Price Reduction Amount”).  Buyer shall have the right to retain (and shall have no obligation to pay to Seller), the portion of the Holdback Amount equal to the Purchase Price Reduction Amount and, if the Purchase Price Reduction Amount exceeds the Holdback Amount, Seller shall pay the amount of such excess to Buyer within five days after the final determination of the Closing Date Working Capital Statement.  If, on the basis of the Closing Date Working Capital Statement (as adjusted and as finally determined in accordance with the above-described procedures), the Closing Date Working Capital is greater than the Target Working Capital, the Purchase Price shall be increased on a dollar-for-dollar basis by an amount equal to the difference between the Closing Date Working Capital and the Target Working Capital, and Buyer shall pay such amount to Seller within five days after the final determination of the Closing Date Working Capital Statement.  Any adjustment pursuant to this Section 3.4 shall be paid in immediately available funds, and shall result in a corresponding adjustment to the allocation of the Purchase Price set forth on the Allocation Schedule, in accordance with Section 3.3.

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3.5           Calculation of Additional Consideration.  Buyer shall pay to Seller additional consideration for the Purchased Assets (“Additional Consideration”) in the aggregate amount of up to $2,000,000, subject to, and in accordance with the terms and conditions of, this Section 3.5 and Schedule 3.5:

(a)           If the Earn-Out Revenue as of an Earn-Out Calculation Date equals or exceeds an amount equal 10% of the applicable “Cumulative Revenue Target”, as determined pursuant to Schedule 3.5, as of such Earn-Out Calculation Date (in each case, the “Minimum Cumulative Revenue Amount”), then Seller shall be entitled to Additional Consideration as of such Earn-Out Calculation Date, in the amount determined in accordance with Schedule 3.5; provided, however, that the maximum amount of Additional Consideration payable as of the first Earn-Out Calculation Date and based on the Earn-Out Revenue shall be $1,000,000, and the maximum amount of Additional Consideration payable as of the second Earn-Out Calculation Date and based on the Earn-Out Revenue shall be $500,000.  Notwithstanding anything in this Agreement to the contrary, if, as of either Earn-Out Calculation Date, the Earn-Out Revenue is less than the applicable Minimum Cumulative Revenue Amount, then Seller shall not be entitled to, and Buyer shall have no obligation to pay, any Additional Consideration with respect to the Earn-Out Revenue as of such Earn-Out Calculation Date.

(b)           If the Earn-Out EBITDA as of an Earn-Out Calculation Date equals or exceeds an amount equal to 10% of the applicable “Cumulative EBITDA Target”, as determined pursuant to Schedule 3.5, as of such Earn-Out Calculation Date (in each case, the “Minimum Cumulative EBITDA Amount”), then Seller shall be entitled to Additional Consideration as of such Earn-Out Calculation Date, in the amount determined in accordance with Schedule 3.5; provided, however, that the maximum amount of Additional Consideration payable as of the first Earn-Out Calculation Date and based on the Earn-Out EBITDA shall be $333,000, and the maximum amount of Additional Consideration payable as of the second Earn-Out Calculation Date and based on the Earn-Out EBITDA shall be $167,000.  Notwithstanding anything in this Agreement to the contrary, if, as of either Earn-Out Calculation Date, the Earn-Out EBITDA is less than the applicable Minimum Cumulative EBITDA Amount, then Seller shall not be entitled to, and Buyer shall have no obligation to pay, any Additional Consideration with respect to the Earn-Out EBITDA as of such Earn-Out Calculation Date.

(c)           The Earn-Out Revenue and Earn-Out EBITDA as of each Earn-Out Calculation Date, and the corresponding amount, if any, of Additional Consideration shall be determined based on Buyer’s internally-prepared financial statements as of each Earn-Out Calculation Date, prepared in accordance with GAAP applied consistently with Seller’s past practices and with Schedule 3.5 and this Section 3.5(c).  Buyer and Seller agree that, in calculating Earn-Out EBITDA as of any Earn-Out Calculation Date, such calculation shall  include only the expense categories of the type (the “Designated Expenses”) included in the projections used in calculating the “Cumulative EBITDA Targets”, as set forth in Schedule 3.5 (the “Projections”), and that the amount of each such Designated Expense used in calculating the Earn-Out EBITDA as of either Earn-Out Calculation Date shall be equal to the lesser of (i) the cumulative maximum amount forecasted for such Designated Expense through such Earn-Out Calculation Date, as set forth in the Projections, provided, however, that with respect to Designated Expenses included within “Costs of Goods Sold” in the Projections, the maximum amounts forecasted for such Designated Expenses in the Projections shall be increased pro rata to reflect revenues in excess of those forecasted in the Projections for the corresponding period, and (ii) the actual amount of such Designated Expense incurred through the Earn-Out Calculation Date.

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(d)           Except as otherwise provided in Section 3.5(f), within 30 days after each Earn-Out Calculation Date, Buyer shall deliver to Seller a written calculation of the Earn-Out Revenue and Earn-Out EBITDA through and as of such Earn-Out Calculation Date, together with payment of the Additional Consideration, if any, due based on such Earn-Out Revenue and Earn-Out EBITDA.  Except as otherwise provided in Section 3.5(f), within 30 days after receipt of Buyer’s calculation of the Earn-Out Revenue, Earn-Out EBITDA and Additional Consideration, provided that Seller shall have received from Buyer all information, books and records reasonably requested by Seller in order to review and assess such calculations, Seller shall submit to Buyer, Seller’s written exceptions thereto.  Except as otherwise provided in Section 3.5(f), if no such written exceptions are so delivered to Buyer within such 30-day period, then the determination by Buyer of the Earn-Out Revenue, Earn-Out EBITDA and Additional Consideration, if any, shall be final and binding upon the Parties for all purposes.  However, if written exceptions to Buyer’s calculations are so delivered to Buyer, and such exceptions are not resolved by mutual agreement between Buyer and Seller within 30 days after receipt thereof by Buyer, then the differences between them shall be arbitrated by the Independent Accountant, whose decision shall be final and binding on the Parties for all purposes.  The expenses of the Independent Accountant in connection with such arbitration shall be borne by Buyer and Seller in proportion to the manner by which the amount that is subject to such arbitration is determined in favor of, or adversely to, each party.  Buyer and Seller shall each bear all expenses of their respective certified public accountants

(e)           Within 15 days after the final determination of the Earn-Out Revenue and Earn-Out EBITDA pursuant to Section 3.5(d), Buyer shall pay to Seller the amount, if any, by which the Additional Consideration due based on such the Earn-Out Revenue and Earn-Out EBITDA exceeds the amount, if any, paid by Buyer pursuant to Section 3.5(d) at the time it delivered its initial calculations.

(f)           Notwithstanding anything in this Agreement to the contrary, Buyer and Seller agree that if legislation has not been enacted, on or before December 31, 2012, that would result in the United States tax rate on long term capital gains remaining at 15% (or lower) for 2013 and, as a result, the second Earn-Out Calculation Date is November 30, 2012, then (i) Buyer shall deliver its initial calculation of the Earn-Out Revenue, Earn-Out EBITDA and Additional Consideration, if any, as of such Earn-Out Calculation Date to Seller, in accordance with Section 3.5(d), on or before December 15, 2012 (rather than during the 30-day period provided for in Section 3.5(d)), (ii) Seller shall deliver any written exceptions to such calculations, pursuant to Section 3.5(d), on or before December 30, 2012 (rather than during the 30-day period provided for in Section 3.5(d)); (iii) Buyer shall pay to Seller the undisputed amount, if any, of such Additional Consideration on or before December 31, 2012; and (iv) if any portion of the Additional Consideration as of such Earn-Out Date remains subject to dispute after such payment, any remaining Additional Consideration shall be paid, pursuant to Section 3.5(e), following the final determination of Earn-Out Revenue and Earn-Out EBITDA pursuant to Section 3.5(d).  Notwithstanding anything in this Section 3.5(f) to the contrary, if legislation is enacted after November 30, 2012 but on or before December 31, 2012, that would result in the United States tax rate on long term capital gains remaining at 15% (or lower) for 2012, then the second Earn-Out Calculation Date shall remain the second anniversary of the Closing Date, notwithstanding any prior calculations of the Earn-Out Revenue and Earn-Out EBITDA as of November 30, 2012, and any such calculations as of November 30, 2012 shall be disregarded and of no force and effect.

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(g)           Notwithstanding anything in this Section 3.5 to the contrary, if, during the Earn-Out Period, Buyer terminates the employment of either David Cuthbert or Louis Hayner without Cause (as defined in the applicable Employment Agreement) and not in connection with a Sale Event, then the maximum full amount of Additional Consideration that could be payable as of any Earn-Out Calculation Date that is after the effective date of such termination without Cause (the “Employment Termination Date”) shall become immediately due pursuant to this Section 3.5(g), without regard to the Earn-Out Revenue or Earn-Out EBITDA as of the Employment Termination Date or such Earn-Out Calculation Date. Buyer shall pay such amount to Seller within 30 days after the Employment Termination Date. For purposes of clarification, (i) if the Employee Termination Date occurs before the first Earn-Out Calculation Date, the total maximum amount of Additional Consideration payable with respect to both the first Earn-Out Calculation Date ($1,500,000) and the second Earn-Out Calculation Date ($500,000) shall become due and payable pursuant to this Section 3.5(g); and (ii) if the Employee Termination Date occurs after the first Earn-Out Calculation Date but before the second Earn-Out Calculation Date (as may be adjusted pursuant to Section 3.5(f)), the total maximum amount of Additional Consideration payable with respect to only the second Earn-Out Date ($500,000) shall become due and payable pursuant to this Section 3.5(g) (and the Additional Consideration, if any, as of the first Earn-Out Calculation Date shall be calculated as otherwise provided in this Section 3.5, with no adjustment or acceleration pursuant to this Section 3.5(g).

(h)           Notwithstanding anything in this Section 3.5 to the contrary, if, during the Earn-Out Period, there is a Sale Event, then the last day of the calendar month immediately preceding the month in which the closing of such Sale Event occurs (the “Pre-Sale Month End Date”) shall be treated as an Earn-Out Calculation Date, as provided in this Section 3.5(h).  The Earn-Out Revenue and Earn-Out EBITDA (and corresponding Additional Consideration, if any) shall be calculated as of the Pre-Sale Month End Date in accordance with the provisions of this Section 3.5, and the “Cumulative Revenue Targets” and “Cumulative EBITDA Targets” shall be determined as of the Pre-Sale Month End Date based on the Projections, as provided in Schedule 3.5; provided, however, that if the Pre-Sale Month End Date occurs before the first Earn Out Calculation Date, then the Pre-Sale Month End Date shall be treated as both the first Earn-Out Calculation Date and the second Earn-Out Calculation Date, and the amount of Additional Consideration to be paid based on such Earn-Out Revenue and Earn-Out EBITDA as of the Pre-Sale Month End Date shall be calculated by applying the applicable percentages set forth on Schedule 3.5 to the Additional Consideration that would otherwise have been payable on both the first Earn-Out Calculation Date and the second Earn-Out Calculation Date.  Except as otherwise provided in this Section 3.5(h), the provisions of this Section 3.5 shall apply to the calculation and payment of Additional Consideration with respect to a Pre-Sale Month End Date.  As used in this Agreement, “Sale Event” means: (a) the closing of any transaction where any “person,” as such term is used in sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Buyer representing more than 50% of the voting power of the then outstanding securities of Buyer; provided that a Sale Event shall not be deemed to occur as a result of a transaction in which Buyer becomes a subsidiary of another corporation and in which Buyer Parent, or the stockholders of Buyer Parent, immediately prior to the transaction, will beneficially own, immediately after the transaction, shares entitling Buyer Parent or such stockholders to more than 50% of all votes to which all stockholders of the Buyer would be entitled in the election of directors; (b) the consummation of (i) a merger or consolidation of Buyer with another corporation where Buyer or the stockholders of Buyer  Parent, immediately prior to the merger or consolidation, will not beneficially own, immediately after the merger or consolidation, shares entitling such stockholders to more than 50% of all votes to which all stockholders of the surviving corporation would be entitled in the election of directors, (ii) a sale or other disposition of all or substantially all of the assets of Buyer; or (c) the liquidation or dissolution of Buyer.

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(i)           Buyer acknowledges and agrees that, following the Closing and during the Earn-Out Period, Buyer shall conduct all activities relating to the Business through Buyer, and not any Affiliate of Buyer or Buyer Parent.

3.6           Holdback Amount.  Buyer shall hold the Holdback Amount for a period of one year from the Closing Date (the “Holdback Period”), pursuant to the terms of this Agreement.  Buyer shall have the right to set off against the Holdback Amount (a) any Purchase Price Reduction Amount, in accordance with Section 3.4(c), (b) any Liabilities of Seller that Buyer pays or otherwise satisfies during the Holdback Period (i) that are not Assumed Liabilities or (ii) that are Assumed Payables but were not included in the Closing Date Working Capital or the adjustments provided for in Section 3.4, provided that Buyer has provided Seller with a written demand for payment of such Liabilities and Seller has failed to pay such Liabilities within 30 days after receipt of such Demand; and (c) any Losses for which any Buyer Indemnitee is entitled to indemnification from Seller pursuant to Section 11.2 (other than Representation Claims pursuant to Section 11.2(a)), subject to and in accordance with the provisions of Section 11.6.  On the first anniversary of the Closing Date, Buyer shall pay to Seller (without interest), in immediately available funds, the Holdback Amount less any amounts set off against the Holdback Amount pursuant to this Section 3.6 or Section 11.6 or paid to the Escrow Agent pursuant to Section 11.6.

3.7                 No Restrictions on Buyer’s Operation of the Business.  Except as provided in Section 3.5 (and Schedule 3.5 thereto) and except as otherwise provided in this Agreement, after the Closing, Buyer shall have no obligation to operate its business or the Business in any manner other than as it determines to be appropriate in its sole and absolute discretion.

ARTICLE IV

Closing.

4.1           Closing.   The Closing shall be consummated at 10:00 a.m., local time, at the offices of Seller, on a date designated by Buyer not later than five Business Days after the date that the conditions set forth in Article VIII and Article IX have been satisfied or waived (other than conditions that by their terms are to be satisfied at Closing, but subject to the satisfaction or waiver of such conditions), or on such other date or at such other place or time as is mutually agreed upon by the Parties.  The Closing shall be effective for economic and accounting purposes as of 12:01 a.m. on the Closing Date.

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4.2           Closing Actions and Deliveries.  All actions to be taken and all documents to be executed and delivered in connection with the consummation of the transactions provided for herein shall be reasonably satisfactory in form and substance to the Parties and their respective counsel.  All actions to be taken and all documents to be executed and delivered by the Parties at the Closing shall be deemed to have been taken and executed simultaneously, and no action shall be deemed taken nor any document executed and delivered until all have been taken, executed and delivered.

ARTICLE V

Representations and Warranties of Seller.

In order to induce the Buyer Parties to enter into and perform this Agreement and to consummate the transactions contemplated hereunder, Seller makes the following representations and warranties to the Buyer Parties as of the date hereof and as of the Closing Date, which representations and warranties are supplemented and qualified by the disclosures contained in the disclosure schedule attached hereto as Schedule A that contains references to the representations and warranties to which the disclosures contained therein relate (the “Disclosure Schedule”).

5.1           Organization; Subsidiaries; Ownership; Predecessors.

(a)           Seller is a limited liability company duly organized, validly existing and in good standing under the laws of the State of New Jersey and has the full right, power and authority to own, lease and operate all of its properties and assets and carry out the Business as it is presently conducted.  Section 5.1(a) of the Disclosure Schedule sets forth each jurisdiction in which Seller is qualified or licensed to do business as a foreign Person and there are no other jurisdictions in which the character of Seller’s properties or the nature of Seller’s activities require it to be qualified in order to conduct the Business.

(b)           The limited liability company members of Seller identified on Schedule 5.1 (b) of the Disclosure Schedule are the owners of record and beneficially of all of the outstanding membership units of Seller, as set forth in Section 5.1(b) of the Disclosure Schedule.  All of the outstanding membership units of Seller have been duly authorized and are validly issued, fully paid and nonassessable.  Except as set forth in Section 5.1(b) of the Disclosure Schedule, there are no outstanding securities convertible or exchangeable into membership units or other equity interests of Seller.  Seller has no Subsidiaries.

(c)           Section 5.1(c) of the Disclosure Schedule lists (i) each of Seller’s prior legal names and any other trade name, fictitious name or other name under which Seller currently conducts business, or has ever conducted any business or activity, and (ii) each legal name, trade name, fictitious name or other name under which any predecessor to any part of the Business acquired by Seller conducted any business related to such acquired part of the Business.

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5.2           Due Authorization; No Conflict.

(a)           Seller has the full limited liability company power and authority to execute and deliver this Agreement and all other Transaction Document to which it is a party, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby.  The execution, delivery and performance by Seller of this Agreement and all other Transaction Documents to which it is a party have been duly authorized by all necessary limited liability company action.  Each Key Principal has the full capacity, power, and authority to execute and deliver this Agreement and all other Transaction Documents to which he is a party, to perform the obligations applicable to him hereunder and thereunder and to consummate the transactions contemplated hereby and thereby.

(b)           This Agreement has been duly executed and delivered by Seller.  This Agreement, and all other Transaction Documents executed or to be executed by Seller or a Key Principal in connection herewith, constitute or, when executed and delivered, shall constitute a legal, valid and binding contract of Seller and each such Key Principal, enforceable against such Seller and each such Key Principal in accordance with its terms.

(c)           Except for the consents, approvals and authorizations set forth in Section 5.2(c) of the Disclosure Schedule (collectively, the “Seller Required Consents and Authorizations”), the execution and delivery by Seller of this Agreement and the Transaction Documents to which it is a party, the performance by Seller of its obligations hereunder and thereunder and the consummation of the transactions contemplated hereby and thereby, shall not (with or without notice or lapse of time): (i) violate, conflict with, result in a breach of the terms or conditions of, or constitute a default, an event of default or an event creating rights of acceleration, termination or cancellation or a loss of rights under, (A) any Assigned Contract, (B) any other Contractual Obligation to which Seller is a party or any of the Purchased Assets is subject or by which Seller is bound, or (C) any Law, Governmental Authorization or Governmental Order applicable to Seller, the Purchased Assets, the Business or the Assumed Liabilities; (ii) contravene the Organizational Documents of Seller; (iii) require Seller to make any declaration, filing or registration with, or provide any notice to, any Governmental Authority or obtain any Governmental Authorization, (iv) require any consent, approval or authorization of, declaration, filing or registration with, or notice to, any other Person; (v) result in the creation or imposition of any Encumbrance upon any of the Purchased Assets; or (vi) cause Buyer to have any Liability for any Tax properly due from Seller.

5.3           Financial Statements.

(a)           Set forth in Section 5.3(a) of the Disclosure Schedule are the following financial statements of Seller (collectively, the “Financial Statements”):  (i) the  audited balance sheet of Seller as of December 31, 2010 and the related audited statements of income, cash flow and changes in members’ equity for the fiscal year then ended; (ii) the internally-prepared, unaudited balance sheets of Seller as of December 31, 2009, and the related internally-prepared unaudited statements of income for the fiscal years then ended; and (iii) the internally-prepared unaudited balance sheet of Seller as of May 31, 2011 (the “Interim Balance Sheet”) and the related internally-prepared unaudited statements of income, cash flow and changes in stockholder’s equity for the five month period then ended.

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(b)           Except as disclosed in Section 5.3(b) of the Disclosure Schedule, the Financial Statements (i) were prepared in accordance with the books and records of Seller, which books and records are correct and complete in all material respects, (ii) have been prepared in accordance with GAAP, and (iii) fairly present, in all material respects, the financial condition of Seller as at the respective dates thereof and the results of operations of Seller and changes in financial condition for the respective periods covered thereby, except that the Financial Statements for the period ending December 31, 2009 and for the period ending on the date of the Interim Balance Sheet do not contain notes and may be subject to normal audit adjustments, none of which adjustments are expected to be material.

(c)           Except as reflected on, reserved against or otherwise disclosed in the Financial Statements or as specifically set forth in Section 5.3(c) of the Disclosure Schedule, Seller is not subject to any Liability required under GAAP to be disclosed on the Financial Statements or the notes thereto, whether absolute, contingent, accrued or otherwise other than Liabilities that have arisen in the Ordinary Course of Business since the date of the Interim Balance Sheet and that individually, or in the aggregate, are not material.

5.4           Absence of Changes.  Since December 31, 2010, except as set forth Section 5.4 of the Disclosure Schedule, Seller has conducted the Business only in the Ordinary Course of Business, and there has not been:

(a)           any event, development or circumstance that has had or would be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect;

(b)           any material damage, destruction or other casualty loss (whether or not covered by insurance) affecting the Business or the Purchased Assets;

(c)           any amendment or modification of the Organizational Documents of Seller;

(d)           any incurrence of any Debt by Seller affecting the Business or the Purchased Assets;

(e)           any creation or other incurrence of any Encumbrance upon any Purchased Asset of Seller, other than Permitted Liens;

(f)           any failure to pay or satisfy when due any Liability of Seller which materially affects the Business or the Purchased Assets;

(g)           any sale, transfer, lease or other disposition of any asset of Seller related to the Business, except for inventory sold in the Ordinary Course of Business;

(h)           any capital expenditure, or commitments for capital expenditures, by Seller with respect to the Business in an amount in excess of $50,000 in the aggregate;

(i)           any cancellation, compromise, waiver or release of any right or claim (or series of related rights or claims) or any Debt owed to Seller with respect to the Business, in any case involving more than $20,000;

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(j)           any declaration, setting aside or payment of any dividend or other distribution with respect to, or any repurchase, redemption or other acquisition of, any equity interests of Seller, other than distributions made by Seller to its members for purposes of paying Taxes attributable to the income of the Company, made in the Ordinary Course of Business and in accordance with the terms of the Organization Documents of Seller;

(k)           any increase in the compensation payable or paid, whether conditionally or otherwise, to (i) any employee, consultant or agent of Seller for the Business whose annual base compensation exceeds $50,000 (or would exceed such amount after such increase), (ii) any director or officer of Seller, or (iii) any Affiliate of Seller;

(l)           any Tax election of Seller made, changed or revoked, any settlement of any Proceeding with respect to Taxes of Seller, or amendment of any Tax Return of Seller that would result in any material increase in the Liability for Taxes of Seller with respect to the Business;

(m)           any loss, that is material to the Business, of any customer, sales agent or representative, sales location or source of supply of inventory, utilities or contract services or the receipt of any notice that such a loss may be pending;

(n)           any change in the accounting principles and practices of Seller from those applied in the preparation of the Financial Statements; or

(o)           any Contractual Obligation to do any of the foregoing, or any action or omission that would result in any of the foregoing.

5.5           Title to Assets; Condition.

(a)           Except as set forth in Section 5.5(a) of the Disclosure Schedule, Seller has (and shall transfer to Buyer at the Closing) good title to all of the Purchased Assets, free and clear of all Encumbrances, except Permitted Liens.  All Encumbrances (except for any Encumbrances securing only Assumed Liabilities) set forth or required to be set forth in Section 5.5(a) of the Disclosure Schedule shall be terminated or released at or prior to Closing at the expense of Seller.

(b)           The tangible assets included in the Purchased Assets are in good working order, condition and repair, reasonable wear and tear excepted, and to the Knowledge of Seller, are not in need of maintenance or repairs except for maintenance or repairs which are routine, ordinary and are not material in costs or nature.  Except as set forth in Section 5.5(b) of the Disclosure Schedule, all of the Purchased Assets are located at the Leased Premises.

5.6           Real Property.

(a)           Except for its interest in the Leased Premises, Seller does not own any right, title or interest in any real property nor has Seller ever owned any property.

(b)           Section 5.6(b) of the Disclosure Schedule contains a list of all of the real property leased by Seller in connection with the Business (collectively, the “Leased Premises”), and identifies each Contractual Obligation under which such property is leased (the “Existing Leases”).  There are no subleases, licenses, concessions, occupancy agreements or other Contractual Obligations granting to any other Person the right of use or occupancy of the Leased Premises and there is no Person (other than Seller) in possession of the Leased Premises. To the Knowledge of Seller, there is no pending or threatened eminent domain taking affecting any portion of the Leased Premises which shall interfere with Seller’s conduct of the Business.  Seller has delivered to Buyer true, correct and complete copies of the Existing Leases, including all amendments, modifications, notices or memoranda of lease thereto and all estoppel certificates or subordinations, non-disturbance and attornment agreements, if any, related thereto.  To the Knowledge of Seller, no event or condition currently exists which would create a legal or other impediment to the use of the Leased Premises as currently used, or would increase the additional charges or other sums payable by the tenant under any Existing Lease (including, without limitation, any pending tax reassessment or other special assessment affecting the Leased Premises).  To the Knowledge of Seller, the Leased Premises (including, without limitation, the roof, the walls and all plumbing, wiring, electrical, heating, air conditioning, fire protection and other systems, as well as all paved areas, included therein or located thereat) are in good working order, condition and repair, reasonable wear and tear excepted, and are not in need of maintenance or repairs except for maintenance or repairs which are routine, ordinary and are not material in costs or nature.  Seller’s operation and use of the Leased Premises fully comply with (i) all applicable Laws. (ii) the terms and conditions of the applicable Existing Leases,  and (iii) to the Knowledge of Seller, any restrictive covenants applicable to the Leased Premises.  To the Knowledge of Seller, each of the Leased Premises fully complies with all applicable Laws. Seller has not received written notice from any Governmental Authority of any violations of any Law affecting any portion of the Leased Premises.

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5.7           Taxes.  Seller has filed all federal, state, county and local Tax Returns which are required to be filed prior to the date of this Agreement and has paid or has reserved for the payment of all Taxes which have become due and payable. No event has occurred which could impose on Buyer any successor or transferee liability for any Taxes in respect of Seller.  All such Tax Returns are complete and accurate and disclose all Taxes required to be paid.  Seller has not waived or been requested to waive any statute of limitations in respect of Taxes.  All monies required to be withheld by Seller (including from employees for income Taxes and social security and other payroll Taxes) have been collected or withheld, and either paid to the respective taxing authorities, set aside in accounts for such purpose, or accrued, reserved against and entered upon the books of Seller.  Except as set forth on Section 5.7 of the Disclosure Schedules, no examination or audit of any Tax Return is currently in progress and no Governmental Authority is asserting, or has threatened in writing to assert, against Seller any deficiency, proposed deficiency or claim for additional Taxes or any adjustment thereof with respect to any period for which a Tax Return has been filed, for which Tax Returns have not yet been filed or for which Taxes are not yet due and payable. No claim has ever been made by an authority in a jurisdiction where Seller does not file Tax Returns that Seller is or may be subject to taxation by that jurisdiction.

5.8           Insurance.  Section 5.8 of the Disclosure Schedule sets forth a description of the current insurance policies pertaining to the Business maintained by Seller (each, an “Insurance Policy”), including policies by which Seller, or any of the Purchased Assets, or Seller’s employees, officers or directors or the Business are insured.  The description includes for each Insurance Policy the type of policy, policy number, name of insurer and expiration date. Seller has made available to Buyer true, accurate and complete copies of all such Liability Policies, in each case, as amended or otherwise modified and in effect with respect to Seller.  All Liability Policies provide occurrence-based coverage unless noted otherwise in Section 5.8 of the Disclosure Schedule.  Seller is not in default with respect to its obligations under any Insurance Policy and has not failed to give any notice or present any claim thereunder in a due and timely manner.  Seller has not been denied insurance coverage or been subject to any gaps in insurance coverage in the two (2) year period immediately preceding the date of this Agreement.  Except as disclosed in Section 5.8 of the Disclosure Schedule, since January 1, 2005, no insurer (a) has denied or disputed (or otherwise reserved its rights with respect to) the coverage of any claim pending under any Insurance Policy or (b) has threatened to cancel any Insurance Policy.  Seller does not have any self-insurance or co-insurance programs.

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5.9           Governmental Authorizations.

(a)           Seller owns, holds or possesses all Governmental Authorizations (including, without limitation, the Company Telecom Permits) which are necessary to entitle Seller to own or lease, operate and use the Purchased Assets and to carry on and conduct the Business as currently conducted, all of which are set forth on Section 5.9(a) of the Disclosure Schedule (the “Seller Governmental Authorizations”).  None of Seller or any of its officers, managers, members or employees has been a party to or subject to any Proceeding seeking to revoke, suspend or otherwise limit any Seller Governmental Authorization.  Section 5.9(a) of the Disclosure Schedule indicates which of the Seller Governmental Authorizations shall be assigned to Buyer at the Closing.  Except as disclosed in Section 5.9(a) of the Disclosure Schedule, (i) the Seller Governmental Authorizations are valid and in full force and effect, and (ii) Seller is not in breach or violation of, or default under, any Seller Governmental Authorization.

(b)           Seller has not received any written or, to the Knowledge of Seller, oral notice from any Governmental Authority that any of its properties, facilities, equipment, operations or business procedures or practices fails to comply with any applicable Law or Governmental Authorization.  Seller is not in breach or violation of, and there is no pending, or to the Knowledge of Seller, threatened, Proceeding or Governmental Order with respect to, any of the Seller Governmental Authorizations.  Seller has not received any written notice of any Proceeding, including, but not limited to, any Proceeding initiated, pending or recommended by any Governmental Authority having jurisdiction over the Seller Governmental Authorizations to revoke, withdraw or suspend any such Seller Governmental Authorization.  No event has occurred that, with or without notice or the passage of time, would constitute a breach or violation of, or would constitute grounds for a Proceeding or Governmental Order with respect to any of the Seller Governmental Authorizations.

5.10         Compliance with Laws.

(a)           Except as set forth in Section 5.10(a) of the Disclosure Schedule, Seller is in compliance with all applicable Laws and, to the Knowledge of Seller, there is no basis for any Proceeding arising out of or in connection therewith. Seller has not received any written or, to the Knowledge of Seller, oral notice of any violation of any Law, and Seller is not party to any settlement agreement or consent decree with continuing obligations or restrictions on Seller. Each item comprising the Purchased Assets and the current uses thereof conform, in all material respects to all Laws.

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(b)           Neither Seller nor any managers, officers, employees, or agents of Seller have directly or indirectly, overtly or covertly, in violation of any Law in connection with the Business (i) made, or agreed to make, any contribution, gift, bribe, rebate, payoff, influence payment, kickback or other payment to any Person (including, in the case of an individual, any family members of such Person and in the case of an entity, any Affiliates of such entity), regardless of form, whether in money, property or services, including (A) to obtain favorable treatment in securing business, (B) to pay for favorable treatment for business secured, or (C) to obtain special concessions or pay for special concessions already obtained for or in respect of Seller, or (ii) established or maintained any fund or asset that has not been recorded in the books and records of Seller.

5.11         Environmental Matters.  Except as set forth in Section 5.11 of the Disclosure Schedule, (a) Seller has not at any time generated, used, treated or stored Hazardous Substances on, or transported Hazardous Substances to or from, the Leased Premises or any property adjoining or adjacent to the Leased Premises other than in compliance with all Environmental Laws and, to the Knowledge of Seller, no Person has taken such actions on or with respect to the Leased Premises, (b) Seller has not at any time released or disposed of Hazardous Substances on the Leased Premises or any property adjoining or adjacent to the Leased Premises, and, to the Knowledge of Seller, no Person has taken any such actions on the Leased Premises, (c) Seller has at all times been in compliance with all Environmental Laws and all Governmental Authorizations issued under such Environmental Laws with respect to the Leased Premises, the Purchased Assets and the operation of the Business, (d) there are no past, pending or, to the Knowledge of Seller, threatened environmental claims against Seller, any of the Purchased Assets, the Business or, to the Knowledge of Seller, the Leased Premises, (e) to the Knowledge of Seller, there are no facts or circumstances, conditions or occurrences regarding Seller, the Leased Premises, any of the Purchased Assets or the Business that could reasonably be anticipated to form the basis of an environmental claim against Seller, any of the Purchased Assets or the Business or to cause the Leased Premises, the Purchased Assets or the Business to be subject to any restrictions on its ownership, occupancy, use or transferability under any Environmental Law, (f) to the Knowledge of Seller, there are not now and there never have been, any underground storage tanks located on the Leased Premises, (g) other than in compliance with Environmental Laws, Seller has not ever transported or arranged for the transportation of any Hazardous Substances to any site from the Leased Premises, and (h) Seller has not operated the Business at any location other than the Leased Premises, other than Seller’s previous office location of  600 Delran Parkway, Suite B, Delran, NJ 08075.

5.12           Litigation.  Except as set forth in Section 5.12 of the Disclosure Schedule:  (a) there is no Proceeding pending or, to the Knowledge of Seller, threatened (i) against Seller or affecting the Purchased Assets or the Business or (ii) which seeks to prohibit, restrict or delay consummation of the transactions contemplated by this Agreement or any of the conditions to consummation of such transactions and, (b) there is no Governmental Order outstanding or, to the Knowledge of Seller, threatened (i) against Seller or affecting the Purchased Assets or the Business, or (ii) which seeks to prohibit, restrict or delay consummation of the transactions contemplated by this Agreement or any of the conditions to consummation of such transactions.

5.13           Adequacy of Assets.  Except for the Excluded Assets, the Purchased Assets comprise all of the assets, properties, Contractual Obligations and rights, tangible and intangible, of any nature whatsoever, which are necessary to operate the Business in the manner presently operated by Seller, and (ii) include all of the operating assets of Seller.

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5.14           Employee Benefit Plans.

(a)           Section 5.14(a) of the Disclosure Schedule lists all Employee Plans as to which Seller or any ERISA Affiliate sponsors, maintains, contributes or is obligated to contribute, or under which Seller or any ERISA Affiliate has or may have any Liability related to the Business (each, a “Company Benefit Plan”).

(b)           None of the Company Benefit Plans is, and neither Seller nor any ERISA Affiliate has ever contributed to, or had an obligation to contribute to, (i) a plan subject to Title IV of ERISA or Section 412 of the Code, (ii) a “multiemployer plan” (within the meaning of Section 3(37) of ERISA), (iii) a “multiple employer plan” (within the meaning of Section 3(40) of ERISA or Section 413(c) of the Code), (iv) a “voluntary employees’ beneficiary association” (within the meaning of Section 501(c)(9) of the Code), or (v) a “multiple employer welfare arrangement” (within the meaning of Section 3(40)(A) of ERISA).

(c)           Each Company Benefit Plan (and any related trust agreement) has been administered in accordance with its terms, and each Company Benefit Plan is in compliance with the applicable provisions of ERISA, the Code and all Laws applicable thereto.

(d)           All contributions (including all employer contributions and employee salary reduction contributions) that are due as of the Closing have been paid to each Company Benefit Plan.

(e)           All reports, returns and similar documents with respect to each Company Benefit Plan required to be filed with any Governmental Authority or distributed to any participant of each Company Benefit Plan have been duly and timely filed or distributed.

(f)           Neither Seller, any ERISA Affiliate, nor to the Knowledge of Seller, any Company Benefit Plan fiduciary has, with respect to the Company Benefit Plans, engaged in a non-exempt “prohibited transaction,” as such term is defined in Section 4975 of the Code or Section 406 of ERISA and no event or condition exists with respect to any Company Benefit Plan which constitutes a reportable event within the meaning of Section 4043 of ERISA, as to which a waiver is not applicable.

(g)           No Company Benefit Plan provides for or continues welfare benefits, such as medical or health benefits, or life insurance or other death benefits (through insurance or otherwise, but disregarding death benefits payable solely under the terms and from the assets of a qualified retirement plan) for any employee or any dependent or beneficiary of any employee after such employee’s retirement or other termination of employment except as may be required by COBRA, and there has been no communication to any Person by the Company or any ERISA Affiliate that could reasonably be expected to promise or guarantee any such benefits with respect to any Employee Plan or otherwise.

(h)           The consummation of the transactions contemplated by this Agreement will not entitle any individual to severance pay, and will not accelerate the time of payment or vesting, or increase the amount of compensation due to any individual.  None of the Company Benefit Plans obligates the Company or any ERISA Affiliate to pay separation, severance, termination or similar benefits solely as a result of any transaction contemplated by this Agreement or solely as a result of a “change in the ownership or effective control of the corporation, or in the ownership of a substantial portion of the assets of the corporation” (as defined in Section 280G of the Code).

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(i)           With respect to the Company Benefit Plans, there is no Liability whatsoever which any Buyer Party shall assume, or could reasonably be expected to assume, as part of the transactions contemplated by this Agreement or otherwise.

5.15           Employee Relations.

(a)           Section 5.15(a) of the Disclosure Schedule sets forth the names, date of hire, the rate of compensation (and the portions thereof attributable to salary and bonuses, respectively), the amount of accrued but unused vacation time as of the date of this Agreement, and work location of all current employees of Seller.  Section 5.15(a) of the Disclosure Schedule also includes the names of all employees of Seller currently on short-term or long-term disability leave, workers’ compensation leave, leave under the Family Medical Leave Act, and any other leave.  To the Knowledge of Seller, no key employee or group of employees has any plans to terminate employment with Seller.

(b)           Except as set forth in Section 5.15(b) of the Disclosure Schedule, (i) Seller has not entered into any collective bargaining agreement or other Contractual Obligation with any employee, union, labor organization or other employee representative or group of employees and, to the Knowledge of Seller, no such organization or Person has made or is making any attempt to organize or represent employees of Seller; (ii) there is no pending grievance or arbitration and no unsatisfied or unremedied grievance or arbitration award against Seller or any agent, representative or employee of Seller and, to the Knowledge of Seller, there is no basis for any such grievance or arbitration; (iii) there is no unfair labor practice charge, pending trial of unfair labor practice charges, unremedied unfair labor practice finding or adverse decision of the National Labor Relations Board or administrative law judge thereof, against Seller or any agent, representative or employee of Seller and, to the Knowledge of Seller, there is no basis for any such unfair labor practice charge; and (iv) there is not pending or, to the Knowledge of Seller, threatened with respect to Seller or its employees any labor dispute, strike or work stoppage.

(c)           Without limiting the generality of Section 5.10, Seller is in compliance with all applicable Laws and Contractual Obligations relating to employment, and the payment and withholding of Taxes and other similar obligations. Seller has not received any written or, to the Knowledge of Seller, oral notice of any violation of any such Law or Contractual Obligation.

(d)           Except as set forth in Section 5.15(d) of the Disclosure Schedules, no current or former employee of Seller is owed by Seller overtime pay, wages or salary for any period other than the current payroll period, vacation, holiday or other time off or pay in lieu thereof (other than time off or pay in lieu thereof earned in respect of the current year), or any amount arising from any violation of any Law or Contractual Obligation relating to the payment of wages, fringe benefits, wage supplements or hours of work.

(e)           Seller is not, nor immediately after the Closing will be, liable for severance pay or any other payment of monies to any employee of Seller as a result of the execution of this Agreement or Seller’s performance of its terms, or for any other reason in any way related to the consummation of the transactions contemplated hereby.

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5.16           Contractual Obligations.

(a)           Each of the Assigned Contracts is valid and binding, in full force and effect in accordance with its terms and, except for obtaining (or giving any notice required under) any applicable Seller Required Consent and Authorization, is fully assignable to and assumable by Buyer, so that immediately after the Closing Buyer will be entitled to the full benefits thereof, in each case without breaching the terms thereof or resulting in the forfeiture or impairment of any rights thereunder.  There has not been under any such Assigned Contract any default by Seller or, to the Knowledge of Seller, by any other party thereto, nor any event which, after notice or lapse of time, or both, would constitute any such default or result in a right to accelerate against or a loss of rights by Seller.

(b)           Except for Assigned Contracts, Seller is not a party to, or otherwise bound by, any Contractual Obligation or other instrument which is material or necessary to the ownership of the Purchased Assets or the operation of the Business or which is adverse, or otherwise harmful, to any of the Purchased Assets or the Business.

5.17           No Broker.  Neither Seller, any Key Principal nor any Person acting on behalf of Seller or any Key Principal has paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this Agreement.

5.18           Customer List.  Section 5.18 of the Disclosure Schedule (a) sets forth an accurate and complete list of the customers of Seller who have received services in excess of $25,000 provided by Seller pertaining to the Business during the 2008, 2009 and 2010 calendar years (the “Customer List”) and (b) designates each customer on the Customer List which represents more than two percent (2%) of the aggregate annual revenue of Seller, as the case may be, pertaining to the Business during the 2008, 2009 and 2010 calendar years (each a “Large Customer”).  Seller has not received written or, to the Knowledge of Seller, oral notice from any Large Customer that any such Large Customer has any intent to cease doing business with Buyer, or intent to decrease the volume or value of its business with Buyer after, or as a result of, the consummation of the transactions contemplated hereby, or is threatened with bankruptcy or insolvency.

5.19           Intellectual Property.

(a)           Except as set forth on Schedule 2.1(f), Seller has no patents, applications for patents, copyrights or license agreements relating to the Business used, owned by or granted to Seller, and no assumed names, trade names, trademark or service mark registrations, applications for trademark or service mark registrations, trademarks or service marks relating to the Business.  None of the past or present employees, officers, managers or members of Seller has any rights in any of the inventions, whether or not patented, which have been or are used by Seller in the Business or which pertain to the Business.  Seller has not granted any outstanding licenses or other rights to know-how or other intellectual property owned by or licensed to Seller and used in the Business.  Seller is not liable, nor has it made any Contractual Obligation whereby it may become liable, to any Person for any royalty or other compensation for the use of any invention, whether or not patented, trademark, trade name or copyright used in the Business.  Seller has not been named in any Proceeding, or received written or, to the Knowledge of Seller, oral notice of any threatened Proceeding, which involves a claim of infringement of any patents, trademarks, trade names, service marks or copyrights of any Person.  To the Knowledge of Seller, Seller’s conduct of the Business as currently conducted does not infringe any valid patents, trademarks, trade names, service marks or copyrights of any Person.

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(b)           All employees, agents, consultants or contractors who have contributed to or participated in the creation or development of any patentable or trade secret material, or copyrightable material, in each case relating to the Business on behalf of Seller or any predecessor in interest thereto either: (i) is a party to a “work-for-hire” agreement under which Seller is deemed to be the original owner/author of all property rights therein; or (ii) has executed an assignment or an agreement to assign in favor of Seller all right, title and interest in such material.

5.20           Accounts Receivable; Inventory.

(a)           All accounts receivable reflected on the Interim Balance Sheet and all accounts receivable arising subsequent to the date of the Interim Balance Sheet and on or prior to the Closing Date, have arisen or shall arise in the Ordinary Course of Business out of bona fide sales and deliveries of goods, performance of services or other business transactions, represent or shall represent legal, valid, binding and enforceable obligations to Seller, and are owned by Seller free of all claims and Encumbrances other than Permitted Liens.  Except for Customer Deposits identified on Schedule 2.3(a), Seller has not received Customer Deposits or any other prepayments or deposits of any kind whatsoever from any customer included on the Customer List.  All of the accounts receivable shown on the Closing Date Balance Sheet are good and collectible in accordance with the terms thereof at their respective full  amounts.

(b)           All of the inventory of Seller described in Schedule 2.1(b) (a) is properly valued on a cost (first-in, first-out) basis in accordance with GAAP, (b) except to the extent of reserves shown in the Financial Statements, consists of inventories of the kind, quality and quantity regularly and currently used in the Business, and (c) except to the extent of reserves shown in the Financial Statements, is in good and saleable condition and fit for the purposes intended.  None of such inventory has been consigned to others.

5.21           No Creation of Liens. Neither the execution of this Agreement nor the consummation of the transactions contemplated herein will result in the creation of any Encumbrance on any Purchased Assets other than a Permitted Lien.

5.22           Telecom Law.

(a)           Without limiting the generality of Section 5.10, Seller is currently in compliance in all respects with applicable Telecom Laws and has in the past complied in all respects with applicable Telecom Laws.  Without limiting the generality of the foregoing, Seller has filed all reports, and paid all contributions and fees, required by the Telecom Laws applicable to Seller, including with respect to FCC regulatory fees, contributions to state or federal universal service support mechanisms, contributions to intrastate or interstate telecommunications relay services, contributions to administration of the North American Numbering Plan, contributions to the shared costs of local number portability administration, FCC and state regulatory fees, franchise fees, and state E911 fees.  No investigation, review or Proceeding by the FCC or any State PUC with respect to any actual or alleged material violation of Telecom Law by Seller is pending or, to the Knowledge of Seller, threatened, nor has Seller received any written or, to the Knowledge of Seller, oral notice from the FCC or any State PUC indicating an intention to conduct the same.

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(b)           Seller has obtained all Governmental Authorizations necessary for it to conduct its Business in compliance, in all material respects, with applicable Telecom Laws (the ”Company Telecom Permits”), each of which is listed in Section 5.9(a) of the Disclosure Schedule.  Each of the Company Telecom Permits is in full force and effect and Seller is not in violation of any of the terms, conditions and requirements of any of the Company Telecom Permits.  Seller has provided to Buyer correct and complete copies of all Company Telecom Permits.

(c)           There is no Proceeding pending or, to the Knowledge of Seller, threatened, that: (i) questions or contests the validity of, or seeks the revocation, non-renewal or suspension of, any Company Telecom Permit; or (ii) seeks the imposition of any material condition, administrative sanction, modification or amendment with respect to any Company Telecom Permit.  No consent under any of Company Telecom Permit is required to be obtained under applicable Telecom Law in connection with consummation of the transactions contemplated by this Agreement and the Transaction Documents.

(d)           Except for the Seller Required Consents and Authorizations, no consent, approval, waiver, order, permit or authorization of, or application, registration, qualification, designation, declaration, notification or filing with or to, the FCC or any State PUC is required in connection with the execution and delivery by Seller (as applicable) of this Agreement and the Transaction Documents and the consummation of the transactions contemplated hereby and thereby.  To the Knowledge of Seller, there are no facts or circumstances relating to Seller that would be reasonably likely to prevent, materially delay, or otherwise materially interfere with, the issuance of any approval by the FCC or any State PUC included in the Seller Required Consents and Authorizations.

5.23           Transactions with Related Parties.  Except (a) for standard confidentiality, assignment of invention and non-competition agreements, employment agreements and the Organizational Documents of Seller, and (b) as set forth in Section 5.23 of the Disclosure Schedule, neither any present officer, manager or member of Seller, or any other Person that, to the Knowledge of Seller, is an Affiliate of any of the foregoing, is currently a party to any transaction or Contractual Obligation with Seller, including without limitation, any loan, extension of credit or arrangement for the extension of credit, any Contractual Obligation providing for the employment of, furnishing of services by, rental or sale of assets from or to, or otherwise requiring payments to or from, any such officer, director, shareholder or Affiliate.  No officer, manager or Key Principal of Seller, nor, to the Knowledge of Seller, any of their respective Affiliates, has any interest in any competitor, supplier or customer of Seller, except for immaterial interests in publicly held companies.

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5.24           Privacy and Data Protection.

(a)           With respect to the Business, Seller has established, implemented, updated, maintained and diligently enforced such policies, programs, procedures, contracts and systems with respect to the collection, use, storage, transfer, retention, deletion, destruction, disclosure and other forms of processing of any and all data and information (“Company Data”) including, without limitation, any and all data or information collected, used, stored, transferred, retained, deleted, destroyed, disclosed or processed with respect to any of its customers or prospective customers (“Customer Data”) as consistent and compliant with accepted industry practice and standards as are known in the information security industry to protect, physically and electronically, information and assets from unauthorized disclosure, access, use, dissemination or modification, including but not limited to the current publication of the National Institute of Standards and Technology data security guidelines; and

(b)           With respect to the Business, Seller is not a party to or the subject of any pending or, to the Knowledge of Seller, threatened Proceeding, which involves or relates to a claim against Seller of any breach, misappropriation, unauthorized disclosure, access, use, dissemination, modification or any similar violation or infringement of any Company Data including, without limitation, any Customer Data.

(c)           Seller does not have any Knowledge of any actual, suspected or threatened (i) breach, misappropriation, or unauthorized disclosure, access, use, dissemination or modification of any Company Data including, without limitation any Customer Data; or (ii) breach or violation of any of the policies, programs, procedures, contracts and systems described in Section 5.24(a) above.

5.25           Acquisition of Parent Shares.  Seller is an accredited investor within the meaning of Rule 501(a) of Regulation D promulgated under the Securities Act.  Seller is acquiring the Parent Shares issued as partial payment of the Purchase Price hereunder, and any Additional Parent Shares (as defined in the Lock-Up Agreement), for investment purposes only and, except as contemplated by this Agreement or the Lock-Up Agreement, not with a view to, or for resale in connection with, any distribution of shares nor with any present intention of dividing its participation with others.  Seller understands that the Parent Shares (and any Additional Parent Shares, if applicable) have not been registered under the Securities Act by reason of a specific exemption under the provisions of the Securities Act in reliance on Seller’s representations contained herein and that, as such, the Parent Shares are “restricted securities.”  Seller acknowledges and understands that Buyer Parent is under no obligation to register the Parent Shares (or any Additional Parent Shares) for public sale in the future, that any sales made publicly under Rule 144 of the Securities Act (the “Rule”) can only be made in accordance with the procedures of that Rule, and that any other resale of the Parent Shares or Additional Parent Shares may require compliance with some other exemption from registration under the Securities Act.  Seller further acknowledges that if an exemption from registration under the Securities Act is available, it may be conditioned on various requirements including, but not limited to, the time and manner of sale, the holding period for the Parent Shares and Additional Parent Shares, and requirements relating to Buyer Parent which are outside of Seller’s control, and which Buyer Parent is under no obligation and may not be able to satisfy.   Seller has such knowledge and experience in financial and business matters that it is fully capable of evaluating the merits and risks of an investment in the Parent Shares and Additional Parent Shares. Seller also agrees that all Parent Shares issued hereunder will be subject to the Lock-Up Agreement.  Seller agrees that appropriate legends may be placed on and stop transfer orders may be placed against any certificate(s) representing the Parent Shares.  Nothing in the preceding provisions shall in any way place any restrictions on the ability of Seller or any permitted transferees of Seller from transferring the Parent Shares or Additional Parent Shares to Buyer Parent pursuant to the terms of the Lock-Up Agreement.

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5.26           DISCLAIMER OF OTHER REPRESENTATIONS AND WARRANTIES.  EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, SELLER MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AT LAW OR IN EQUITY, IN RESPECT OF ANY OF ITS ASSETS (INCLUDING, WITHOUT LIMITATION, THE PURCHASED ASSETS), LIABILITIES OR OPERATIONS (INCLUDING, WITHOUT LIMITATION, THE BUSINESS), INCLUDING, WITHOUT LIMITATION, WITH RESPECT TO MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE, AND ANY SUCH OTHER REPRESENTATIONS OR WARRANTIES ARE HEREBY EXPRESSLY DISCLAIMED.

ARTICLE VI

Representations and Warranties of Buyer Parties.

In order to induce Seller to enter into and perform this Agreement and to consummate the transactions contemplated hereunder, the Buyer Parties, jointly and severally, hereby make the following representations and warranties to Seller as of the date hereof and as of the Closing Date.

6.1           Organization and Good Standing.  Each of the Buyer Parties is a New York corporation duly organized, validly existing and in good standing under the laws of the State of New York, with full corporate power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted. Each Buyer Party is duly qualified or licensed to do business as a foreign Person in which the character of such Buyer Party’s properties or the nature of such Buyer Party’s activities require it to be qualified in order to conduct its respective business activities.

6.2           Due Authorization; No Conflict.

(a)           Each of the Buyer Parties has full corporate power and authority to execute, deliver and perform this Agreement and all other Transaction Documents to which it is a party, to consummate the transactions contemplated hereby and thereby and to perform its obligations hereunder and thereunder.  The execution, delivery and performance by each of the Buyer Parties of this Agreement and all other Transaction Documents to which it is a party have been duly authorized by all necessary corporate action.  This Agreement, and all other Transaction Documents executed or to be executed by a Buyer Party, as applicable in connection herewith, constitute or, when executed and delivered, shall constitute, a legal, valid and binding Contractual Obligation of such Buyer Party, as applicable enforceable against such Buyer Party in accordance with its terms.

(b)           Except for the PSC Approval (collectively, the “Buyer Required Consents and Authorizations”), the execution and delivery by each of the Buyer Parties of this Agreement and the Transaction Documents to which it is a party, the performance by each of the Buyer Parties of its obligations hereunder and thereunder and the consummation of the transactions contemplated hereby and thereby, shall not (with or without notice or lapse of time): (i) violate, conflict with, result in a breach of the terms or conditions of, or constitute a default, an event of default or an event creating rights of acceleration, termination or cancellation or a loss of rights under, (A) any Contractual Obligation to which either Buyer Party is a party or by which either Buyer Party’s respective assets is subject or by which either Buyer Party is bound, or (C) any Law, Governmental Authorization or Governmental Order applicable to either Buyer Party, a Buyer’s Party’s respective assets or business; (ii) contravene the Organizational Documents of either of the Buyer Parties; (iii) require either of the Buyer Parties to make any declaration, filing or registration with, or provide any notice to, any Governmental Authority or obtain any Governmental Authorization, (iv) require any consent, approval or authorization of, declaration, filing or registration with, or notice to, any other Person; or (v) cause Seller to have any Liability for any Tax properly due from either of the Buyer Parties.

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6.3           No Brokers.  Neither of the Buyer Parties, nor any Person acting on behalf of either of the Buyer Parties has paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this Agreement.

6.4           Litigation.  There is no Proceeding pending or, to the Knowledge of the Buyer Parties, threatened (a) against either of the Buyer Parties which, if adversely determined, would have a material adverse effect on the assets, business or financial condition of either of the Buyer Parties or (b) which seeks to prohibit, restrict or delay consummation of the transactions contemplated by this Agreement or any of the conditions to consummation of such transactions. There is no Governmental Order outstanding or, to the Knowledge of either of the Buyer Parties, threatened (i) against either of the Buyer Parties or their respective assets or business, or (ii) which seeks to prohibit, restrict or delay consummation of the transactions contemplated by this Agreement or any of the conditions to consummation of such transactions.

6.5           Capitalization.

(a)           The authorized capital stock of Buyer Parent consists of 10,000,000 shares of Parent Common Stock, of which 5,482,774 are issued and outstanding as of the date of this Agreement; and 10,000,000 shares of Preferred Stock, par value $100.00 per share, of which 5,000 shares are issued and outstanding as of the date of this Agreement.  Except as disclosed in the Parent SEC Documents, there are no other outstanding (w) shares of capital stock or other voting securities of Buyer Parent, (x) securities convertible into or exchangeable for shares of capital stock or voting securities of Buyer Parent, (y) options, warrants, conversion privileges, rights of first refusal, contracts, understandings, agreements or other rights to purchase or acquire from Buyer Parent, and, no obligations of Buyer Parent to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of Buyer Parent, other than options and other securities issued or that may be issued under option plans and other benefit plans disclosed in the Parent SEC Documents and (z) equity equivalent interests in the ownership or earnings of Buyer Parent or other similar rights.

(b)           The Parent Shares that may be issued pursuant to this Agreement and the Additional Parent Shares that may be issued pursuant to the Lock-Up Agreement have been duly authorized and, upon issuance pursuant to this Agreement, will be validly issued, fully paid and non-assessable, will be issued in compliance with all applicable federal and state securities laws, and will be issued free of any preemptive rights, liens or restrictions other than those imposed pursuant to the Securities Act and the Lock-Up Agreement.  Buyer Parent owns all of the issued and outstanding capital stock of Buyer.

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6.6           SEC Filings.  Buyer Parent has filed with the Securities and Exchange Commission (the “SEC”), at or prior to the time due, all forms, reports, schedules, registration statements and definitive proxy statements required to be filed by it with the SEC for the three (3) years preceding the date hereof (together with all information incorporated therein by reference, the “Parent SEC Documents”).  As of their respective dates, the Parent SEC Documents complied in all material respects with the requirements of the Exchange Act or the Securities Act, as the case may be, and the rules and regulations of the SEC thereunder applicable to such Parent SEC Documents.  As of their respective dates and as of the Closing Date, the Parent SEC Documents did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except to the extent that information in any Parent SEC Document has been revised or superseded by a subsequently filed document filed prior to the date hereof with the SEC.  Since the last day of the quarter end reported upon by Buyer Parent by the filing with the SEC of Buyer Parent’s most recent Quarterly Report on Form 10-Q, with respect to any Buyer Party, there has not been any change, effect, event, occurrence, state of facts or development that, individually or in the aggregate, has had or could reasonably be expected to have a material adverse effect on Buyer Parent or any other Buyer Party.  As of the date hereof, there are no outstanding or unresolved comments in comment letters received from the SEC staff with respect to any of the Parent SEC Documents.

6.7           Compliance With Laws.

(a)           Each of the Buyer Parties is in compliance with all applicable Laws and, to the Knowledge of each of the Buyer Parties, there is no basis for any Proceeding arising out of or in connection therewith.  Neither Buyer Party has received any written or, to the Knowledge of the Buyer Parties, oral notice of any violation of any Law, and neither Buyer Party is a party to any settlement agreement or consent decree with continuing obligations or restrictions on either Buyer Party.

(b)           Neither Buyer Party nor, to the Knowledge of the Buyer Parties, any managers, officers, employees, or agents of a Buyer Party, has directly or indirectly, overtly or covertly, in violation of any Law in connection with the business of either Buyer Party (i) made, or agreed to make, any contribution, gift, bribe, rebate, payoff, influence payment, kickback or other payment to any Person (including, in the case of an individual, any family members of such Person and in the case of an entity, any Affiliates of such entity), regardless of form, whether in money, property or services, including (A) to obtain favorable treatment in securing business, (B) to pay for favorable treatment for business secured, or (C) to obtain special concessions or pay for special concessions already obtained for or in respect of a Buyer Party, or (ii) established or maintained any fund or asset that has not been recorded in the books and records of such Buyer Party.

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6.8           Financial Statements.  Each of the financial statements of Buyer Parent (including the related notes) included or incorporated by reference in the Parent SEC Documents (including any similar documents filed after the date of this Agreement) comply as to form and content in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP (except, in the case of unaudited statements, as permitted in Form 10-Q under the rules and regulations of the SEC) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto), were prepared in accordance with the books and records of Buyer Parties, which books and records are correct and complete in all material respects, and fairly and accurately present the consolidated financial position of Buyer Parent and its consolidated subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject to normal year-end adjustments in the case of any unaudited interim financial statements).   Except as and to the extent reflected in, reserved against or otherwise disclosed in the financial statements of Buyer Parent included or incorporated by reference in the Buyer Parent’s most recent Quarterly Report on Form 10-Q filed with the SEC, Buyer Parties are not subject to any Liability required under GAAP to be disclosed on such financial statements or the notes thereto, whether absolute, contingent, accrued or otherwise, other than Liabilities that have arisen in the Ordinary Course of Business since such date and that individually, or in the aggregate, are not material.

6.9           Governmental Authorizations.

(a)           Each Buyer Party owns, holds or possesses all Governmental Authorizations which are necessary to entitle such Buyer Party to own or lease, operate and use its assets and to carry on and conduct its business as currently conducted.  Neither of the Buyer Parties, nor any of their respective officers, managers, directors or employees has been a party to or subject to any Proceeding seeking to revoke, suspend or otherwise limit any of such Governmental Authorization.

(b)           The Buyer Parties have not received any written or, to the Knowledge of the Buyer Parties, oral notice from any Governmental Authority that any of their respective properties, facilities, equipment, operations or business procedures or practices fails to comply with any applicable Law or Governmental Authorization.  The Buyer Parties are is not in breach or violation of, and there is no pending, or to the Knowledge of either of the Buyer Parties, threatened, Proceeding or Governmental Order with respect to, any of the Buyer’s Governmental Authorizations.  Neither of the Buyer Parties has received any written notice of any Proceeding, including, but not limited to, any Proceeding initiated, pending or recommended by any Governmental Authority having jurisdiction over Buyer’s Governmental Authorizations to revoke, withdraw or suspend any such Buyer’s Governmental Authorization.  No event has occurred that, with or without notice or the passage of time, would constitute a breach or violation of, or would constitute grounds for a Proceeding or Governmental Order with respect to any of Buyer’s Governmental Authorizations.

6.10                 Taxes.  Subject to properly granted extensions, the Buyer Parties have filed all federal, state, county and local Tax Returns which are required to be filed prior to the date of this Agreement and have paid or have reserved for the payment of all Taxes which have become due and payable. All such Tax Returns are complete and accurate and disclose all Taxes required to be paid.  The Buyer Parties have not waived or been requested to waive any statute of limitations in respect of Taxes.  All monies required to be withheld by the Buyer Parties (including from employees for income Taxes and social security and other payroll Taxes) have been collected or withheld, and either paid to the respective taxing authorities, set aside in accounts for such purpose, or accrued, reserved against and entered upon the books of Buyer Parties.  No examination or audit of any Tax Return is currently in progress and no Governmental Authority is asserting, or has threatened in writing to assert, against Buyer Parties any deficiency, proposed deficiency or claim for additional Taxes or any adjustment thereof with respect to any period for which a Tax Return has been filed, for which Tax Returns have not yet been filed or for which Taxes are not yet due and payable.

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6.11                 DISCLAIMER OF OTHER REPRESENTATIONS AND WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, THE BUYER PARTIES MAKE NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AT LAW OR IN EQUITY, IN RESPECT OF ANY OF ITS ASSETS, LIABILITIES OR OPERATIONS, INCLUDING, WITHOUT LIMITATION, WITH RESPECT TO MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE, AND ANY SUCH OTHER REPRESENTATIONS OR WARRANTIES ARE HEREBY EXPRESSLY DISCLAIMED.

ARTICLE VII

Covenants and Agreements.

7.1           Buyer’s Investigation.

(a)           Prior to the Closing Date, the Buyer Parties shall be entitled, upon reasonable request and at its own expense, through its employees and representatives, including without limitation, its attorneys to perform a due diligence investigation of the assets, properties, Business and operations of Seller.  The Buyer Parties shall be permitted reasonable access to Seller’s premises, the Leased Premises, books and records of Seller, including, without limitation, the opportunity to observe and verify the Purchased Assets.  Any such investigation and review shall be conducted at reasonable times and under reasonable circumstances.  The Buyer Parties agree that any such investigation or review shall not unreasonably interfere with the ongoing operations of Seller.  Seller shall cooperate with all reasonable requests and shall use reasonable efforts to cause its officers, employees, consultants, agents, accountants and attorneys to cooperate with such review and investigation.

(b)           Prior to the Closing Date, the Buyer Parties shall be entitled to meet with Seller’s employees (but, for avoidance of doubt, not Seller’s customers) related to the Business in order to introduce such employees to Buyer, complete paperwork for background checks and provide employee benefits orientation (collectively, the “Pre-Closing Activities”).  The Buyer Parties shall coordinate the conduct of the Pre-Closing Activities with Seller and the Pre-Closing Activities shall be conducted at mutually agreeable times.  Meetings with employees of Seller shall be conducted so as to minimize interference with the performance of such employee’s duties to Seller.  Seller shall use commercially reasonable efforts to cooperate with the Buyer Parties in completing the Pre-Closing Activities prior to the Closing Date.

(c)           The Parties shall adhere to the terms and conditions of the Confidentiality Agreement; provided, however, Buyer’s obligations under the Confidentiality Agreement shall terminate upon the Closing.  In the event this Agreement is terminated for any reason, upon the written request of Seller, Buyer shall promptly return to Seller, or destroy, any such information in its possession and certify in writing to Seller that it has done so.  The provisions of this Section 7.1(c) shall survive the termination of this Agreement.

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7.2           Consents of Third Parties; Governmental Authorizations.  The Parties shall use commercially reasonable efforts to seek and secure, before the Closing Date, all Governmental Authorizations, all other declarations, filings or registrations with, or notices to, any Governmental Authority and all consents, approvals or authorizations of, declarations, filings or registrations with, or notices to, any other Person, including, without limitation, all Seller Required Consents and Authorizations and all Buyer Required Consents and Authorizations, in each case in form and substance reasonably satisfactory to Buyer and Seller.

7.3           Operations of the Business Prior to the Closing.  During the period prior to the Closing Date, except as contemplated by this Agreement, Seller shall operate and carry on the Business only in the Ordinary Course of Business.  Consistent with the foregoing, Seller shall (a) keep and maintain the Purchased Assets in good operating condition and repair subject to normal wear and tear; (b) use its commercially reasonable efforts consistent with good business practice to maintain the Business intact and to preserve the goodwill of the suppliers, licensors, employees, customers, distributors and others having business relations with Seller; (c) maintain (except for expiration due to lapse of time) all Assigned Contracts in effect without change, except those Assigned Contracts which expire or terminate by their terms or as otherwise expressly provided herein; (d) comply in all material respects with the provisions of all Laws applicable to Seller, the Purchased Assets and the conduct of the Business; (e) not cancel, release, waive or compromise any Debt in its favor other than in connection with returns for credit or replacement in the Ordinary Course of Business; (f) not alter the rate or basis of compensation of any of its officers, directors or employees related to the Business other than in the Ordinary Course of Business or establish, alter or amend any Employee Plan other than as required by Law; (g) not enter into any new material Contractual Obligation, other than in the Ordinary Course of Business; (h) not enter into any Contractual Obligations with respect to capital leases, without Buyer’s prior written approval, which approval shall not be unreasonably withheld; (i) not sell, lease or otherwise dispose of any properties or assets, except in the Ordinary Course of Business; (j) not enter into any Contractual Obligation with any member of Seller or any Affiliate of any such member; (k) not take any action to change accounting policies, estimates or procedures (including, without limitation, procedures with respect to revenue recognition, payments of accounts payable and collection of accounts receivable); and (l) not take or omit to take any action that would cause the representations and warranties in Section 5.4 to be untrue at, or as of any time prior to, the Closing Date.

7.4           Notification of Certain Matters.  From the date of this Agreement until the Closing Date, Seller shall give Buyer prompt written notice upon becoming aware of any material development affecting the Purchased Assets, the Assumed Liabilities, the Business, financial condition, operations or prospects of Seller, or any event or circumstance that could reasonably be expected to result in a breach of, or inaccuracy in, any representation or warranty contained in Article V; provided, however, that no such disclosure shall be deemed to prevent or cure any such breach of, or inaccuracy in, amend or supplement any Schedule to, or otherwise disclose any exception to, any of the representations and warranties of Seller set forth in this Agreement.  Seller shall prepare and furnish to Buyer, promptly after becoming available and in any event within 30 days of the end of each calendar month, the unaudited balance sheet of Seller as of the end of such month and the related unaudited statement of income for the year-to-date period then ended, with respect to each month ending after the date of this Agreement through the Closing Date.

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7.5           No Solicitation.  From the date of this Agreement until the earlier of the Closing Date or the date of the termination of this Agreement pursuant to Article X, neither Seller nor any Key Principal shall, nor shall Seller or any Key Principal authorize or permit any officer, manager, employee, investment banker, attorney or other adviser or representative of Seller to: (a) solicit, initiate or encourage the submission of, any Acquisition Proposal (as hereinafter defined), (b) enter into any agreement with respect to any Acquisition Proposal or (c) participate in any discussions or negotiations regarding, or furnish to any Person any information for the purpose of facilitating the making of, or take any other action to facilitate any inquiries or the making of, any proposal that constitutes, or may reasonably be expected to lead to, any Acquisition Proposal.  Seller shall promptly advise Buyer of any Acquisition Proposal and any inquiries with respect to any Acquisition Proposal.  For purposes of this Section 7.5, “Acquisition Proposal” means any proposal for a merger or other business combination involving Seller or any proposal or offer to acquire in any manner, directly or indirectly, an equity interest in Seller, any voting securities of Seller or a substantial portion of the assets of Seller.

7.6           Satisfaction of Closing Conditions.  Seller and the Buyer Parties shall, and shall cause their respective representatives to, use commercially reasonable efforts to take all of the actions necessary to consummate the transactions hereunder including delivering all the various certificates, documents and instruments described in Article VIII and Article IX hereto, as the case may be.

7.7           Employee Matters.

(a)           At the Closing, Buyer Parent will enter into an Employment Agreement, in substantially the form attached hereto as Exhibit 7.7(a)(i), with each of the Key Employees (collectively, the “Employment Agreements”).  In addition, at the Closing, Buyer will enter into a Consulting Agreement, in substantially the form attached hereto as Exhibit 7.7(a)(ii), with William Bumbernick (the “Consulting Agreement”).

(b)           Except for the Key Principals and after good faith consultation with Key Principals regarding the operation of the Business by Buyer following Closing, Buyer shall have the right, but not the obligation, to offer employment, on an at will basis, effective on the Closing Date, to any or all employees of Seller with respect to the Business.  In no event shall Buyer be obligated to hire or retain any employee of Seller for any period following the Closing; provided that Buyer agrees that any employees so hired shall be hired at starting salaries or hourly wage amounts no less than their currentsalaries or hourly wage amounts, as set forth on Section 5.15(a) of the Disclosure Schedule.  Prior to the Closing, Buyer shall provide Seller with notice of Seller’s employees with respect to the Business that Buyer intends to offer employment (the “Business Employees”).  With respect to any Business Employees hired by Buyer, Buyer shall recognize and honor, subject to and in accordance with Buyer’s vacation policies, the unused and scheduled vacation schedule, as of the Closing Date, for all of such hired Business Employees, as set forth on a schedule delivered by Seller to Buyer on the Closing Date (the “Accrued Vacation Credit”), the dollar value of which shall be included as a Liability in the Closing Date Working Capital Statement. Upon reasonable request by Buyer, Seller shall cooperate with and shall not impair Buyer’s efforts to obtain the employment of such Business Employees.  Buyer and Buyer Parent agree that, for a period of three (3) years after the Closing, they will not (a) relocate Buyer’s location for operating the Business from the Center City, Philadelphia, Pennsylvania area or (b) make it reasonably necessary for any Business Employee hired by Seller to relocate his or her residence from the greater Philadelphia, Pennsylvania area in order to perform services as an employee of Buyer.

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(c)           At the time of Closing, Seller’s employment of the Key Employees and all of the Business Employees shall cease, and Seller shall pay to all such Key Employees and Business Employees (and any of its other employees) all amounts earned or accrued for wages, commissions, salaries, bonuses, holiday and vacation pay (except as otherwise provided in Section 7.7(b) with respect to the Accrued Vacation Credit), and past service claims as of the Closing Date.  Seller shall make and remit, for all periods through and including the Closing Date, all proper deductions, remittances and contributions for employees’ wages, commissions and salaries required under all Contractual Obligations and Laws (including, without limitation, for health, hospital and medical insurance, group life insurance, pension plans, workers’ compensation, unemployment insurance, income tax, FICA taxes and the like) and, wherever required by such Contractual Obligations and/or Laws, all proper deductions and contributions from its own funds for such purposes.  Seller shall be responsible for all Liabilities arising out of or based upon the termination of any of Seller’s employees (including the Key Employees and Business Employees), including, without limitation, any severance pay obligations of Seller or its Affiliates.  Seller shall comply with all provisions of the WARN Act and all similar Laws, including but not limited to all notification requirements and any severance or other payment obligations under such Laws.  However, Buyer acknowledges that Buyer will be responsible for offering COBRA continuation coverage to any “M&A qualified beneficiaries” who become entitled to COBRA continuation coverage as a result of the transactions contemplated by this Agreement, in accordance with Section 54.4980B-9 of the Treasury Regulations.

(d)           Whether or not Buyer hires on or after the Closing Date any employees of Seller, Seller shall be responsible for all compensation and benefits (including salary, bonus, accrued vacation (except as otherwise provided in Section 7.7(b) with respect to the Accrued Vacation Credit), any benefits attributable to compensation and service earned prior to the Closing, and sick pay) accruing prior to the Closing Date.  Without limiting the generality of Section 3.2, Buyer is not assuming any obligations or Liability (i) to any of Seller’s employees for sick or vacation pay or other benefits (except as otherwise provided in Section 7.7(b) with respect to the Accrued Vacation Credit), or (ii) under any Company Benefit Plan, it being acknowledged, however, that Buyer shall be obligated to offer COBRA continuation coverage to M&A qualified beneficiaries as described in Section 7.7(c).  Seller shall retain all Liability and responsibility for its Company Benefit Plans, and shall ensure that such Company Benefit Plans are duly and properly terminated with all benefits paid out to participants and beneficiaries in accordance with the terms of such Company Benefit Plans.

(e)           At the request of Buyer prior to the Closing, Seller shall continue its health care coverage for a period not to exceed the remainder of the calendar month in which the Closing occurs for those Key Principals and Business Employees hired by Buyer.  Seller shall bear the insurance premiums for such period (less the amount paid by covered employees in keeping with Seller’s usual practices) and the pro rated amount for such insurance premiums shall be taken into account pursuant to Section 7.12 hereof and reflected on the Closing Date Working Capital Statement.

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(f)           Nothing contained herein shall (i) be treated as an amendment to any particular Employee Plan of Buyer or Seller, (ii) obligate Buyer or any of its Affiliates to (A) maintain any particular Employee Plan or (B) retain the employment of any particular employee, (iii) prevent Buyer or any of its Affiliates from amending or terminating any Employee Plan, or (iv) give any third party the right to enforce any of the provisions of this Agreement.

7.8           Further Assurances.  From and after the Closing Date, upon the request of either Seller or Buyer, each of the Parties shall do, execute, acknowledge and deliver all such further acts, assurances, deeds, assignments, transfers, conveyances and other instruments and papers as may be commercially reasonable to carry out the transactions contemplated hereunder.  Seller shall not take any action that is designed or intended to have the effect of discouraging any lessor, licensor, supplier, distributor or customer of Seller or other Person with whom Seller has a relationship from maintaining the same relationship with Buyer after the Closing as it maintained with Seller prior to the Closing.  Seller shall refer all customer inquiries relating to the Business to Buyer from and after the Closing.

7.9           Transfer of Warranties.  As of the Closing Date, to the extent assignable, Seller shall be deemed to have assigned to Buyer all of its right, title and interest in and to warranties (express and implied) that continue in effect with respect to any of the Purchased Assets, and to have nominated Buyer as Seller’s true and lawful attorney to enforce such warranties against such manufacturers, and Seller shall execute and deliver such specific assignments of such warranty rights as Buyer may reasonably request.

7.10           Bulk Sales Laws.  Prior to Closing, Buyer and Seller shall deliver all notices, and make filings, with any Governmental Authorities as may be required pursuant to the Laws governing “bulk sales” of assets.  Notwithstanding any other provision hereof to the contrary, if after receiving notice, pursuant to the Laws governing “bulk sales” of assets, of the purchase transaction contemplated hereby, any Governmental Authority notifies Buyer of a potential claim against Seller, for Taxes or other amounts due, and advises Buyer that Buyer will be liable for such claim, then Buyer shall place any amounts otherwise due Seller hereunder, up to the potential amount of the claim, in escrow with the Escrow Agent pursuant to the Escrow Agreement.  Such amounts shall be held in escrow until Buyer is notified by the applicable Governmental Authority of the amount due.  Any amounts due to the Governmental Authority shall be paid from the amount held in escrow and the remaining amount held in escrow, if any, shall be paid promptly to Seller.

7.11           Use of Name; Telephone Numbers.  In furtherance of the purchase and sale of the Purchased Assets hereunder, immediately upon the Closing Seller shall cause Seller’s company name to be changed to a name completely dissimilar to “Alteva, LLC”, and thereafter shall not adopt, use, cause to be used, or approve or sanction the use of such name, or any name so similar as to cause confusion therewith, or any other trade name or assumed name listed in Schedule 2.1(f).  After the Closing, upon the request of Buyer, Seller shall file such other documents as may be necessary to terminate Seller’s use of any trade name or assumed name identified on Schedule 2.1(f).  Promptly after the Closing, Seller shall discontinue use of its existing business telephone numbers and, along with Buyer, shall take all reasonable action (at no cost to Seller) and sign all documents as may be reasonably necessary to make such telephone numbers available for use by Buyer.  Notwithstanding the provisions of this Section 7.11, Buyer acknowledges that Seller’s employees, including all Key Principals, shall be permitted to announce or reflect on their respective resumes, curriculum vitae and other factual references the fact of their previous association with and achievements on behalf of Seller (including, with respect to the Key Principals, their role as founding members of Seller).

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7.12           Prorations.  Personal property, ad valorem, use and intangible Taxes and assessments, common area maintenance charges, utility charges and rental payments with respect to the Purchased Assets and the Leased Premises and, to the extent applicable pursuant to Section 7.7(e), health insurance premiums for the calendar month during which Closing occurs (collectively, “Charges”) shall be prorated on a per diem basis and apportioned on a calendar year basis between Seller, on the one hand, and Buyer, on the other hand, as of the date of the Closing.  Seller shall be liable for that portion of such Charges relating to, or arising in respect of, periods on or prior to the Closing Date, and Buyer shall be liable for that portion of such Charges relating to, or arising in respect of, any period after the Closing Date.

7.13           Representation and Warranty Insurance.  Prior to Closing, Buyer shall obtain  from an insurer acceptable to Buyer in its sole discretion a Representation and Warranty Liability Insurance policy or policies in form acceptable to Buyer in its sole discretion, insuring against the breach by Seller of its representations or warranties set forth in this Agreement (the “Representation and Warranty Insurance”), which policy shall have limits of not less than $5,000,000 in the aggregate, shall have a retention or deductible of no more than $150,000 in the aggregate and shall contain only those exclusions as are acceptable to Buyer. The Representation and Warranty Insurance shall name the Buyer Indemnitees as insureds.  Seller agrees to reimburse and pay to Buyer an amount equal to 50 percent of the aggregate amount of the premium and underwriting fee for the Representation and Warranty Insurance (provided, however, that the amount that Seller shall pay to Buyer with respect to the Representation and Warranty Insurance shall not exceed $125,000), which amount shall be deducted from the Purchase Price pursuant to 3.2(a).

7.14           Restrictive Covenants.  Seller and, by their respective joinder in the execution hereof, Key Principals, acknowledge that Buyer and Seller are engaged in a highly competitive industry, that Seller and each of the Key Principals have knowledge of the operations of the Business, and that details of the operations of the Business constitute valuable confidential information, the disclosure of which to a competitor would diminish the value of the Purchased Assets being purchased hereunder.  Seller and each of the Key Principals further acknowledge that the usual and natural territory of the Business is and has been the area within the states of Pennsylvania, New Jersey, New York, Delaware, Maryland, Connecticut, Rhode Island and Massachusetts (the “Territory”), and that the value of the Purchased Assets being purchased hereunder would be seriously diminished if Seller or any Key Principal were to compete with Buyer in the Territory.   Buyer and the Key Principals acknowledge that the non-solicitation and non-competition covenants applicable to the Key Principals shall be exclusively set forth in their respective Employment Agreements or Consulting Agreement, as applicable, upon the consummation of Closing hereunder and, for such Key Principals, such non-solicitation and non-competition covenants shall supersede and be in lieu of the non-solicitation and non-competition covenants set forth in subsections  (b), (c) and (d), below (provided, however, that the provisions of subsection (a) shall apply to the Key Principals, in addition to any covenants set forth in their respective Employment Agreements and Consulting Agreement).   Therefore, Seller, for itself and its Affiliates other than any Key Principal who may be an Affiliate (collectively, the “Restricted Persons”), and the Key Principals covenant upon the consummation of Closing that:

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(a)           the Restricted Persons and the Key Principals will not at any time disclose, either directly or indirectly, any information concerning the customers, suppliers, price lists, catalogs, products, operations, sales techniques or other Business-related information of Seller (except information pertaining solely to the Excluded Assets) to any Person not specifically authorized in writing by Buyer to have such information; and

(b)           for a period of three (3) years from and after the Closing Date (the “Restricted Period”), the Restricted Persons will not, directly or indirectly, solicit in any manner the business of any Person which is a customer of Seller on the date hereof, with respect to products or services which are similar to or competitive with the products or services offered by Seller prior to the date hereof; and

(c)           during the Restricted Period, the Restricted Persons will not, directly or indirectly employ, or knowingly permit any Person directly or indirectly controlled by a Restricted Person, to employ, any person who was employed by Seller on the date hereof and who becomes an employee of a Buyer Party or an Affiliate of a Buyer Party, or in any manner to seek to induce any such Person to leave his employment with a Buyer Party or its Affiliate; and

(d)           during the Restricted Period, the Restricted Persons will not, directly or indirectly, compete with Buyer or become an interested party, as shareholder, director, employee, partner, investor or otherwise, in any Person which competes with Buyer within the Territory, for any business purpose competitive with the Business.  Notwithstanding the provisions of this Section 7.14, the beneficial ownership of less than five percent (5%) of the shares of stock of any corporation having a class of equity securities actively traded on a national securities exchange or over-the-counter market and not formed for the purpose of circumventing this Section 7.14 shall not be deemed to violate the provisions of this Section 7.14.

Seller and each of the Key Principals acknowledge that the foregoing restrictive covenants and the restrictive covenants set forth in the respective Employment Agreements and Consulting Agreement, as applicable, are necessary to preserve the value of the Purchased Assets being purchased hereunder, are essential elements of this Agreement and the transactions contemplated hereby and are reasonable notwithstanding the expense or hardship they may impose on it or him, and Seller and each of the Key Principals agree that they have each received fair and adequate consideration for making such restrictive covenants.  Seller and each of the Key Principals agree that if any of the provisions of this Section 7.14 are or become unenforceable, the remainder of this Section 7.14 shall nevertheless remain binding to the fullest extent possible, taking into consideration the purposes and spirit of hereof.  The Parties agree and acknowledge that the breach of this Section 7.14 will cause irreparable damage to the Buyer Parties and upon breach of any provision of this Section 7.14, the Buyer Parties shall be entitled to injunctive relief, specific performance or other equitable relief, provided, however, that the foregoing remedies shall in no way limit any other remedies which either Buyer Party may have (including, without limitation, the right to seek monetary damages), and in any event, Seller and each of the Key Principals shall be liable for and pay any and all reasonable expenses (including reasonable attorneys’ fees and expenses) incurred by the Buyer Parties in successfully enforcing the terms of this Section 7.14 on account of any such breach by them.

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(e)           Notwithstanding anything to the contrary contained in this Agreement or in the Employment Agreements and Consulting Agreement, in the event Buyer defaults in its payment of any of the Purchase Price or Additional Consideration, when due, under this Agreement, or Buyer Parent defaults in its payment or performance of any of Buyer Parent’s obligations under the Lock-Up Agreement, which breach or default continues uncured by Buyer or Buyer Parent, as applicable, for a period of thirty (30) days following written notice of any such breach, the restrictive covenants set forth in Section 7.14(b), Section 7.14(c) and Section 7.14(d) (but expressly excluding Section 7.14(a)) shall be null, void and of no further force and effect and the Restricted Parties shall forever be relieved of all restrictions thereunder.

7.15           Accounts Receivable.  During the 120 day period beginning on the day immediately following the Closing Date (the “Collection Period”), Buyer shall use commercially reasonable efforts to collect the accounts receivable of Seller included in the Purchased Assets (but Buyer shall not be obligated to bring collection actions to collect any such accounts from an account debtor).  Buyer shall apply amounts received during the Collection Period from customers in payment of accounts receivable existing as of the Closing Date to the specific outstanding invoice to which such payment relates; provided, however, that no such amounts received during the Collection Period and specifically identified as being delivered in payment of an accounts receivable existing as of the Closing Date shall be applied to Buyer’s accounts receivable generated following the Closing. If, during the Collection Period, Buyer does not collect in full any of the accounts receivable of Seller included in the Purchased Assets, then Buyer shall deliver to Seller written notice identifying all such accounts receivable that were not so collected (“Uncollected Receivables”) and the Uncollected Receivables shall not be included in the value of the accounts receivable of the Company for purposes of calculating the Closing Date Working Capital to be included in the Closing Date Working Capital Statement pursuant to Section 3.4.  Upon such adjustment of the value of the accounts receivable (to exclude the Uncollected Receivables) for purposes of calculating the Closing Date Working Capital of Seller as of the Closing Date, Buyer shall assign, without recourse, the Uncollected Receivables to Seller, and Seller shall thereafter be entitled to take reasonable actions to collect, for Seller’s benefit, the Uncollected Receivables and, if Buyer thereafter receives any payments with respect to such Uncollected Receivables, it shall promptly remit such payments to Seller.

7.16           Reporting of 2011 Revenues.  Seller (and not Buyer) shall file with USAC, when due, FCC Form 499-A for collected revenues received by Seller between January 1, 2011 and the Closing Date, and Seller (and not Buyer) shall be responsible for all Liabilities relating to such filing.  Seller (and not Buyer) shall be entitled to any credit or refund resulting from USAC’s true-up of the revenues reported on such FCC Form 499-A (a “True-Up Credit”), and if Buyer receives any credit on its account attributable to a True-Up Credit due to Seller, then Buyer shall pay to Seller, within 30 days after receiving such credit, the amount of such credit received by Buyer.  Seller covenants and agrees that it will not be dissolved prior to such filing, and shall take all such actions as may be necessary under any applicable Laws or under any applicable rules or policies of USAC to permit Seller to make such filing.

ARTICLE VIII

Conditions to Performance by Buyer.

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The obligation of Buyer to consummate the Closing is subject to the fulfillment of each of the following conditions (unless waived by Buyer in accordance with Section 12.4):

8.1           Representations and Warranties.  Each of the representations and warranties of Seller contained in this Agreement and in any document, instrument or certificate delivered pursuant to this Agreement, shall be true and correct in all respects (in the case of any representation or warranty qualified by materiality or Material Adverse Effect) or true and correct in all material respects (in the case of any representation or warranty not qualified by materiality or Material Adverse Effect), in either case, as of the date hereof and as of the Closing Date, other than representations and warranties that expressly speak only as of a specific date or time, which shall be true and correct (or true and correct in all material respects, as the case may be) as of such specified date or time.

8.2           Covenants and Agreements.  Seller shall have performed and complied in all respects with all of his, her or its respective obligations under this Agreement which are to be performed or complied with by them prior to or at the Closing.

8.3           Compliance Certificate.  Seller shall have delivered to Buyer a certificate dated as of the Closing Date, duly executed by an officer of Seller, certifying as to the satisfaction or the conditions set forth in Sections 8.1 and 8.2.

8.4           Absence of Litigation.  No Proceeding shall be initiated, pending or threatened, verbally or in writing, nor shall there be any formal or informal inquiry by a Governmental Authority, which may result in a Governmental Order (nor shall there be any Governmental Order in effect) (a) which would prevent consummation of any of the transactions contemplated hereunder, (b) which would result in any of the transactions contemplated hereunder being rescinded following consummation, (c) which would limit or otherwise adversely affect the right of Buyer to operate all or any portion of either the Business or the Purchased Assets or of the business or assets of Buyer or any of its Affiliates, or (d) would compel Buyer or any of its Affiliates to dispose of all or any portion of either the Business or the Purchased Assets or the business or assets of Buyer or any of its Affiliates.

8.5           No Material Adverse Effect.  There shall not have occurred after the date of this Agreement any event, change, effect or development that has had or is reasonably expected to have, individually or in the aggregate, a Material Adverse Effect.

8.6           Consents and Authorizations.  All actions by (including any Governmental Authorization or consents of any other Persons) or in respect of (including notice to), or filings with, any Governmental Authority or other Person that are required to consummate the transactions contemplated hereunder, and identified in Schedule 8.6 (the “Material Consents and Authorizations”) shall have been obtained or made in a manner reasonably satisfactory in form and substance to Buyer.

8.7           Release of Encumbrances on the Purchased Assets.  Buyer shall have received evidence reasonably satisfactory to it that all Encumbrances on the Purchased Assets, other than Permitted Liens, shall have been released and that termination statements with respect to all UCC financing statements relating to such Encumbrances have been, or shall be promptly following the Closing, filed at the expense of Seller.

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8.8           Other Closing Deliveries.  Seller shall deliver or shall cause to be delivered to Buyer the following:

(a)           Seller’s Customer List, updated as of the Closing Date;

(b)           lease amendment and assignment documents in a form reasonably acceptable to Buyer and Seller, duly executed by Seller and any other required Persons and in forms satisfactory to Buyer (the “Existing Lease Assignments”), pursuant to which the Existing Leases shall be assumed by Buyer, together with Landlord Estoppel Certificates and Subordination, Non-Disturbance and Attornment Agreements to the extent requested by Buyer;

(c)           the Assumption Agreement, duly executed by Seller;

(d)           the Consulting Agreement, duly executed by William Bumbernick;

(e)           a General Assignment and Bill of Sale, in a form acceptable to Buyer and Seller, duly executed by Seller;

(f)           an Employment Agreement, duly executed by each Key Employee;

(g)           a certificate of the secretary of Seller, in form and substance reasonably satisfactory to Buyer, certifying that  attached thereto is a true, correct and complete copy of  the articles or certificate of organization or formation of Seller, certified as of a recent date by the Secretary of State of Seller’s state of formation and the operating agreement of Seller,  to the extent applicable, resolutions duly adopted by the board of managers and members of Seller authorizing the performance of the transactions contemplated by this Agreement and the execution and delivery of the Transaction Documents to which it is a party and  a certificate of existence or good standing, as of a recent date, of Seller from Seller’s state of formation and a certificate of good standing, as of a recent date, of Seller from each state in which it is qualified to conduct business,  the resolutions referenced in subsection (A)(2) are still in effect and  nothing has occurred since the date of the issuance of the certificate(s) referenced in subsection (A)(3) that would adversely affect Seller’s existence or good standing in any such jurisdiction;

(h)           the Lock-Up Agreement, duly executed by Seller, if the Parent Shares are to be issued at the Closing pursuant to Section 3.2(c);

(i)           the Closing Statement, duly executed by a duly authorized officer of Seller;

(j)           the schedule reflecting the Accrued Vacation Credit, as required pursuant to Section 7.7(b); and

(k)           such other bills of sale, assignments and other instruments of transfer or conveyance, including without limitation, a domain name assignment, trademark assignment and any applicable trade name assignments, duly executed by Seller, as may be reasonably requested by Buyer to effect the sale, conveyance and delivery of the Purchased Assets to Buyer.

8.9           Representation and Warranty Insurance..  Buyer shall have obtained the Representation and Warranty Insurance, pursuant to Section 7.13.

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ARTICLE IX

Conditions to Performance by Seller.

The obligations of Seller to consummate the Closing is subject to the fulfillment of each of the following conditions (unless waived by Seller in accordance with Section 12.4):

9.1           Representations and Warranties.  Each of the representations and warranties of the Buyer Parties contained in this Agreement shall be true and correct in all respects (in the case of any representation or qualified by materiality) or true and correct in all material respects (in the case of any representation or warranty not qualified by materiality), in either case, as of the date hereof and as of the Closing Date, other than representations and warranties that expressly speak only as of a specific date or time, which shall be true and correct (or true and correct in all material respects, as the case may be) as of such specified date or time.

9.2           Covenants and Agreements.  The Buyer Parties shall have performed and complied in all respects with all of its obligations under this Agreement which are to be performed or complied with by them prior to or at the Closing.

9.3           Compliance Certificate. Buyer shall have delivered to Seller a certificate dated as of the Closing Date, duly executed by an officer of each of Buyer and Buyer Parent, certifying as to the satisfaction or the conditions set forth in Sections 9.1 and 9.2.

9.4           Absence of Litigation.  No Proceeding shall be pending or threatened in writing which may result in a Governmental Order (nor shall there be any Governmental Order in effect) (a) which would prevent consummation of any of the transactions contemplated hereunder, or (b) which would result in any of the transactions contemplated hereunder being rescinded following consummation.

9.5           Consents and Authorizations.  All Material Consents and Authorizations shall have been obtained or made in a manner reasonably satisfactory in form and substance to Seller.

9.6           Representation and Warranty Insurance..  Buyer shall have obtained the Representation and Warranty Insurance, pursuant to Section 7.13.

9.7           Other Closing Deliveries.  Subject to the fulfillment or waiver of the conditions set forth in Article VIII, at Closing, Buyer shall (a) pay the Purchase Price to Seller, in the manner provided in Section 3.2, (b) pay the Escrow Amount to the Escrow Agent, (c) pay in full or otherwise arrange for the release of all personal guaranties of Seller’s Key Principals’ (and their respective spouses) with respect to, all Guaranteed Capital Leases, pursuant to Section 2.3(c), and (d) execute, if applicable, and deliver to Seller (i) the certificate contemplated by Section 9.3, (ii) the Existing Lease Assignments, (iii) the Assumption Agreement, (iv) the Consulting Agreement, (v) the Closing Statement; (vi) the Employment Agreements, duly executed by Buyer Parent, and (vii) the Lock-Up Agreement, if the Parent Shares are to be issued at the Closing pursuant to Section 3.2(c).

ARTICLE X

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Termination.

10.1           Termination.  Notwithstanding anything contained in this Agreement to the contrary, this Agreement may be terminated at any time prior to the Closing:

(a)           by the mutual written consent of Buyer and Seller;

(b)           by either Buyer or Seller, if (i) any Governmental Authority having competent jurisdiction over any Party hereto shall have issued a final Governmental Order restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such Governmental Order is or shall have become nonappealable or (ii) there shall be adopted any Law that makes the transactions contemplated by this Agreement illegal or otherwise prohibited; provided, however, that the Party seeking to terminate this Agreement pursuant to clause (i) above shall not have initiated such Proceeding or taken any action in support of such Proceeding and shall have used its reasonable best efforts to challenge such order or other action;

(c)           by Buyer, in the event of the inaccuracy in or breach of any representation or warranty of Seller contained in this Agreement or if Seller breaches or fails to perform any of its covenants or agreements contained in this Agreement and such inaccuracy, breach or failure to perform (i) would reasonably be expected to give rise to the failure of a condition set forth in Article VIII, (ii) cannot be or has not been cured within 20 Business Days after the receipt of written notice thereof and (iii) has not been waived by Buyer; provided, that, the right to terminate this Agreement pursuant to this Section 10.1(c) shall not be available if, at the time of such purported termination, any Buyer Party has breached or failed to perform in any respect any of its representations, warranties, covenants or agreements contained in this Agreement;

(d)           by Seller, in the event of the inaccuracy in or breach of any representation or warranty of the Buyer Parties contained in this Agreement or if any Buyer Party breaches or fails to perform any of its covenants or agreements contained in this Agreement and such inaccuracy, breach or failure to perform (i) would reasonably be expected to give rise to the failure of a condition set forth in Article IX, (ii) cannot be or has not been cured within 20 Business Days after the receipt of written notice thereof and (iii) has not been waived by Seller; provided, that, the right to terminate this Agreement pursuant to this Section 10.1(d) shall not be available if, at the time of such purported termination, Seller has breached or failed to perform in any respect any of its representations, warranties, covenants or agreements contained in this Agreement; or

(e)           by either Buyer or Seller, if the Closing has not been consummated on or before August 15, 2011 (the “Closing Date Deadline”); provided, that neither Party may terminate this Agreement pursuant to this Section 10.1(e) if such Party’s breach or failure to perform any of such Party’s representations, warranties, covenants or agreements contained in this Agreement shall have been a principal cause of or resulted in the failure of the Closing to be consummated on or before the Closing Date Deadline; provided, however, that in the event the Closing has not occurred solely by reason of Section 8.6, Section 8.9, Section 9.5 or Section 9.6, the Closing Date Deadline shall automatically be extended by an additional 60 days, and the Parties shall continue their efforts pursuant to Sections 7.2 to fulfill the conditions in Section 8.6, Section 8.9, Section 9.5 or Section 9.6 by the earliest practicable date.

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10.2           Notice of Termination; Effect of Termination.

(a)           The Party desiring to terminate this Agreement pursuant to Sections 10.1(b) through 10.1(e) shall give written notice of such termination to the other Party in accordance with Section 12.7, specifying the provision or provisions hereof pursuant to which such termination is effected.  The right of any Party to terminate this Agreement pursuant to Section 10.1 shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Party hereto, whether prior to or after the execution of this Agreement.

(b)           In the event of termination of this Agreement pursuant to Section 10.1, this Agreement shall be of no further force or effect; provided, however, (i) the provisions of Section 7.1(c), Article X and Article XII shall survive termination and (ii) any termination pursuant to Section 10.1 shall not relieve any Party of any Liability for breach of any representation, warranty, covenant or agreement hereunder occurring prior to such termination.

10.3           Return of Documentation.  Following termination of this Agreement, (a) all filings, applications and other submissions made pursuant to this Agreement or prior to the execution of this Agreement in contemplation hereof shall, to the extent practicable, be withdrawn from the Governmental Authority to which made and (b) Buyer shall return or destroy (and provide proof of such destruction of) all agreements, documents, contracts, instruments, books, records, materials and other information (in any format) regarding Seller provided to Buyer or its representatives in connection with the transactions contemplated hereunder other than as reasonably necessary to enforce its rights under this Agreement.  Notwithstanding the foregoing, Buyer shall be permitted to retain one (1) copy of all such information and materials in its law department or with its outside legal counsel, and Buyer shall be permitted to retain such electronic copies of all such information and materials that have become embedded in its electronic data systems through programmed backup procedures.

ARTICLE XI

Indemnification.

11.1           Survival of Representations and Warranties. Except for the representations and warranties contained in Sections 5.2(a), 5.2(b), 5.5(a), 5.7, 5.11 and 5.14 and Sections 6.2 and 6.5(b) (collectively, the “Special Representations”), which shall survive the consummation of the transactions contemplated by this Agreement without limitation, all representations and warranties contained in this Agreement shall survive the consummation of the transactions contemplated by this Agreement for a period of two years from the Closing Date.  The right to indemnification, reimbursement or other remedy based upon the representations and warranties of any Party shall not be affected by any investigation conducted with respect to, or any knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of any such representation or warranty.  The waiver of any condition based upon the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or obligation, shall not affect the right to indemnification, reimbursement or other remedy based upon such representations, warranties, covenants and obligations.

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11.2           Indemnification by Seller. Subject to the terms and conditions of Section 11.4,  Section 11.5 and Section 11.6, Seller agrees to indemnify, defend and hold harmless Buyer and Buyer Parent and their respective successors and assigns (each a “Buyer Indemnitee”) from or against, for and in respect of, any and all damages, losses, obligations, Liabilities, demands, judgments, injuries, penalties, claims, actions or causes of action, costs, and expenses (including, without limitation, reasonable attorneys’, experts’ and consultants’ fees) (collectively, “Losses”) suffered, sustained, incurred or required to be paid by any Buyer Indemnitee arising out of, based upon, in connection with or as a result of:

(a)           any inaccuracy in or breach of any representation or warranty made by Seller in or pursuant to this Agreement;

(b)           the non-fulfillment, non-performance or other breach of any covenant or agreement to be performed by Seller pursuant to this Agreement;

(c)           the Excluded Liabilities or any Liability of any member of Seller;

(d)           all Taxes, losses, damages and deficiencies resulting from the Parties’ non-compliance with any applicable Laws of the State of Pennsylvania, the State of New Jersey or the State of New York pertaining to “bulk transfers”, including, without limitation, the New Jersey Bulk Sales Act, N.J. Stat. Sec.54:48-1 et seq. and Sec­tion 1141(c) of Article 28 of the New York Tax Law;

(e)           any arrangements or agreements made or alleged to have been made by Seller or any member of Seller with any broker, finder or other agent in connection with the transactions contemplated by this Agreement; or

(f)           any matter, item, condition or circumstance listed, contained or otherwise referred to in Section 5.7 of the Disclosure Schedule.

11.3           Indemnification by Buyer Parties.  Subject to the terms and conditions of Section 11.4 and Section 11.5, the Buyer Parties, jointly and severally hereby agree to indemnify, defend and hold harmless Seller and their respective successors and assigns (each a “Seller Indemnitee”) from or against, for and in respect of, any and all Losses suffered, sustained, incurred or required to by paid by any Seller Indemnitee arising out of, based upon, in connection with or as a result of:

(a)           any inaccuracy in or breach of any representation or warranty made by a Buyer Party in or pursuant to this Agreement;

(b)           the non-fulfillment, non-performance or other breach of any covenant or agreement to be performed by Buyer or Buyer Parent pursuant to this Agreement;

(c)           the Assumed Liabilities; or

(d)           the operation of the Business and the Purchased Assets by Buyer following Closing.

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11.4           Indemnification Procedures.

(a)           Any Party seeking indemnification hereunder (the “Indemnified Party”) shall promptly notify the other Party hereto (the “Indemnifying Party”, which term shall include all Indemnifying Parties if there be more than one) of any claim for indemnification hereunder (a “Claim”), provided that failure of the Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations under this Article XI except to the extent, if at all, that such Indemnifying Party shall have been prejudiced thereby. After an Indemnified Party has delivered a Claim requesting payment from an Indemnifying Party for any Losses, the Indemnifying Party shall, within 30 days of receipt of such Claim, (i) pay to the Indemnified Party, in immediately available funds, the amount of Losses, or (ii) deliver to the Indemnified Party written notice (a “Dispute Notice”) advising the Indemnifying Party that it disputes the Claim.  If, within 30 days of receipt of a Claim, the Indemnifying Party fails to pay said amount to the Indemnified Party or deliver to the Indemnified Party a Dispute Notice the Indemnifying Party shall be deemed to have accepted and agreed to such Claim (a “Deemed Acceptance”) and the Indemnified Party may exercise any and all legal or equitable remedies available to the Indemnified Party under this Agreement or otherwise with respect to such Losses.  If, within such 30 day period following receipt of a Claim, the Indemnifying Party delivers a Dispute Notice with respect to the Indemnified Party’s Claim, the Indemnifying Party and the Indemnified Party agree that, prior to commencing any litigation or other proceedings against the other concerning such Claim, they will negotiate in good faith to resolve any dispute with respect to such Claim and to provide each other with all relevant information relating to such dispute.  If the Indemnifying Party and the Indemnified Party are unable to resolve any such dispute within 30 days of the delivery of a Dispute Notice (or such longer period as the Parties may agree upon), the Indemnifying Party or the Indemnified Party may thereafter commence litigation or other proceedings to resolve such dispute.  The successful Party in any such proceeding shall be entitled to reimbursement from the non-successful Party for any and all of the successful Party’s costs and expenses including, without limitation, reasonable attorneys’ fees, incurred in connection with such proceeding. Notwithstanding anything herein to the contrary, if any Claim relates to a Third Party Claim, the procedures of Section 11.4(b), Section 11.4(c) and Section 11.4(d) shall apply to such Third Party Claim.

(b)           If such Claim relates to any Proceeding or demand instituted against the Indemnified Party by a third party (a “Third Party Claim”), the Indemnifying Party shall be entitled to participate in the defense of such Third Party Claim after receipt of notice of such claim from the Indemnified Party.  Within 30 days after receipt of notice of a particular matter from the Indemnified Party, the Indemnifying Party may assume the defense of such Third Party Claim, in which case the Indemnifying Party shall have the authority to negotiate, compromise and settle such Third Party Claim, if and only if the following conditions are satisfied:

(i)           the Indemnifying Party shall have confirmed in writing that it is obligated hereunder to indemnify the Indemnified Party with respect to such Third Party Claim;

(ii)           the Indemnified Party shall not have given the Indemnifying Party written notice that it has determined, in the exercise of its reasonable discretion in good faith, that matters of corporate or management policy or a conflict of interest make separate representation by the Indemnified Party’s own counsel advisable; and

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(iii)           such Third Party Claim involves only money damages and does not seek an injunction or other equitable relief;

provided, however, that no Indemnifying Party shall, except with the consent of the Indemnified Party, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all Liability in respect of such claim or litigation.  Indemnified Party’s consent shall not be unreasonably withheld with respect to monetary matters and matters that are not likely to adversely affect the business operations or reputation of the Indemnified Party.

(c)           In the event the Indemnifying Party does not elect, or is not entitled, to assume the defense of the Third Party Claim, the Indemnified Party (upon further written notice to the Indemnifying Party) shall have the right to undertake the defense, compromise or settlement of such Third Party Claim, by counsel of its own choosing, on behalf of and for the account and at the risk of the Indemnifying Party.

(d)           Notwithstanding anything in this Section 11.4 to the contrary, the Indemnified Party shall have the right, at its own cost and expense, to participate in the defense and, to the extent such participation affects the Indemnified Party, the compromise or settlement of the Third Party Claim.  In the event the Indemnifying Party undertakes defense of any Third Party Claim, the Indemnified Party, at its sole cost and expense, shall have the right to consult with the Indemnifying Party and its counsel concerning such Claim and the Indemnifying Party and the Indemnified Party and their respective counsel shall cooperate with respect to the defense of such Claim.

11.5           Limitations.

(a)           Notwithstanding any provision of Section 11.2, and except as hereafter provided, Seller shall not be required to indemnify any Buyer Indemnitee for any individual claim, pursuant to Section 11.2(a), that any representation or warranty of Seller contained in this Agreement has been breached or is inaccurate (a “Representation Claim”), where the Losses relating to such Representation Claim (or series of related representation Claims, or Representation Claims arising from the same or substantially similar facts and circumstances) is less than $10,000, individually and in the aggregate (the “Minimum Claim Threshold”).  Notwithstanding any provision of Section 11.2 and except as hereafter provided, Seller shall have no liability for indemnification with respect to Representation Claims unless and until the aggregate amount of Losses incurred by the Buyer Indemnitees (not including claims below the Minimum Claim Threshold) with respect to such Representation Claims exceeds $150,000 (the “Threshold”), at which time Seller shall be obligated to indemnify the Buyer Indemnitees for all Lossesfor Representation Claims and not merely Losses in excess of the Threshold (but excluding claims below the Minimum Claim Threshold); provided, however, that after Seller has paid or satisfied Representation Claims in an aggregate amount equal to the Threshold, the Buyer Indemnitees’ sole remedy and recourse for Representation Claims shall be claims against the Representation and Warranty Insurance Policy (except to the extent of any facts or circumstances which constitute fraud or intentional breach of this Agreement by Seller).  Notwithstanding the foregoing, the Minimum Claim Amount and the Threshold shall not apply to (i) Losses relating to any Claims under Section 11.2(b), Section 11.2(c), Section 11.2(d), Section 11.2(e) or Section 11.2(f), or (ii) Losses resulting from any facts or circumstances which constitute fraud or intentional breach of this Agreement by Seller.

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(b)           Notwithstanding any provision of Section 11.3, and except as hereafter provided, the Buyer Parties shall not be required to indemnify any Seller Indemnitee for any individual claim, pursuant to Section 11.3(a), that any representation or warranty of either Buyer Party contained in this Agreement has been breached or is inaccurate, where the Losses relating to such claim (or series of related claims, or claims arising from the same or substantially similar facts and circumstances) is less the Minimum Claim Threshold.  Notwithstanding any provision of Section 11.3 and except as hereafter provided, the Buyer Parties shall have no liability for indemnification with respect to Claims for breaches of representations and warranties under Section 11.3(a) unless and until the aggregate amount of Losses incurred by the Seller Indemnitees (not including claims below the Minimum Claim Threshold) with respect to such matters exceeds the Threshold, at which time the Buyer Parties shall be obligated to indemnify the Seller Indemnitees for all Lossesand not merely Losses in excess of the Threshold (but excluding claims below the Minimum Claim Threshold). Notwithstanding the foregoing, the Minimum Claim Amount and the Threshold shall not apply to (i) Losses relating to any claims under Section 11.3(b), Section 11.3(c) or Section 11.3(d), or (ii) Losses resulting from any facts or circumstances which constitute fraud or intentional breach of this Agreement by the Buyer Parties.

(c)           Buyer and Seller acknowledge and agree that the indemnification provided in this Article XI (including the Representation and Warranty Insurance) is the exclusive remedy with respect to any Losses arising under or in connection with this Agreement; provided, however, that (i) either Seller or the Buyer Parties may seek equitable relief, including the remedies of specific performance and injunction, with respect to the breach of any covenant or agreement to be performed after Closing, (ii) this Section 11.5(c) shall not apply with respect to any claim based on fraud or intentional breach of this Agreement, and (iii) nothing contained in this Agreement shall impair or limit in any way the rights or remedies available to any Party under or in respect of the other Transaction Documents.

(d)           Seller and the Buyer agree to treat any indemnity payments made pursuant to Sections 11.2 and 11.3 hereof as an adjustment to the Purchase Price for all Tax purposes.  All such indemnity payments shall be determined net of any insurance recoveries actually received by the Indemnified Party, as applicable, with respect to the Losses subject to such indemnification claim.  Indemnification payments under this Article XI shall be paid without reduction for any Tax Benefits available to the Indemnified Party.  However, to the extent that the Indemnified Party actually recognizes Tax Benefits as a result of any Losses, the Indemnified Party shall pay the amount of such Tax Benefits (but not in excess of the payments actually received from the Indemnifying Party on account of such Losses) to the Indemnifying Party as and when such Tax Benefits are actually recognized by the Indemnified Party.  For this purpose, the Indemnified Party shall be deemed to recognize a tax benefit (“Tax Benefit”) with respect to a Taxable period if, and to the extent that, such Indemnified Party’s  cumulative liability for Taxes through the end of such period, calculated by excluding any Tax items attributable to the Losses from all Tax periods, exceeds the Indemnified Party’s actual cumulative liability for Taxes through the end of such Tax period, calculated by taking into account any Tax items attributable to the Losses and the receipt of indemnification payments under this Article XI for all Tax periods.

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(e)           For all purposes of this Article XI, when determining the amount of any Losses associated with a breach of a representation or warranty of Seller or the Buyer Parties, as applicable, any Material Adverse Effect or other materiality qualifier contained in any such representation or warranty will be disregarded.

11.6           Limited Right of Setoff. Selleragree that any payments which may be due to Seller from Buyer pursuant to Section 3.6 of this Agreement with respect to the Holdback Amount (for avoidance of doubt, such rights shall not apply to Buyer’s obligations with respect to the Additional Consideration under Section 3.5 or Buyer’s obligations under the Lock-Up Agreement or the Employment Agreements or Consulting Agreement) may be used by Buyer to satisfy (i) Seller’s indemnification obligations with respect to any Claim for Losses required to be paid by Seller pursuant to this Article XI (other than Representation Claims pursuant to Section 11.2(a), which may not be set of pursuant to this Section 11.6), provided that a Final Resolution with respect to such Claim for Losses has occurred; and (ii) any obligation of Seller to pay when due any amounts that may become due to Buyer pursuant to Section 3.4 with respect to the adjustments to the Purchase Price, which right may be exercised at any time after such payments become due.  As used in this Agreement, a “Final Resolution”with respect to a Claim shall mean (a) a written agreement duly signed by Seller and the Buyer Parties; (b) a Deemed Acceptance under Section 11.4(a); or (c) a final order issued by a court with proper jurisdiction.  If Buyer exercises its rights in accordance with the terms of this Section 11.6, such exercise shall be and constitute a complete and absolute set-off against any such payments which may become due to Seller from Buyer, to the extent of the amount for which such right was exercised.  If, at the time any payment is due to Seller pursuant to Section 3.6, there is a pending Claim by a Buyer Indemnitee against Sellerfor indemnification pursuant to this Article XI (other than Representation Claims pursuant to Section 11.2(a)), but there has not been a Final Resolution of such Claim, then Buyer may withhold from any payment then due to Seller an amount that Buyer reasonably deems necessary to fully satisfy such Claim, and instead pay such amount to the Escrow Agent to be held pursuant to the Escrow Agreement until there is a Final Resolution of such Claim.   All remaining amounts not so set-off or paid to the Escrow Agent pursuant to this Section 11.6 shall be timely paid to Seller when due.  The Parties acknowledge and agree that the right of setoff provided in this Section 11.6 shall be the Buyer Indemnitees’ sole and exclusive source for satisfying Claims for Losses under Section 11.2(b), Section 11.2(c), Section 11.2(d), Section 11.2(e) and Section 11.2(f) (but not Representation Claims under Section 11.2(a)), except to the extent of any facts or circumstances which constitute fraud or intentional breach of this Agreement by Seller.

ARTICLE XII

General Provisions.

12.1           Expenses; Transfer Taxes.  Whether or not the transactions contemplated herein shall be consummated, except as otherwise expressly provided herein, the Parties shall pay their own respective expenses incident to the preparation of this Agreement and to the consummation of the transactions provided for herein.  All transfer, documentary, sales, use, stamp, registrations and other such Taxes applicable to, imposed upon or arising out of the transactions contemplated hereby shall be shared equally by Buyer and Seller.

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12.2           Entire Agreement; No Third Party Beneficiaries; Amendment.  This Agreement and the other Transaction Documents and the Exhibits and Schedules thereto, embodies all of the representations, warranties and agreements of the Parties with respect to the subject matter hereof, and all prior understandings, representations and warranties (whether oral or written) with respect to such matters are superseded.  Nothing in this Agreement, express or implied, is intended to or shall confer upon any Person other than the Parties any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.  This Agreement may not be amended, modified, waived, discharged or orally terminated except by an instrument in writing signed by the Party or a duly authorized officer of a corporate Party against whom enforcement of the change, waiver, discharge or termination is sought.

12.3           Severability.  The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted.  Furthermore, in lieu of such illegal, invalid or unenforceable provisions there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable.

12.4           Waiver.  Any Party to this Agreement may, by written notice to the other Parties, waive any provision of this Agreement from which such Party is entitled to receive a benefit.  The waiver by any Party hereto of a breach by another Party of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by such other Party of such provision or any other provision of this Agreement.

12.5           Public Announcements.  Prior to the Closing Date, no public announcement or other publicity regarding the existence of this Agreement or any agreements contemplated hereby or their contents or the transactions contemplated hereby or thereby shall be made by any Party or any of their respective Affiliates, officers, directors, employees, representatives or agents, without the prior written agreement of the other Parties as to form, content, timing and manner of distribution or publication.  On and after the Closing Date, each Party shall maintain confidential the terms and provisions of this Agreement and the agreements contemplated hereby and the terms of the transactions contemplated hereby and thereby.  Notwithstanding the foregoing, nothing in this Section 12.5 shall prevent any Party or its Affiliates or any other Person from (a) making any public announcement or disclosure required by applicable Law or the rules of any stock exchange (in which case the disclosing Party will provide the other Party with the opportunity to review and comment in advance of the disclosure), (b) disclosing this Agreement or any of the agreements contemplated hereby or their contents or the transactions contemplated hereby or thereby to (i) current and future officers, directors, employees, representatives and agents of such Party and its Affiliates, (ii) current and potential lenders to, investors in and purchasers of such Party and its Affiliates, and (iii) any Governmental Authority in order to provide notice, transfer any permits or licenses or obtain such Government Authorities consent in order to consummate the transaction contemplated by this Agreement, (c) disclosing the tax treatment and tax structure of the transactions contemplated hereby and all materials of any kind (including opinions or other tax analyses) that are provided to such Party relating to such tax treatment and tax structure except to the extent maintaining confidentiality of such information is necessary to comply with any applicable securities Laws or (d) enforcing its rights hereunder.

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12.6           Successors and Assigns.  This Agreement shall not be assignable by any Party hereto without the prior written consent of the other Parties; provided, however, Buyer may, upon written notice to Seller, assign this Agreement in whole or in part to any affiliate of Buyer, provided that such assignment shall not relieve Buyer or Buyer Parent of its obligations hereunder.  This Agreement shall be binding upon, and shall inure to the benefit of, and be enforceable by, the Parties and their respective legal representatives, heirs, legatees, successors and assigns.

12.7           Notice.  All notices or other communications required or permitted hereunder shall be in writing and shall be delivered personally or sent by registered or certified mail, by reputable overnight delivery or courier or by facsimile transmission, addressed as follows:

To Seller:	Alteva, LLC
	111 S. Independence Mall East Suite 700
	Philadelphia, PA 19106-2512
	Facsimile No.: (866) 406-9283
	Attn: President/CEO
	and
	William Bumbernick
	254 Jennings Way
	Mickleton, NJ 08056
With a copy to:
(which shall not constitute notice)	Sherman Silverstein
	308 Harper Drive, Suite 200
	Moorestown, NJ 08057
	Facsimile No.: (856) 661-2069
	Attn: Daniel J. Barrison, Esq.; and
	Morgan, Lewis & Bockius LLP
	1701 Market St.
	Philadelphia, PA 19103
	Facsimile No.: (215) 963-5001
	Attn: Jeffrey P. Bodle, Esq.
To Buyer or Buyer Parent:	Warwick Valley Telephone Company
	47 Main St. PO Box 592
	Warwick, NY 10990
	Facsimile No.: (845) 986-6699
	Attention: Chief Executive Officer
With a copy to:	Harter Secrest & Emery LLP
(which shall not constitute notice)	1600 Bausch & Lomb Place
	Rochester, New York 14604-2711
	Facsimile No.: (585) 232-2152
	Attn: James M. Jenkins, Esq.

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and in any case at such other address as the advisee shall have specified by written notice.  Notice of change of address shall be effective only upon receipt thereof.  All such other notices and communications shall be deemed effective (a) if by personal delivery, upon receipt, (b) if by registered or certified mail, on the seventh Business Day after the date of mailing thereof, (c) if by reputable overnight delivery or courier, on the first Business Day after the date of mailing or (d) if by facsimile transmission, immediately upon receipt of a transmission confirmation, provided notice is sent on a Business Day between the hours of 9:00 a.m. and 5:00 p.m., recipient’s time, but if not then upon the following Business Day.

12.8           Counterparts; Facsimile Signatures.  This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be an original, but all such counterparts shall constitute one and the same instrument.  The exchange of executed copies of this Agreement by facsimile, portable document format (PDF) or other reasonable form of electronic transmission shall constitute effective execution and delivery of this Agreement.

12.9           Governing Law.  This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York, without regard to conflicts-of-laws principles that would require application of any other law.

12.10           Jurisdiction.  Seller and each of the Buyer Parties hereby (a) agrees that any Proceeding in connection with or relating to this Agreement, any agreement contemplated hereby or any matters contemplated hereby or thereby, shall be brought in a court of competent jurisdiction located in Burlington County, New Jersey, whether a state or federal court; (b) agrees that in connection with any such Proceeding, such Party shall consent and submit to personal jurisdiction in any such court described in clause (a) of this Section 12.10 and to service of process upon it in accordance with the rules and statutes governing service of process; and (c) agrees to waive to the full extent permitted by Law any objection that it may now or hereafter have to the venue of any such Proceeding in any such court or that any such Proceeding was brought in an inconvenient forum.  Seller and each of the Buyer Parties shall not, and shall cause its Affiliates not to, file, initiate or bring, or participate in, any Proceeding in connection with or relating to this Agreement or any matters contemplated hereby in or before any Governmental Body other than that specified in clause (a) of this Section 12.10.

12.11           Interpretation.  The use of the masculine, feminine or neuter gender or the singular or plural form of words used herein (including defined terms) shall not limit any provision of this Agreement.  The terms “include,” “includes” and “including” are not intended to be limiting and shall be deemed to be followed by the words “without limitation” (whether or not they are in fact followed by such words) or words of like import.  The term “or” has the inclusive meaning represented by the phrase “and/or.”  Reference to a particular Person includes such Person’s successors and assigns to the extent such successors and assigns are permitted by the terms of any applicable agreement.  Reference to a particular agreement (including this Agreement), document or instrument means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof.  The terms “dollars” and “$” mean United States Dollars.  Unless Business Days are specified, all references to “days” hereunder shall mean calendar days.  The Exhibits and Disclosure Schedule identified in this Agreement are incorporated into this Agreement by reference and made a part hereof.  The Article, Section, paragraph, Exhibit and Schedule headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.  References to Articles, Sections, paragraphs, clauses, Exhibits or Schedules shall refer to those portions of this Agreement.  The use of the terms “hereunder,” “hereof,” “hereto” and words of similar import shall refer to this Agreement as a whole and not to any particular Article, Section, paragraph or clause of, or Exhibit or Schedule to, this Agreement.

[Signature page follows.]

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IN WITNESS WHEREOF, the Parties have executed this Asset Purchase Agreement as of the day and year first above written.

BUYER: WARWICK VALLEY NETWORKS, INC.
By:	/s/ Duane W. Albro
	Duane W. Albro
	President and Chief Executive Officer

BUYER PARENT: WARWICK VALLEY TELEPHONE COMPANY
By:	/s/ Duane W. Albro
	Duane W. Albro
	President and Chief Executive Officer

SELLER: ALTEVA, LLC
By:	/s/ William Bumbernick
	William Bumbernick
	Chairman

The undersigned, the Key Principals referred to in the foregoing Asset Purchase Agreement, hereby acknowledge receipt of the foregoing Asset Purchase Agreement and agree to be legally responsible for the terms and provisions applicable to them set forth in Section 7.5 and Section 7.14 therein.

KEY PRINCIPALS:

/s/ William Bumbernick

William Bumbernick

/s/ David Cuthbert

David Cuthbert

/s/ Louis Hayner

Louis Hayner

/s/ Mardoqueo Marquez

Mardoqueo Marquez

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The exhibits and schedules to the Asset Purchase Agreement are listed below.  Upon request, Warwick Valley Telephone Company will furnish supplementally a copy of any schedule or exhibit to the Securities and Exchange Commission.

EXHIBITS AND SCHEDULES

Exhibits:

Exhibit 3.2(c)	-	Form of Lock-Up Agreement
Exhibit 3.2(d)	-	Form of Escrow Agreement
Exhibit 7.7(a)(i)	-	Form of Employment Agreement
Exhibit 7.7(a)(ii)	-	Form of Consulting Agreement
Schedules:
Schedule A	-	Disclosure Schedule
Schedule 2.1(a)	-	Personal Property Assets
Schedule 2.1(b)	-	Inventory and Supplies
Schedule 2.1(f)	-	Intellectual Property Rights
Schedule 2.1(j)	-	Leases and Subleases
Schedule 2.2	-	Excluded Assets
Schedule 2.3(a)	-	Assigned Contracts
Schedule 3.3	-	Allocation Schedule
Schedule 3.5	-	Calculation of Additional Consideration
Schedule 8.6	-	Material Consents and Authorizations

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Disclosure Schedule:
Section 5.1(a)	-	Organization
Section 5.1(b)	-	Ownership
Section 5.1(c)	-	Predecessors
Section 5.2(c)	-	No Conflict
Section 5.3(a)	-	Financial Statements
Section 5.3(b)	-	Preparation of Financial Statements
Section 5.3(c)	-	No Undisclosed Liabilities
Section 5.4	-	Absence of Changes
Section 5.5(a)	-	Title to Assets
Section 5.5(b)	-	Location of Purchased Assets
Section 5.6(b)	-	Leased Premises; Existing Leases
Section 5.7	-	Taxes
Section 5.8	-	Insurance
Section 5.9(a)	-	Governmental Authorizations
Section 5.10(a)	-	Compliance with Laws
Section 5.11	-	Environmental Matters
Section 5.12	-	Litigation
Section 5.14(a)	-	Employee Plans
Section 5.15(a)	-	Employees
Section 5.15(b)	-	Employee Liabilities
Section 5.15(d)	-	Employee Compensation Liabilities
Section 5.18	-	Customer List
Section 5.23	-	Transactions with Related Parties

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EX-2.2

Exhibit 2.2

FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT

THIS FIRST AMENDMENT (this “Amendment”) to the Asset Purchase Agreement, dated as of July 14, 2011 (the “Purchase  Agreement”) by and among WARWICK VALLEY NETWORKS, INC., a New York corporation (“Buyer”); WARWICK VALLEY TELEPHONE COMPANY, a New York corporation and the sole shareholder of Buyer (“Buyer Parent”); and ALTEVA, LLC, a New Jersey limited liability company (“Seller” and, together with Buyer and Buyer Parent, the “Parties”) is made as of August 5, 2011, by and among all of Parties.

Recitals

A.           The Parties have heretofore entered into the Asset Purchase Agreement.

B.           Pursuant to Section 12.2 of the Purchase Agreement, the Parties desire to amend the Purchase Agreement, as set forth herein.

Now, Therefore, for good and valuable consideration, the Parties hereby agree as follows:

1.           Definitions.  All capitalized terms used but not otherwise defined herein shall have the meanings given to them in the Purchase Agreement.

2. Amendments to Purchase Agreement.

a.      Section 2.3(c) of the Purchase Agreement is hereby amended in its entirety to read as follows:

“(c)           Subject to the terms and conditions of this Agreement, at the Closing, Buyer shall (i) pay in full or (ii) otherwise arrange for the release of all personal guaranties of Seller’s Key Principals’ (and their respective spouses) with respect to, all Assumed Capital Lease Obligations guaranteed by any of the Key Principals or their respective spouses (the “Guaranteed Capital Leases”), which Guaranteed Capital Leases are identified as such on Schedule 2.3(a).  As used in this Agreement, “Closing Date Lease Payment Amount” means the aggregate amount that Buyer pays at Closing for purposes of paying in full, or obtaining any such release of guaranty under, the Guaranteed Capital Leases pursuant to this Section 2.3(c), plus the aggregate amount that Buyer pays at Closing to satisfy any other Assumed Capital Lease Obligations that Buyer satisfies at Closing.”

b.      Section 3.4(a) of the Purchase Agreement is hereby amended in its entirety to read as follows:

“(a)           After completion of the Collection Period but within 145 days following the Closing Date, Buyer and Seller shall prepare, and Buyer shall cause WithumSmith+Brown, PC to audit, a statement of Closing Date Working Capital as at the Closing Date, together with a written report setting forth their determination of the adjustment, if any, to the Purchase Price in accordance with this Section 3.4 (collectively, the “Closing Date Working Capital Statement”).  The Closing Date Working Capital Statement shall be prepared in accordance with GAAP and in a manner consistent with Seller’s preparation of the Financial Statements and Seller’s application of GAAP in connection with such preparation.  Buyer shall pay the fees and expenses of WithumSmith+Brown, PC in auditing the Closing Date Working Capital Statement.  The Parties agree that, for purposes of calculating the Closing Date Working Capital, (i) the value of Seller’s inventory, if any, shall be determined based on a physical inventory conducted by Buyer and Seller as of a date reasonably proximate to the Closing Date, as determined by Buyer and Seller; (ii) in lieu of any other reserve for doubtful accounts that would otherwise be set forth in the Closing Date Working Capital Statement, all Uncollected Receivables shall be excluded from the Closing Date Working Capital (unless any such Uncollected Receivables are collected by Buyer prior to the final determination of the Closing Date Working Capital Statement, in which case the amount so collected shall be included in Closing Date Working Capital); (iii) the amount of the Assumed Payables shall include accounts payable or other Liabilities of Seller accrued prior to and properly payable as of Closing that Buyer pays or otherwise satisfies, whether or not such accounts payable or Liabilities are identified on Schedule 2.3(a); and (iv) no portion of the Assumed Capital Lease Obligations shall be included as a current Liability on the Closing Date Working Capital Statement.”

c.      The first sentence of Section 5.3(b) of the Purchase Agreement is hereby amended by replacing the clause “Except as disclosed in Section 5.3(b) of the Disclosure Schedule” with the following: “Except as disclosed in Section 5.3(a) of the Disclosure Schedule”.  In addition, the Table of Exhibits and Schedules contained in the Purchase Agreement is hereby amended by deleting any reference to Section 5.3(b) of the Disclosure Schedule.

d.      Section 5.9(a) of the Purchase Agreement is hereby amended by deleting from Section 5.9 the following sentence: “Section 5.9(a) of the Disclosure Schedule indicates which of the Seller Governmental Authorizations shall be assigned to Buyer at the Closing.”

e.      Schedule A (Disclosure Schedule) to the Purchase Agreement is hereby amended to add two new Sections, referred to as Schedules 5.10(a) and Schedule 5.11, in the form attached to this Amendment.

3.           Effect of Amendment.  Except for the terms, conditions and provisions modified by this Amendment, the Purchase Agreement shall remain in full force and effect pursuant to the terms thereof.

4.           Binding Effect.  Subject to the provisions of the Purchase Agreement, this Amendment shall be binding upon and shall inure to the benefit of the Parties and their respective successors and permitted assigns.  The Parties acknowledge that the consent or approval of the Key Principals is not required, pursuant to Section 12.2 of the Purchase Agreement, to give effect to the amendments set forth herein.

5.           Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

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In Witness Whereof, the Parties have signed this Amendment as of the date first written above.

BUYER: WARWICK VALLEY NETWORKS, INC.
By:	/s/ Duane W. Albro
	Duane W. Albro
	President and Chief Executive Officer

BUYER PARENT: WARWICK VALLEY TELEPHONE COMPANY
By:	/s/ Duane W. Albro
	Duane W. Albro
	President and Chief Executive Officer

SELLER: ALTEVA, LLC
By:	/s/ William Bumbernick
	William Bumbernick
	Chairman

Upon request, Warwick Valley Telephone Company will furnish supplementally to the Securities and Exchange Commission a copy of any schedule referenced in this First Amendment to Asset Purchase Agreement.

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EX-10.1

Exhibit 10.1

Loan No. RX0886-S1

SECOND SUPPLEMENT

TO THE MASTER LOAN AGREEMENT

This SECOND SUPPLEMENT TO THE MASTER LOAN AGREEMENT (this “Second Supplement”), is entered into as of August 3, 2011, by and between COBANK, ACB (“CoBank”) and WARWICK VALLEY TELEPHONE COMPANY (the “Borrower”), and supplements the Master Loan Agreement, dated as of February 18, 2003, by and between CoBank and the Borrower (as the same has been amended on the date hereof and as the same may be amended, modified, supplemented, extended or restated from time to time, the (“MLA”)).  Capitalized terms used and not otherwise defined in this Second Supplement shall have the meanings assigned to them in the MLA.

SECTION 1.   The Revolving Loan.On the terms and conditions set forth in the MLA and this Second Supplement, CoBank agrees to make one or more advances (collectively, the “Loan”) to the Borrower during the Availability Period (as hereinafter defined in Section 3 hereof) in an aggregate principal amount outstanding at any one time not to exceed $5,000,000 (the “Commitment”).  The Commitment shall expire at 11:00 am Mountain time on August 2, 2012 (the “Maturity Date”).  Under the Commitment, amounts borrowed and later prepaid may be reborrowed during the Availability Period.

SECTION 2.   Purpose.  The proceeds of the Loan shall be used by the Borrower to (A)  finance capital expenditures, working capital and general corporate expenditures of the Borrower, including acquisitions expressly permitted by CoBank in writing, and (B) pay the expenses and fees incurred by the Borrower in connection with the closing of the Loan.  The Borrower agrees that the proceeds of the Loan shall be used only for the purposes set forth in this Section 2.

SECTION 3.   Availability.   Subject to Sections 2 and 5 of the MLA and Section 9 hereof, during the period commencing on the date on which all conditions precedent to the initial advance under the Loan were satisfied (the “Closing Date”) and ending on the Business Day immediately preceding the Maturity Date (the “Availability Period”), advances under the Loan shall be made as provided in the MLA.

SECTION 4.   Interest.

(A)           Rate Options; Etc.  The unpaid principal balance of the Loan shall accrue interest at the rate or rates determined or selected by the Borrower in accordance with this Section 4(A).

(1)           Weekly Quoted Rate Option (Variable Rate Option).  As to any portion of the unpaid principal balance of the Loan selected by the Borrower (any such portion, and any portion selected pursuant to Section 4(A)(2) hereof, is hereinafter referred to as a “Portion” of the Loan), interest shall accrue pursuant to this variable rate option at a variable annual interest rate (the “Variable Rate”) equal at all times to the rate of interest established for the Borrower by CoBank in CoBank’s sole and absolute discretion on the first Business Day of each week.  The rate of interest so established by CoBank will be effective from and including the first Business Day of each week to and excluding the first Business Day of the next week.  Each change in the Variable Rate shall be applicable to the Portion of the Loan subject to this option and information about the then current Variable Rate shall be made available upon telephonic request.

Second Supplement to Master Loan Agreement/Warwick Valley Telephone Company

Loan No. RX0886-S1

(2)           LIBOR Option.  As to any Portion or Portions of the Loan selected by the Borrower, interest shall accrue pursuant to this LIBOR option at a fixed rate per annum equal to LIBOR (as hereinafter defined in this Section 4(A)(2)) plus 3.50%.  Under this option:  (i) rates may be fixed for Interest Periods (as hereinafter defined in this Section 4(A)(2)) of one, two, three, or six months, as selected by the Borrower; (ii) amounts fixed shall be in increments of $100,000 or multiples thereof; and (iii) rates may only be fixed on a Banking Day (as hereinafter defined in this Section 4(A)(2)) on three Banking Days’ prior written notice. “LIBOR” means the rate (rounded upward to the nearest thousandth and adjusted for reserves required on Eurocurrency Liabilities (as hereinafter defined in this Section 4(A)(2)) for banks subject to FRB Regulation D (as hereinafter defined in this Section 4(A)(2)) or required by any other federal law or regulation)), as quoted by the BBA at 11:00 a.m. London time and published by Bloomberg, on the date the Borrower elects to fix a rate under this option for the offering of U.S. dollar deposits in the London interbank market for the Interest Period designated by the Borrower, as published by Bloomberg or another major information vendor listed on BBA’s official website.  “Banking Day” shall mean a day on which CoBank is open for business, dealings in U.S. dollar deposits are being carried out in the London interbank market, and banks are open for business in New York City and London, England.  “Interest Period” shall mean the time period chosen by the Borrower during which the chosen fixed rate is to apply to a Portion of the Loan, which period commences on the day a rate fixed under Section 4(A)(4) hereof becomes effective.  The Interest Period for Portions accruing interest at the LIBOR option shall end on the day in the next calendar month or in the month that is two, three or six months thereafter which corresponds numerically with the day the Interest Period commences; provided, however, that:  (a) in the event such ending day is not a Banking Day, such period shall be extended to the next Banking Day unless such next Banking Day falls in the next calendar month, in which case it shall end on the preceding Banking Day; and (b) if there is no numerically corresponding day in the month, then such period shall end on the last Banking Day in the relevant month.  No Interest Period shall extend beyond the Maturity Date.  “Eurocurrency Liabilities” has the meaning as set forth in FRB Regulation D.  “FRB Regulation D” means Regulation D as promulgated by the Board of Governors of the Federal Reserve System, 12 CFR Part 204, as amended from time to time.

Upon the occurrence and during the continuance of a Potential Default or an Event of Default, as the Interest Periods for Portions of the Loan accruing interest at a LIBOR option expire, at CoBank’s option in its sole and absolute discretion and upon notice to the Borrower, such Portions of the Loan shall be converted to the Variable Rate option and the LIBOR option will not be available to the Borrower until all Potential Defaults or Events of Default are no longer continuing.

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Second Supplement to Master Loan Agreement/Warwick Valley Telephone Company

Loan No. RX0886-S1

(3)           Rate Combinations.  Notwithstanding the foregoing, at any one time there may be no more than a total of fivePortions of the Loan accruing interest pursuant to any fixed rate option.

(4)           Selection and Changes of Rates.  The Borrower shall select the rate option or options applicable to any Portion of the Loan at the time it requests such Portion of the Loan.  Thereafter, with respect to Portions of the Loan accruing interest at the Variable Rate, the Borrower may, on any Business Day, subject to Section 4(A)(2) hereof, elect to have the LIBOR option apply to such Portion.  In addition, with respect to any Portion of the Loan accruing interest pursuant to the LIBOR option, the Borrower may, subject to Section 4(A)(2) hereof, on the last day of the Interest Period for such Portion, elect to fix the interest rate accruing on such Portion for another Interest Period pursuant to the LIBOR option.  From time to time the Borrower may elect, on a Business Day prior to the expiration of the Interest Period for any Portion of the Loan accruing interest pursuant to the LIBOR option, and upon payment of the applicable Surcharge (as defined in, and calculated pursuant to, Section 6 hereof) to convert all, but not part, of such Portion of the Loan so that it accrues interest at the Variable Rate or a combination of the Variable Rate and the LIBOR option, for a new Interest Period or Interest Periods selected in accordance with Section 4(A)(2) hereof.  Except for the initial selection, all interest rate selections provided for herein shall be made by telephonic or written request of an authorized employee of the Borrower by 12:00 noon, Eastern time, on the relevant day; in the case of Loans under the LIBOR option, all such elections must be made in writing.  In taking actions upon telephonic requests, CoBank shall be entitled to rely on (and shall incur no liability to the Borrower in acting upon) any request made by a person identifying himself or herself as one of the persons authorized by the Borrower to request the Loan or select interest rates hereunder so long as any funds advanced are wired to an account previously designated by the Borrower.

(5)           Accrual of Interest.  Interest shall accrue pursuant to the LIBOR option from and including the first day of the applicable Interest Period to but excluding the last day of the Interest Period.  If the Borrower elects to refix the interest rate on any Portion of the Loan accruing interest pursuant to one of the LIBOR option pursuant to Section 4(A)(4) hereof, the first day of the new Interest Period shall be the last day of the preceding Interest Period.  In the absence of any such election, interest shall accrue on such Portion at the Variable Rate from and including the last day of such Interest Period.  If the Borrower elects to convert from the LIBOR option to the Variable Rate option pursuant to Section 4(A)(4) hereof upon payment of the applicable Surcharge as provided in Section 6 hereof, interest at the applicable LIBOR shall accrue through the day before such conversion and either (i) the first day of any new Interest Period shall be the date of such conversion, or (ii) interest at the Variable Rate shall accrue on the Portion of the Loan so converted from and including the date of conversion.

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Second Supplement to Master Loan Agreement/Warwick Valley Telephone Company

Loan No. RX0886-S1

(B)           Payment and Calculation.  The Borrower shall pay interest on the Loan quarterly in arrears on the 20th day of each January, April, July and October, commencing on October 20, 2011, upon any prepayment (whether due to acceleration or otherwise) and on the Maturity Date; provided, however, in the event that the Borrower elects to fix all or a portion of the Loan under the LIBOR option, interest shall be payable at the maturity of the applicable Interest Period, or, if such Interest Period exceeds three (3) months, interest on such Portion shall be payable in arrears on each quarterly anniversary date of the date such Portion was fixed under the LIBOR option.  Interest shall be calculated on the actual number of days the Loan, or any part thereof, is outstanding on the basis of a year consisting of 360 days.  In calculating accrued interest, the date the Loan is made shall be included and the date any principal amount of the Loan is repaid or prepaid shall be excluded as to such amount.

SECTION 5. Loan Fees.

(A)           Commitment Fee.  During the period commencing on the date hereof and ending on the Maturity Date, the Borrower shall pay to CoBank a commitment fee on the average daily unused portion of the Commitment at a rate of 0.500% per annum (calculated on a 360-day basis), payable quarterly in arrears on the 20th day of each January, April, July and October, commencing on October 20, 2011.

(B)           Origination Fee.  In consideration of the Commitment, the Borrower shall pay to CoBank a non-refundable origination fee in the amount of $50,000, which shall be paid in full upon execution and delivery by CoBank and the Borrower of this Second Supplement.

SECTION 6. Prepayment and Surcharge.  The Borrower may, (i) on any Business Day prepay in full or in part any Portion of the Loan accruing interest at the Variable Rate, and (ii) on two (2) Business Day’s prior written notice prepay in full or in part any Portion of the Loan accruing interest at pursuant to the LIBOR option.  Notwithstanding the foregoing, the Borrower’s right to prepay any amount accruing interest at pursuant to a fixed rate option (whether such payment is made voluntarily, as a result of an acceleration, or otherwise) shall be conditioned upon the payment of a prepayment Surcharge as defined and calculated below.  For purposes of calculating the Surcharge provided for in this Section 6, early conversion of a Portion of the Loan accruing interest pursuant to the LIBOR option so that it accrues interest at a different rate pursuant to Section 4(A)(4) hereof shall be deemed a prepayment in full of that Portion of the Loan.  Upon any such early conversion or any prepayment of any Portion of the Loan accruing interest pursuant to a fixed rate option, and as a condition to any voluntary prepayment, the Borrower shall pay to CoBank, on the date of such prepayment or early conversion, a surcharge (“Surcharge”) in an amount equal to the greater of (a) the present value of any funding losses incurred or imputed by CoBank to have been incurred as a result of such prepayment for the period such amount was scheduled to have been outstanding at such LIBOR and (b) $300.  Such Surcharge, including the amount of any funding losses incurred by CoBank, shall be determined and calculated in accordance with methodology established by CoBank.

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Second Supplement to Master Loan Agreement/Warwick Valley Telephone Company

Loan No. RX0886-S1

SECTION 7.   Termination of Commitment; Repayment. The Commitment will terminate in full on the Maturity Date.  If not sooner required to be repaid, all advances under the Loan and all other amounts due and owing hereunder and under the Loan Documents relating to the Loan shall be due and payable on the Maturity Date.

SECTION 8.   Security.  The Loan shall be unsecured, except with respect to the equity of the Borrower in CoBank, as described in Section 4 of the MLA.

SECTION 9.   Additional Conditions Precedent.

(A)           In addition to the conditions precedent set forth in the MLA, CoBank’s obligation to make the initial advance under the Loan is subject to the satisfaction of the condition precedent on or before the date of such advance that CoBank receive, in form and content acceptable to CoBank, opinions of counsel (who shall be acceptable to CoBank) for the Borrower; provided, however, such opinions may take exception for limitations imposed by or resulting from bankruptcy, insolvency, moratorium, reorganization or other laws affecting creditors’ rights generally and may conform to the generally recognized principles of opinions among practicing counsel in the States of New York and New Jersey or promulgated by a recognized national association of counsel.

(B)           In addition to the conditions precedent set forth in the MLA, CoBank’s obligation to make an advance under the Loan, including the initial advance, is subject to the satisfaction of each of the following conditions precedent on or before the date of such advance:

(1)                 No Material Adverse Change.  That from December 31, 2010 to the date of such advance there shall not have occurred any event which has had or could reasonably be expected to have a Material Adverse Effect on the business or prospects of the Borrower;

(2)                 Representations and Warranties.  That the representations and warranties of the Borrower contained in the MLA, this Second Supplement and any other Loan Document to which it is a party; be true and correct in all material respects on and as of the date of such advance, as though made on and as of such date; and

(3)                 Other Information.  That CoBank receive such other information regarding the condition, financial or otherwise, and operations of the Borrower as CoBank shall request and such other opinions, certificates or documents as CoBank shall request.

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Second Supplement to Master Loan Agreement/Warwick Valley Telephone Company

Loan No. RX0886-S1

IN WITNESS WHEREOF, the Borrower has caused this Second Supplement to be executed and delivered, and CoBank has caused this Second Supplement to be executed and delivered, each by their respective duly authorized officer as of the date first shown above.

WARWICK VALLEY TELEPHONE COMPANY
By:	/s/ Duane W. Albro
	Duane W. Albro
	President and Chief Executive Officer

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Second Supplement to Master Loan Agreement/Warwick Valley Telephone Company

Loan No. RX0886-S1

[Signatures Continued from Previous Page]

COBANK, ACB
By:	/s/ Gary Franke
	Gary Franke
	Vice President

EX-10.2

Exhibit 10.2

Loan No. RX0886-S1

PROMISSORY NOTE

WARWICK VALLEY TELEPHONE COMPANY

$5,000,000Dated: August 3, 2011

FOR VALUE RECEIVED, the undersigned promises to pay to COBANK, ACB (“Payee”), or its order, at the times and in the manner set forth in that certain Master Loan Agreement, dated as of February 18, 2003, as it may be amended, modified, supplemented, extended or restated from time to time (the “MLA”), and in that certain Second Supplement to the Master Loan Agreement, dated as of even date herewith, by and between the undersigned and Payee (as it may be amended, modified, supplemented, extended or restated from time to time, the “Second Supplement”; the MLA and the Second Supplement collectively, the “Loan Agreement”), the principal sum of FIVE MILLION DOLLARS AND 00/100 ($5,000,000) or such lesser amount as may be advanced hereunder from time to time, together with interest on the unpaid principal balance hereof at the rate or rates provided for in the Loan Agreement.

This note is given for one or more advances to be made by the Payee to the undersigned pursuant to the Loan Agreement, all of the terms and provisions of which (including, without limitation, provisions regarding acceleration of the maturity hereof and application of default interest and of a surcharge to payments hereunder) are hereby incorporated by reference. The total of such advances may exceed the face amount of this note, but the unpaid principal balance shall not at any time exceed such face amount. Advances, accrued interest, and payments shall be posted by the Payee upon an appropriate accounting record, which record (and all computer printouts thereof) shall constitute prima facie evidence of the outstanding principal and interest on the advances. Any amount of principal hereof which is not paid when due, whether at stated maturity, by acceleration or otherwise, shall bear interest from the date when due until said principal amount is paid in full, payable on demand, at a rate per annum set forth in Section 10(D) of the MLA.

The makers or endorsers hereof hereby waive presentment for payment, demand, protest, and notice of dishonor and nonpayment of this note, and all defenses on the ground of delay or of any extension of time for the payment hereof which may be hereafter given by the holder or holders hereof to them or to anyone who has assumed the payment of this note, and it is specifically agreed that the obligations of said makers or endorsers shall not be in anywise affected or altered to the prejudice of the holder or holders hereof by reason of the assumption of payment of the same by any other person or entity.

Should this note be placed in the hands of an attorney for collection or the services of any attorney become necessary in connection with enforcing its provisions, the undersigned agrees to pay reasonable attorneys’ fees, together with all costs and expenses incident thereto, to the extent allowed by law. Except to the extent governed by applicable federal law, this note shall be governed by and construed in accordance with the laws of the State of Colorado, without reference to choice of law doctrine. Whenever possible each provision of this note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this note shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this note. Whenever in this note reference is made to the Payee or the undersigned, such reference shall be deemed to include, as applicable, a reference to their respective successors and assigns. The provisions of this note shall be binding upon and shall inure to the benefit of such successors and assigns. The undersigned’s successors and assigns shall include, without limitation, a receiver, trustee or debtor in possession of or for the undersigned.

IN WITNESS WHEREOF, the Borrower has caused this note to be executed and delivered by its duly authorized officer as of the date first shown above.

WARWICK VALLEY TELEPHONE COMPANY
By:	/s/ Duane W. Albro
	Duane W. Albro
	President and Chief Executive Officer

EX-10.3

Exhibit 10.3

EMPLOYMENT AGREEMENT

This Employment Agreement (this “Agreement”) is made and entered into as of August 5, 2011 and shall be effective August 5, 2011 (the “Effective Date”), by and between Warwick Valley Telephone Company (the “Company”) and David Cuthbert (“Executive”).

RECITALS:

A.           The Company’s subsidiary, Warwick Valley Networks, Inc. (“WVN”), has purchased from Alteva, LLC, a New Jersey limited liability company (“Seller”), substantially all of the assets of Seller used in its business of providing telecommunications products and services, pursuant to an Asset Purchase Agreement dated as of July 14, 2011, as amended (the “Purchase Agreement”) by and among the Company, WVN and Seller.

B.           As a condition precedent to the transactions contemplated by the Purchase Agreement, the Company and Executive agreed to enter into this Agreement.

Now, Therefore, in consideration of the mutual promises contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is agreed as follows:

1. Employment.

The Company hereby agrees to employ Executive, and Executive hereby agrees to be employed by the Company, upon the terms and subject to the conditions set forth in this Agreement.

2. Term of Employment.

(a)           The period of Executive’s employment under this Agreement shall begin as of the Effective Date and shall continue until August 5, 2013 (the “Initial Term”), and shall be renewed automatically for successive one-year periods thereafter (each, a “Renewal Period”), unless Executive or the Company gives written notice of nonrenewal to the other at least sixty (60) days before the expiration of the Initial Term or any subsequent Renewal Period.

(b)           Notwithstanding the foregoing, Executive’s employment may be terminated by the Company or by Executive at any time for any reason.

(c)           As used in this Agreement, the term “Employment Term” refers to Executive’s period of employment from the Effective Date until the date his employment terminates.

3. Duties and Responsibilities.

(a)           The Company will employ Executive as its Executive Vice President, Chief Operating Officer.  In such capacity, Executive shall perform the customary duties and have the customary responsibilities of such positions and such other duties as may be assigned to Executive from time to time by the President and Chief Executive Officer (the “President”) pursuant to the President’s properly delegated authority. Executive will exercise his judgment in accordance with the highest ethical standards.

(b)           Executive agrees to faithfully serve the Company, devote his full working time, attention and energies to the business of the Company, its subsidiaries and affiliated entities, and perform the duties under this Agreement to the best of his abilities.

(c)           Executive agrees (i) to comply with all applicable laws, rules and regulations; (ii) to comply with the Company’s rules, procedures, policies, requirements, and directions; and (iii) not to engage in any other business or employment without the written consent of the Company except as otherwise specifically provided herein.

(d)           Executive acknowledges that he has received a copy of the Company’s Code of Ethics, that he has read the Code of Ethics and that this Agreement does not supersede that policy.

4. Compensation and Benefits.

(a)           Base Salary.  During the Employment Term, the Company shall pay Executive a base salary at the annual rate of $235,000 per year or such higher rate as may be determined annually by the Company (“Base Salary”). Such Base Salary, less applicable withholdings, shall be paid in accordance with the Company’s standard payroll practice for executives.

(b)           Annual Bonus.  During the Employment Term, Executive will be eligible to receive an Annual Bonus each year, as determined in accordance with the Applicable Plan approved by the Board (or Compensation Committee as the case may be) for Executive for such year. An example of the Applicable Plan for 2011 is attached as Appendix A to this Agreement for illustration purposes only. Subsequent measurement metrics will be determined by the Board (or Compensation Committee as the case may be) at their sole discretion for 2011 and each subsequent year. The Board (or Compensation Committee as the case may be) has the right to change or eliminate the Applicable Plan in its sole discretion at any time. The Annual Bonus to be paid to Executive in 2012 shall be based on the Company’s financial performance in 2011, continuing in like progression with the Annual Bonus to be paid in any year based on the Company’s prior year’s performance. Such Annual Bonus, less applicable withholdings, shall be paid within 2.5 months of the end of the taxable fiscal year during which it was earned. Except as otherwise provided by Section 7, in order to be eligible to receive payment of any portion of an Annual Bonus, Executive must be actively employed by the Company on the payment date. Notwithstanding the foregoing, Executive acknowledges that whether any Annual Bonus is to be paid for a given year and the amount of that Annual Bonus is completely at the discretion of the Board (or Compensation Committee as the case may be).

(c)           Incentive Compensation.  Executive shall be eligible to receive incentive compensation (“Incentive Compensation”) each year, in accordance with the Applicable Plan approved by the Board (or Compensation Committee as the case may be) for Executive for such year. The Incentive Compensation shall be in the form of equity-based awards (stock options and restricted stock of the Company) under the Company’s incentive compensation plans. An example of the Applicable Plan for 2011 is attached as Appendix A to this Agreement for illustration purposes only. Subsequent measurement metrics will be determined by the Board (or Compensation Committee as the case may be) at their sole discretion for 2011 and each subsequent year. The Board (or Compensation Committee as the case may be) has the right to change or eliminate the Applicable Plan in its sole discretion at any time. The Incentive Compensation to be paid to Executive in 2012 shall be based on the Company’s financial performance in 2011, continuing in like progression with the Incentive Compensation to be paid in any year based on the Company’s prior year performance. Such Incentive Compensation shall be delivered to Executive within 2.5 months of the end of the taxable fiscal year during which it was earned. Except as otherwise provided by Section 7, in order to be eligible to receive payment of any portion of the Incentive Compensation, Executive must be actively employed by the Company on the payment date. Notwithstanding the foregoing, Executive acknowledges that whether any Incentive Compensation is to be paid for a given year and the amount of that Incentive Compensation is completely at the discretion of the Board (or Compensation Committee as the case may be).

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(d)           Benefit Plans, Fringe Benefits and Vacation.  Executive shall be eligible to participate in any 401(k) savings plan generally made available by the Company to other executives in accordance with the eligibility requirements of such plans and subject to the terms and conditions set forth in such plans, except for any pension benefit. Executive shall be eligible to participate in any health and welfare plans made available to other executives, including, but not limited to, any medical and dental benefits plan, life insurance plan, short-term and long-term disability plans, or other executive benefit or fringe benefit plan. Executive will also be eligible to receive at least four (4) weeks of vacation per calendar year, accrued and earned on a daily basis, as well as other types of paid time-off (e.g., holidays, personal days, absence due to illness, etc.) according to the Company’s vacation and paid time-off policy.

(e)           Expense Reimbursement.  The Company shall promptly reimburse Executive for the ordinary and necessary business expenses incurred by Executive in the performance of the duties under this Agreement in accordance with the Company’s customary practices applicable to executives, provided that such expenses are incurred and accounted for in accordance with the Company’s expense reimbursement policy. Reimbursement shall be made as soon as administratively practicable following Executive’s submission of the necessary documents and receipts required under the Company’s expense reimbursement policy, but in no event later than December 31st of the calendar year following the calendar year in which the expense was incurred.

(f)           Concession.  Executive will be provided with paid PDA or mobile phone service for one electronic device, as well as concession Telephone and Toll Service and Internet Service consistent with those benefits available to other executives.

(g)           Indemnification.  Executive will be covered by the Company’s standard Director’s and Officer’s Indemnification Agreement, providing for indemnification consistent with the New York Business Corporation Law and the Company’s by-laws.

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5. Termination of Employment.

Executive’s employment may be terminated by the Company or by Executive at any time for any reason. Upon termination, Executive shall be entitled to receive the compensation and benefits described in Section 7. Executive’s employment will terminate under the following conditions:

(a)           Death.  Executive’s employment shall terminate upon Executive’s death.

(b)           Total Disability.  The Company may terminate Executive’s employment upon his becoming Totally Disabled. For purposes of this Agreement, Executive shall be “Totally Disabled” if Executive is physically or mentally incapacitated so as to render Executive incapable of performing his usual and customary duties under this Agreement without reasonable accommodation. Executive’s receipt of disability benefits under the Company’s long-term disability plan, if any, or receipt of Social Security disability benefits shall be deemed conclusive evidence of Total Disability for purpose of this Agreement; provided, however, that in the absence of Executive’s receipt of such longterm disability benefits or Social Security benefits, the Company may, in its reasonable discretion (but based upon appropriate medical evidence), determine that Executive is Totally Disabled.

(c)           Termination by the Company for Cause.

(i) The Company may terminate Executive’s employment for Cause at any time after providing written notice to Executive.

(ii) For purposes of this Agreement, the term “Cause” shall mean any of the following: (A) conviction of a crime or a nolo contendere plea involving the alleged commission by Executive of a felony or of a criminal act involving, in the good faith judgment and sole discretion of the Board, fraud, dishonesty, or moral turpitude; (B)  refusal or failure to perform employment duties reasonably requested by the Board after fifteen (15) days’ written notice by certified mail of such failure to perform, specifying that the failure constitutes cause (other than as a result of vacation, sickness, illness or injury); (C) fraud or embezzlement as determined by the Board; (D) gross misconduct or gross negligence in connection with the business of the Company or an affiliate which has a substantial adverse effect on the Company or the affiliate; (E) breach of the terms of the confidentiality, non-solicitation and non-competition provisions of Section 9 or (F) job performance which, in the collective determination of the CEO, Chairman of the Board and Chairman of the Audit Committee, consistently or significantly, fails to fulfill the duties and responsibilities contemplated by this Agreement, as generally described in Section 3.

(iii) Regardless of whether Executive’s employment initially was considered to be terminated for any reason other than Cause, Executive’s employment will be considered to have been terminated for Cause for purposes of this Agreement if the Board subsequently determines that Executive engaged in an act constituting Cause during the Employment Period or Executive breached the terms of the terms of the confidentiality, non-solicitation and non-competition provisions of Section 9 after his termination.

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(d)           Termination by the Company Without Cause.  The Company may terminate Executive’s employment at any time under this Agreement without Cause after providing written notice to Executive.

(e)           Termination by Executive.  Executive may terminate his employment under this Agreement after providing thirty (30) days’ written notice to the Company.

(f)           Expiration of Initial Term or Renewal Period.  In the event that either party gives written notice of non-renewal of the Initial Term or a Renewal Period, as applicable, pursuant to Section 2, Executive’s employment shall terminate upon the expiration of the Initial Term or Renewal Period.

6. Return of Property and Information.

Executive agrees that when his employment with the Company ends, he will immediately return to the Company all property, data, information and knowledge which are in his possession or under his control, including without limitation all documents, forms, correspondence, financial records and forecasts, operation manuals, notebooks, reports, proposals, computer programs, software, software documentation, employee handbooks, supervisor’s manuals, lists of clients and referral sources, client data, and all copies thereof, relating in any way to the business of the Company, whether relating to the Company directly or to a client of the Company, made or obtained by Executive during his employment with the Company, whether or not such data, information, or knowledge constitute confidential or trade secret information.

7. Compensation Following Termination of Employment.

(a)           Termination for Any Reason.  Upon termination of Executive’s employment for any reason under this Agreement, Executive (or his designated beneficiary or estate, as the case may be) shall be entitled to receive the following compensation:

(i) Earned but Unpaid Compensation.  The Company shall pay Executive any accrued but unpaid Base Salary for services rendered through the date of termination, any appropriately documented and accrued but unpaid expenses required to be reimbursed under this Agreement, and any unused vacation accrued to the date of termination.

(ii) Other Compensation and Benefits.  Except as may be provided under this Agreement, any benefits to which Executive may be entitled through the date of Executive’s termination pursuant to the plans, policies and arrangements referred to in Section 4(d) shall be determined and paid in accordance with the terms of such plans, policies and arrangements, and except as otherwise provided by this Agreement, Executive shall have no right to receive any other compensation, or to participate in any other plan, arrangement or benefit, with respect to future periods after such termination or resignation.

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(b)           Termination by the Company Without Cause not in Connection With a Change in Control.  In the event Executive’s employment is terminated without Cause before a Change in Control (as defined by Section 7(c)(iii)) or more than twenty-four (24) months after a Change in Control, if Executive executes the Release and Waiver required by Section 8 and such Release and Waiver is not revoked on or before the expiration of the revocation period thereof, and Executive has complied with the return of property and information provision set forth in Section 6, then in addition to the payments to be made pursuant to Section 7(a), the Company shall also:

(i) Severance Pay.  Pay to Executive severance pay in an amount equal to 100% of his Base Salary in effect as of the date of his termination of employment. Payment of such Severance Pay shall be made in a lump sum as soon as administratively practicable after the date of Executive’s termination (or if required by Section 409A, on the six (6) month anniversary of his termination), but no later than ninety (90) days thereafter, and not before the expiration of the revocation period for the Release and Waiver.

(ii) Annual Bonus.  Pay to Executive the target amount of the Annual Bonus under the Applicable Plan for the year in which the termination of Executive’s employment occurs. Payment of such Annual Bonus shall be made in a lump sum as soon as administratively practicable after the date of Executive’s termination (or if required by Section 409A, on the six (6) month anniversary of his termination), but no later than ninety (90) days thereafter, and not before the expiration of the revocation period for the Release and Waiver.

(iii) Benefits Continuation.  Continue to provide Executive and his family for the one-year period following Executive’s termination with the health and welfare benefits, including, but not limited to, benefits under any medical and dental benefits plan, life insurance plan, short-term and long-term disability plans, or other executive benefit or fringe benefit plan, which Executive and his family were receiving as of the date of Executive’s termination. The Company shall provide such benefits at the same cost to Executive as the cost, if any, charged to Executive for those benefits at the time of his termination. To the extent that the provision of such benefits at the Company’s expense during the six (6) month period following Executive’s termination would violate the requirements of Section 409A, then Executive shall be required to pay to the Company the Company portion of the cost of such benefits during such six (6) month period, and the Company shall reimburse Executive for the amounts so paid by Executive on the six (6) month anniversary of his termination, or as soon as administratively practicable thereafter, but no later than ninety (90) days thereafter.

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(c)           Termination by the Company Without Cause or by Executive for Good Reason in Connection With a Change in Control.

(i) In the event Executive’s employment is terminated by the Company without Cause, or by Executive for Good Reason, within the twenty-four (24) month period following a Change in Control, if Executive executes the Release and Waiver required by Section 8 and such Release and Waiver is not revoked on or before the expiration of the revocation period thereof, and Executive has complied with the return of property and information provision set forth in Section 6, then in addition to the payments to be made pursuant to 7(a), but subject to Section 7(c)(iv), the Company shall also:

(A) Severance Pay.  Pay to Executive severance pay in an amount equal to 150% of his Base Salary at its highest level in effect from the date of the Change in Control through his termination of employment. Payment of such Severance Pay shall be made in a lump sum as soon as administratively practicable after the date of Executive’s termination (or if required by Section 409A, on the six (6) month anniversary of his termination), but no later than ninety (90) days thereafter, and not before the expiration of the revocation period for the Release and Waiver.

(B) Annual Bonus.  Pay to Executive 150% of the target amount of the Annual Bonus under the Applicable Plan for the year in which the termination of Executive’s employment occurs. Payment of such Annual Bonus shall be made in a lump sum as soon as administratively practicable after the date of Executive’s termination (or if required by Section 409A, on the six (6) month anniversary of his termination), but no later than ninety (90) days thereafter, and not before the expiration of the revocation period for the Release and Waiver.

(C) Equity Vesting Acceleration.  Accelerate the vesting of and the lapsing of restrictions on any unvested or restricted equity compensation (e.g., stock options, restricted stock, etc.).

(D) Benefits Continuation.  Continue to provide Executive and his family for the one-year period following Executive’s termination with the health and welfare benefits, including, but not limited to, benefits under any medical and dental benefits plan, life insurance plan, short- term and long-term disability plans, or other executive benefit or fringe benefit plan, which Executive and his family were receiving as of the date of Executive’s termination. The Company shall provide such benefits at the same cost to Executive as the cost, if any, charged to Executive for those benefits at the time of his termination. To the extent that the provision of such benefits at the Company’s expense during the six (6) month period following Executive’s termination would violate the requirements of Section 409A, then Executive shall be required to pay to the Company the Company portion of the cost of such benefits during such six (6) month period, and the Company shall reimburse Executive for the amounts so paid by Executive on the six (6) month anniversary of his termination, or as soon as administratively practicable thereafter, but no later than ninety (90) days thereafter.

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(ii) “Good Reason.”  For purposes of this Agreement, the term “Good Reason” shall mean the occurrence of any of the following in connection with a Change in Control, without Executive’s express written consent: (A) the assignment of duties to Executive materially inconsistent with Executive’s current authorities, duties, responsibilities and status; (B) any reduction in Executive’s title, position, or reporting lines; (C) the relocation of Executive to an office or location more than seventy-five (75) miles from the office or location of Executive’s work as of the date of the Change in Control; (D) requiring Executive to travel on Company business to a substantially greater extent than required as of the date of the Change in Control; or (E) the reduction in Executive’s Base Salary as in effect on the date of the Change in Control.

(iii) “Change in Control.”  For purposes of this Agreement, the term “Change in Control” shall mean the happening of any of the following:

(A) Any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (a “Person”) becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of either (1) the then outstanding common shares of the Company (the “Outstanding Company Common Shares”) or (2) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company  Voting Securities”); provided, however, that such beneficial ownership shall not constitute a Change in Control if it occurs as a result of any of the following acquisitions of securities: (I) any acquisition directly from the Company, (II) any acquisition by the Company or any corporation, partnership, trust or other entity controlled by the Company (a “Subsidiary”), (III) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary, (IV) any acquisition by an underwriter temporarily holding Company securities pursuant to an offering of such securities, (V) any acquisition by an individual, entity or group that is permitted to, and actually does, report its beneficial ownership on Schedule 13-G (or any successor schedule); provided that, if any such individual, entity or group subsequently becomes required to or does report its beneficial ownership on Schedule 13D (or any successor schedule), then, for purposes of this paragraph, such individual, entity or group shall be deemed to have first acquired, on the first date on which such individual, entity or group becomes required to or does so report, beneficial ownership of all of the Outstanding Company Common Stock and Outstanding Company Voting Securities beneficially owned by it on such date, or (VI) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (I ), (2) and (3) of Section 7(c)(iii)(C) are satisfied. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the “Subject Person”) became the beneficial owner of 25% or more of the Outstanding Company Common Shares or Outstanding Company Voting Securities as a result of the acquisition of Outstanding Company Common Shares or Outstanding Company Voting Securities by the Company which, by reducing the number of Outstanding Company Common Shares or Outstanding Company Voting Securities, increases the proportional number of shares beneficially owned by the Subject Person; provided, that if a Change in Control would be deemed to have occurred (but for the operation of this sentence) as a result of the acquisition of Outstanding Company Common Shares or Outstanding Company Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the beneficial owner of any additional Outstanding Company Common Shares or Outstanding Company Voting Securities which increases the percentage of the Outstanding Company Common Shares or Outstanding Company Voting Securities beneficially owned by the Subject Person, then a Change in Control shall then be deemed to have occurred; or

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(B) Individuals who, as of the date of this Agreement, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board, including by reason of agreement intended to avoid or settle any such actual or threatened contest or solicitation; or

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(C) The consummation of a reorganization, merger, statutory share exchange, consolidation, or similar corporate transaction involving the Company or any of its direct or indirect Subsidiaries (each a “Business Combination”) in each case, unless, following such Business Combination, (1) the Outstanding Company Common Shares and the Outstanding Company Voting Securities immediately prior to such Business Combination, continue to represent (either by remaining outstanding or being converted into voting securities of the resulting or surviving entity or any parent thereof) more than 50% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from Business Combination (including, without limitation, a corporation that, as a result of such transaction, owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries), (2) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company, a Subsidiary or such corporation resulting from such Business Combination or any parent or a subsidiary thereof, and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 25% or more of the Outstanding Company Common Shares or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination (or any parent thereof) or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors, and (3) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination (or any parent thereof) were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such Business Combination; or

(D) The consummation of the sale, lease, exchange or other disposition of all or substantially all of the assets of the Company, unless such assets have been sold, leased, exchanged or disposed of to a corporation with respect to which following such sale, lease, exchange or other disposition (1) more than 50% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation (or any parent thereof) entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Shares and Outstanding Company Voting Securities immediately prior to such sale, lease, exchange or other disposition in substantially the same proportions as their ownership immediately prior to such sale, lease, exchange or other disposition of such Outstanding Company Common Shares and Outstanding Company Voting Shares, as the case may be, (2) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or a Subsidiary of such corporation or a subsidiary thereof and any Person beneficially owning, immediately prior to such sale, lease, exchange or other disposition, directly or indirectly, 25% or more of the Outstanding Company Common Shares or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding shares of common stock of such corporation (or any parent thereof) and the combined voting power of the then outstanding voting securities of such corporation (or any parent thereof) entitled to vote generally in the election of directors, and (3) at least a majority of the members of the board of directors of such corporation (or any parent thereof) were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale, lease, exchange or other disposition of assets of the Company; or

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(E) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

(iv) Potential Section 280G Adjustment.  In the event that any amount or benefit to be paid or provided to Executive pursuant to Section 7(c)(i), taken together with any amounts or benefits otherwise paid or provided to Executive by the Company or any affiliated company (collectively, the “Covered Payments”), would be an “excess parachute payment,” as defined in Section 280G of the Internal Revenue Code and the related Treasury Regulations and other guidance issued thereunder, and would thereby subject Executive to the tax imposed under Section 4999 of the Internal Revenue Code (the “Excise Tax”), then the Company shall either (A) make the Covered Payment to Executive without adjustment and subject to the Excise Tax, or (B) reduce the Covered Payments to the maximum amount that may be paid without Executive becoming subject to the Excise Tax (such reduced amount, the “Payment Cap”), whichever provides the greater net after-tax benefit to Executive. In the event that the reduction of the Covered Payments will provide Executive with the greater net after-tax benefit, Executive shall have the right to designate which of the payments and benefits otherwise provided for in Section 7(c)(i) that he will receive in connection with the application of the Payment Cap.

(d)           Termination of Employment.  For purposes of this Section 7, the term “termination of employment” and words of similar import shall mean a “separation from service” as defined by Section 409A, and this Section 7 shall be interpreted and administered consistent with such definition.

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(e)           No Mitigation; No Set-Off Against Severance Benefits.  Executive shall not be required to mitigate damages or the amount of any payment or benefits provided for under Section 7 by seeking other employment or otherwise, nor shall the amount of any payment or benefits provided for in Section 7 be reduced by any compensation earned by Executive as a result of employment by another employer after the date of termination of Executive’s employment with the Company, except as otherwise provided by the confidentiality, non-solicitation and non-competition provisions of Section 9. In addition, the Company’s obligations under this Agreement shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against Executive.

8. Release and Waiver.

(a)           In exchange for the additional consideration under Section 7 to which Executive would not otherwise be entitled, Executive shall generally and completely release the Company, its subsidiaries and affiliates, and its directors, officers, executives, shareholders, partners, agents, attorneys, predecessors, successors, insurers and assigns from any and all claims, liabilities and obligations, both known and unknown, that arise out of or are in any way related to events, acts, conduct, or omissions occurring at any time prior to or at Executive’s termination. Such general release shall include, but shall not be limited to: (i) all claims arising out of or in any way related to Executive’s employment with the Company or the termination of that employment; (ii) all claims related to Executive’s compensation or benefits from the Company, including salary, bonuses, incentive compensation, vacation pay, expense reimbursements, severance pay, fringe benefits, stock, stock options, restricted stock, or any other ownership or equity interests in the Company, or its subsidiaries or affiliates under all State and federal statutes such as the Fair Labor Standards Act, the Family and Medical Leave Act, the Employee Retirement and Income Security Act, the New York Labor Law and any similar Pennsylvania or other state or local statute, regulation or order; (iii) all claims for breach of contract, wrongful termination, and breach of the implied covenant of good faith and fair dealing; (iv) all tort claims, including claims for fraud, defamation, emotional distress, and discharge in violation of public policy; and (v) all federal, state, and local statutory claims, including claims for discrimination, harassment, retaliation, attorneys’ fees, or other claims arising under, for example, the Age Discrimination in Employment Act (the “ADEA”), Title VII of the Civil Rights Act of 1964, as amended, the Rehabilitation Act of 1973, the Americans With Disabilities Act, the Equal Pay Act, the Family Medical Leave Act, the New York Human Rights Law and any similar Pennsylvania or other state or local statute, regulation or order. Notwithstanding the foregoing, Executive shall not be required to release the Company or its subsidiaries or affiliates from: (A) any obligation to indemnify Executive pursuant to the articles and bylaws of the Company, any valid fully executed indemnification agreement with the Company, any applicable directors and officers liability insurance policy, and applicable law; or (B) any obligations to make payments to Executive under Section 7. Executive shall be required to represent that he has no lawsuits, claims or actions pending in his name, or on behalf of any other person or entity, against the Company or its subsidiaries or affiliates, or any other person or entity subject to the release to be granted under this Section.

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(b)           Executive shall acknowledge that: (i) he is knowingly and voluntarily waiving and releasing any rights he may have under the ADEA; (ii) that the consideration given for the waiver and release (i.e., the additional consideration to be provided under Section 7) is in addition to anything of value to which he is already entitled; and (iii) that he has been advised, as required by the ADEA, that: (A) his waiver and release does not apply to any rights or claims that may arise after the date that he signs such release; (B) he should consult with an attorney prior to signing the release (although he may choose voluntarily not to do so); (C) he has twenty-one (21) days from the date he receives the proposed release to consider the release (although he may choose voluntarily to sign it earlier); (D) he has seven (7) days following the date he signs the release to revoke the release by providing written notice of his revocation to the Board; and (E) the release will not be effective until the date upon which the revocation period has expired, which will be the eighth day after the date that the release is signed by Executive.

(c)           The claims included in this release and waiver do not include vested rights, if any, under any qualified retirement plan in which Executive participates, and his COBRA, unemployment compensation and worker’s compensation rights, if any. Nothing in this release shall be construed to constitute a waiver of: (i) any claims Executive may have against the Company that arise from acts or omissions that occur after the effective date of this Release; (ii) Executive’s right to file an administrative charge with any governmental agency concerning the termination of that employment; or (iii) Executive’s right to participate in any administrative or court investigation, hearing or proceeding. Executive agrees, however, to waive and release any right to receive any individual remedy or to recover any individual monetary or non-monetary damages as a result of any such administrative charge or proceeding. In addition, this release does not affect Executive’s rights as expressly created by this Agreement, and does not limit his ability to enforce this Agreement.

9. Executive Covenants.

(a)           Non-Disclosure of Confidential Information and Trade Secrets.

(i) During the course of Executive’s employment with the Company, Executive will acquire and have access to Confidential Information and Trade Secrets belonging to the Company, its affiliates, subsidiaries, divisions and joint ventures (collectively referred to as the “Company” throughout and for purposes of this Section 9). Such Confidential Information and Trade Secrets include, without limitation, business and technical information, whatever its nature and form and whether obtained orally, by observation, from written materials or otherwise, as for example: (A) financial and business information, such as information with respect to costs, commissions, fees, profits, profit margins, sales, markets, mailing lists, accounts receivables and accounts payables, pricing strategies, strategies and plans for future business, new business, product or other development, potential acquisitions or divestitures, and new marketing ideas; (B) marketing information, such as information on markets, end users and applications, the identity of the Company’s customers, vendors, suppliers, and distributors, their names and addresses, the names of representatives of the Company’s customers, vendors, distributors or suppliers responsible for entering into contracts with the Company, the Company’s financial arrangements with its distributors and suppliers, the amounts paid by such customers to the Company, specific customer needs and requirements, leads and referrals to prospective customers; and (C) personnel information, such as the identity and number of the Company’s employees, personal information such as social security numbers, skills, qualifications, and abilities. Executive acknowledges and agrees that the Confidential Information and Trade Secrets are not generally known or available to the general public, but have been developed, complied or acquired by the Company at its great effort and expense and for commercial advantage and, therefore, takes every reasonable precaution to prevent the use or disclosure of any part of it by or to unauthorized persons. Confidential Information and Trade Secrets can be in any form or media, whether oral, written or machine readable, including electronic files.

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(ii) Executive agrees he will not, while associated with the Company and for so long thereafter as the pertinent information or documentation remains confidential, directly or indirectly use, disclose or disseminate to any other person, organization or entity or otherwise use any Confidential Information and Trade Secrets, except as specifically required in the performance of Executive’s duties on behalf of the Company or with prior written authorization from the Board.

(b)           Non-Solicitation of Customers.  Executive acknowledges and agrees that during the course of and solely as a result of employment with the Company, he will come into contact with some, most or all of the Company’s customers and will have access to Confidential Information and Trade Secrets regarding the Company’s customers, distributors and suppliers. Consequently, Executive covenants and agrees that in the event of the termination of his employment, whether such termination is voluntary or involuntary, Executive will not, for a period of twelve (12) months following such termination, directly or indirectly, solicit or initiate contact with any customer, former customer or prospective customer of the Company for the purpose of selling products or services to the customer competitive with the products or services purchased by the customer from the Company. This restriction shall apply to any customer, former customer or prospective customer of the Company with whom Executive had contact or about whom Executive obtained Confidential Information or Trade Secrets during his employment with the Company. For the purposes of this Section, “contact” means interaction between Executive and the customer or then prospective customer which takes place to further the business relationship, or making sales to our performing services for the customer or prospective customer on behalf of the Company. This restriction will not apply when a former employee who is not working in a competitive capacity responds to a request for proposal on behalf of his new employer who is not engaged in the same or similar businesses as the Company.

(c)           Non-Compete.  Executive acknowledges that his services are special and unique, and compensation is partly in consideration of and conditioned upon Executive not competing with Company, and that a covenant on Executive’s part not to compete is essential to protect the business and good will of the Company. Accordingly, except as hereinafter provided, Executive agrees that for twelve (12) months after the termination of his employment, Executive shall not be engaged or interested as a director, officer, stockholder (except as provided herein), employee, partner, individual proprietor, lender or in any other capacity, in any business, which competitive with the business of the Company as conducted at the time of Executive’s termination and which involves Executive’s knowledge, actions or assistance within the states of Pennsylvania, New Jersey, New York, Delaware, Maryland, Connecticut, Rhode Island or Massachusetts (the “Restricted Territory”); however, this restriction will not apply to new kinds of business in which Executive may engage in the future, after such termination, unless Executive has been actively engaged in the development or otherwise involved in such business while an employee of the Company. In addition, Executive agrees that for this same twelve (12) months, he shall not recruit or recommend any other person who is or was an employee of the Company while Executive was also an employee, to any business which is competitive with the business of Executive as conducted at the time of Executive’s termination and which involves Executive’s knowledge, actions or assistance within the Restricted Territory. Nothing herein shall prohibit Executive from investing in any securities of any corporation which is in competition with the Company, whose securities are listed on a national exchange or traded in the over-the-counter market if Executive shall own less than 5% of the outstanding securities of such operation.

14

(d)           Enforcement of Covenants.  Executive acknowledges and agrees that compliance with the covenants set forth in this Section 9 is necessary to protect the Confidential Information and Trade Secrets, business and goodwill of the Company, and that any breach of this Section 9 will result in irreparable and continuing harm to the Company, for which money damages may not provide adequate relief. Accordingly, in the event of any breach or anticipatory breach of Section 9 by Executive, the Company and Executive agree that the Company shall be entitled to the following particular forms of relief as a result of such breach, in addition to any remedies otherwise available to it at law or equity: (i) injunctions, both preliminary and permanent, enjoining or restraining such breach or anticipatory breach, and Executive hereby consents to the issuance thereof forthwith and without bond; and (ii) recovery of all reasonable sums and costs, including attorneys’ fees, incurred by the Company to enforce the provisions of this Section 9.  Executive understands and acknowledges that this Agreement, including the provisions of this Section 9, were conditions precedent to the performance by the Company and WVN of their obligations under the Purchase Agreement, and that the provisions hereof are essential elements of the transactions contemplated by the Purchase Agreement, and that the value of the Purchased Assets (as defined in the Purchase Agreement) would seriously diminished if Executive were to violate any of the provisions of this Section 9.

e)        Limitations. Notwithstanding anything to the contrary contained in this Agreement, in the event (i) WVN defaults in its payment of any of the Purchase Price or Additional Consideration (each as defined in the Purchase Agreement), when due, under the Purchase Agreement, (ii) the Company defaults in its payment of any amounts due to Executive pursuant to this Agreement, or (iii) the Company defaults in its payment or performance of any of its obligations under the Lock-Up Agreement (as defined in the Purchase Agreement), and in each case such breach or default continues uncured by the Company or WVN for a period of thirty (30) days following written notice of any such breach, the restrictive covenants set forth in Section 9(b) and Section 9(c) (but expressly excluding Section 9(a), which shall continue to apply in full force and effect)  shall be null, void and of no further force and effect and Executive shall forever be relieved of all restrictions thereunder.

15

10. Withholding of Taxes

The Company shall withhold from any compensation and benefits payable under this Agreement all applicable federal, state, local or other taxes.

11. No Claim Against Assets.

Nothing in this Agreement shall be construed as giving Executive any claim against any specific assets of the Company or as imposing any trustee relationship upon the Company in respect of Executive. The Company shall not be required to establish a special or separate fund or to segregate any of its assets in order to provide for the satisfaction of its obligations under this Agreement. Executive’s rights under this Agreement shall be limited to those of an unsecured general creditor of the Company and its affiliates.

12. Executive Acknowledgement.

Executive acknowledges that he has had the opportunity to discuss this Agreement with and obtain advice from his private attorney, has had sufficient time to and has carefully read and fully understands all of the provisions of this Agreement, and is knowingly and voluntarily entering into this Agreement.

13. Successors and Assignment.

(a)           Except as otherwise provided in this Agreement, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, representatives, successors and assigns.

(b)           The Company shall require any successor or successors (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to Executive, to acknowledge expressly that this Agreement is binding upon and enforceable against the Company in accordance with the terms hereof, and to become jointly and severally obligated with the Company to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession or successions had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement by the Company.

(c)           The rights and benefits of Executive under this Agreement are personal to him and no such right or benefit shall be subject to voluntary or involuntary alienation, assignment or transfer; provided, however, that nothing in this Section 13 shall preclude Executive from designating a beneficiary or beneficiaries to receive any benefit payable on his death.

16

14. Entire Agreement; Amendment.

This Agreement shall supersede any and all existing oral or written agreements, representations, or warranties between Executive and the Company (or any of its subsidiaries or affiliated entities) relating to the terms of Executive’s employment, except for the Company’s Code of Ethics and the Director’s and Officer’s Indemnification Agreement. This Agreement may not be amended except by a written agreement signed by both parties.

15. Governing Law.

This Agreement shall be governed by and construed in accordance with the domestic substantive laws of the State of New York, without giving effect to any conflicts or choice of laws rule or provision that would result in the application of the domestic substantive laws of any other jurisdiction.

16. Section 409A.

The parties intend that this Agreement and the payments and benefits to be provided hereunder satisfy the requirements of Section 409A, and this Agreement shall be administered and interpreted consistent with such intention.

17. Notices.

Any notice, consent, request or other communication made or given in connection with this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by registered or certified mail, return receipt requested, or by facsimile or by hand delivery, to those listed below at their following respective addresses or at such other address as each may specify by notice to the others:

To the Company:

Warwick Valley Telephone Company

Attention: President and CEO

47 Main Street

Warwick, New York 10990

To Executive:

At the address set forth below

18. Miscellaneous.

(a)           Waiver.  The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver thereof or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement.

(b)           Severability.  If any term or provision of this Agreement is declared illegal or unenforceable by any court of competent jurisdiction and cannot be modified to be enforceable, such term or provision shall immediately become null and void, leaving the remainder of this Agreement in full force and effect.

17

(c)           Headings.  Section headings are used herein for convenience of reference only and shall not affect the meaning of any provision of this Agreement.

(d)           Rules of Construction.  Whenever the context so requires, the use of the singular shall be deemed to include the plural and vice versa.

(e)           Authority to Enter into this Agreement.  The officer of the Company whose signature appears below has been authorized to enter into this Agreement on behalf of the Company.

(f)           Counterparts.  This Agreement may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, and such counterparts will together constitute but one agreement.

[Signature Page to Follow]

18

In Witness Whereof, the parties hereto have duly executed this Agreement as of the day and year first written above.

Warwick Valley Telephone Company		Executive
By:	/s/ Duane W. Albro	By:	/s/ David Cuthbert
			David Cuthbert
Name:	Duane W. Albro	Address:
Title:	President and CEO

19

APPENDIX A

Illustration of Annual Bonus and Incentive Compensation (Long Term Incentive Plan) — COO

Annual Bonus Performance Matrix:

The performance matrix below will be used to calculate the Payout Factor amounts. The Payout Factor amounts will be applied to both the Target Annual Bonus and the Target Incentive Compensation amounts.

Target Annual Bonus:

Target Annual Bonus Amount:  50% x [base salary of $235,000] = $117,500

Actual Annual Bonus Payout:  [Target Annual Bonus Amount of $117,500] x [calculated Payout Factor]

Methodology:

Target Financial Metrics will be determined for each year by the Board of Directors on behalf of the Company and in collaboration with the CEO.

The matrix below reflects both the elements of performance that will be evaluated and the weightings associated with each Financial Metric to determine the applicable payout factor that will be used to calculate the Annual Bonus and Incentive Compensation amounts.

Financial Metric	Weighting	Result	Target	Actual/Target	Payout Factor
	A	B	C	(B/C)	A x (B/C)
Revenue	0.25	TBD	$TBD	TBD	TBD
EBITDA	0.25	TBD	$TBD	TBD	TBD
Free Cash Flow	0.25	TBD	$TBD	TBD	TBD
Net Income	0.15	TBD	$TBD	TBD	TBD
BOD Discretion	0.10	NA	NA	NA	TBD
Total	1.00				Total Payout Factor

Illustrative Example:By way of illustration only, assume the following Financial Metric targets: (1) Revenue: $30,000,000; (2) EBITDA: $5,000,000; (3) Free Cash Flow: $2,000,000; and (4) Net Income: $6,000,000.  Assume the following actual financial results for the fiscal year: (1) Actual Revenue: $28,000,000; (2) Actual EBITDA: $4,000,000; (3) Actual Free Cash Flow: $1,500,000; and (4) Actual Net Income: $5,000,000. The resulting payout factor calculations would be calculated as follows:

20

Financial Metric	Weighting	Result	Target	Actual/Target	Payout Factor
	A	B	C	(B/C)	A x (B/C)
Revenue	0.25	$28,000,000	$30,000,000	.9333	.2333
EBITDA	0.25	$  4,000,000	$  5,000,000	.8000	.2000
Free Cash Flow	0.25	$  1,500,000	$  2,000,000	.7500	.1875
Net Income	0.15	$  5,000,000	$  6,000,000	.8333	.1250
BOD Discretion	0.10	N/A	N/A	N/A	.1000
Total	1.00				.8458

Based upon this illustration, which also assumes the BOD Discretionary component is paid out in the full 10% amount, the actual Annual Bonus to be paid would be based on a payout factor of .8458 and result in an Annual Bonus of $117,500 x .8458 or $99,382

Notwithstanding the foregoing matrix, in the event that the actual results / target results for Revenue and Net Income are less than .9000 (90%) then the payout factor attributable to those metrics of measurement will be zero, respectively. Likewise, in the event that the actual results / target results for EBITDA and Free Cash Flow are less than .7500 (75%) then the payout factor attributable to those metrics of measurement will be zero, respectively. This methodology will also be applied to Incentive Compensation payout in the same manner.

Incentive Compensation (Long Term Incentive Plan) Component:

Ø Target Incentive Compensation Component

Stock Options:	25,000
Restricted Shares:	5,000

Applying the same methodological approach used to determine the Annual Bonus payout as shown above would result in an Incentive Compensation payout of:

Stock Options:	25,000  x .8458 = 21,146
Restricted Shares:	5,000 x .8458 =   4,229

For calculating both the Annual Bonus and the Incentive Compensation, the Board of Directors retains the sole discretion to award compensation, if any, under this Appendix A.

21

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Duane W. Albro, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Warwick Valley Telephone Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  November 9, 2011

/s/ Duane W. Albro

Duane W. Albro

President and Chief Executive Officer

EX-31.2

  Exhibit 31.2

CERTIFICATIONOF PRINCIPAL FINANCIAL OFFICER

I, Ralph Martucci, Jr., certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Warwick Valley Telephone Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 9, 2011

/s/ Ralph Martucci, Jr.

Ralph Martucci, Jr.

Executive Vice President, Chief Financial Officer and Treasurer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT 0F 2002

In connection with the Quarterly Report of Warwick Valley Telephone Company (the "Company") on Form 10-Q for the period ending September 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Duane W. Albro, the President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Duane W. Albro

Duane W. Albro

President and Chief Executive Officer

November 9, 2011

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT 0F 2002

In connection with the Quarterly Report of Warwick Valley Telephone Company (the "Company") on Form 10-Q for the period ending September 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ralph Martucci, Jr., the Executive Vice President, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Ralph Martucci, Jr.

Ralph Martucci, Jr.

Executive Vice President, Chief Financial Officer and Treasurer

November 9, 2011

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request

XML

Condensed Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data	Sep. 30, 2011	Dec. 31, 2010
Accounts receivable, allowance for uncollectibles	$ 483	$ 350
Common stock, par value	$ 0.01	$ 0.01
Common stock, authorized shares	10,000,000	10,000,000
Common stock, issued shares	6,218,654	6,054,741
Treasury stock, common shares	733,694	635,189
Preferred Stock 100 Par Value [Member]
Preferred shares, par value	$ 100	$ 100
Preferred shares, authorized shares	5,000	5,000
Preferred shares, issued shares	5,000	5,000
Preferred Stock 0.01 Par Value [Member]
Preferred shares, par value	$ 0.01	$ 0.01
Preferred shares, authorized shares	10,000,000	10,000,000
Preferred shares, unissued shares	10,000,000	10,000,000

XML

Condensed Consolidated Statements Of Operations (USD $) In Thousands, except Share data	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Condensed Consolidated Statements Of Operations [Abstract]
Operating revenues	$ 6,829	$ 6,250	$ 18,818	$ 18,197
Operating expenses
Cost of services and products (exclusive of depreciation and amortization expense)	4,024	2,940	10,215	8,747
Selling, general and administrative expenses	4,883	3,566	12,471	9,908
Depreciation and amortization	1,365	1,370	4,103	4,210
Total operating expenses	10,272	7,876	26,789	22,865
Operating loss	(3,443)	(1,626)	(7,971)	(4,668)
Other income (expense)
Interest income (expense)	(55)	37	4	23
Income from equity method investment	1,328	3,362	6,744	9,105
Other income (expense), net	31	81	46	212
Total other income (expense)	1,304	3,480	6,794	9,340
Income (loss) before income taxes	(2,139)	1,854	(1,177)	4,672
Income taxes (benefit)	(450)	588	(120)	1,585
Net income (loss)	(1,689)	1,266	(1,057)	3,087
Preferred dividends	6	6	19	19
Income (loss) applicable to common stock	$ (1,695)	$ 1,260	$ (1,076)	$ 3,068
Basic earnings (loss) per share	$ (0.31)	$ 0.24	$ (0.20)	$ 0.57
Diluted earnings (loss) per share	$ (0.31)	$ 0.23	$ (0.20)	$ 0.57
Weighted average shares of common stock used to calculate earnings per share
Basic	5,424,927	5,362,433	5,408,603	5,360,485
Diluted	5,424,927	5,407,192	5,408,603	5,401,531
Dividends declared per common share	$ 0.26	$ 0.24	$ 0.78	$ 0.72

XML

Commitments And Contingenices

9 Months Ended

Sep. 30, 2011

Commitments And Contingenices [Abstract]

Commitments And Contingenices

NOTE 18: COMMITMENTS AND CONTINGENICES                         

In conjunction with the recent business acquisition (see Note 2) the Company has assumed various contingent liabilities as of September 30, 2011. Pursuant to the Alteva Agreement, the seller shall be paid additional consideration up to $2,000 if certain performance-based conditions are met as of the earn-out calculation dates of August 5, 2012 and August 5, 2013 (or prior to January 1, 2013 depending on certain tax law changes). In addition, at the time of the closing on the Alteva Agreement the Company withheld $750 as security of any future claims against the seller. Such amount is payable on August 5, 2012, less any amounts offset against the holdback amount pursuant to the terms of the Alteva Agreement.

In connection with the Alteva Agreement, the Company placed cash in the amount of $4,000 in escrow, pending the issuance of 272,479 shares of the Company's common stock. The issuance of the shares of common stock is contingent upon receipt by the Company of certain approvals of the PSC and BPU. Such approvals have been received as of October 21, 2011 (see Note 19).

The Alteva Agreement provides for the payment to the seller of a working capital adjustment based on actual amount of working capital, as defined, as of August 5, 2011 compared to the target working capital. As of September 30, 2011 the Company estimated this liability to be $590, of which $322 has been advanced to the seller. However, it is subject to an independent audit to be completed within 145 days of closing.

As of September 30, 2011, the estimated fair value of the aforementioned amount have been recorded as "amounts due in connection with business acquisition" in the accompanying condensed consolidated balance sheet.

Effective October 21, 2011, the Company entered into a Lock-Up and Put Agreement with the members of Alteva (the "Lock-up and Put Agreement) pursuant to which each of the members of Alteva agreed to certain restrictions on their ability to sell the shares of the Company's common stock they were issued in connection with the Alteva Agreement (the "Alteva Shares"). Under the Lock-up and Put Agreement, each member of Alteva may transfer to any of the permitted transferees up to 50% of their Alteva Shares between October 21, 2012 and December 14, 2012. The members of Alteva may sell their remaining Alteva Shares without restriction beginning on December 15, 2012. In addition, the Lock-up and Put Agreement gives each member of Alteva the option to sell their Alteva Shares to the Company within a certain prescribed time period at a certain prescribed price (the "Put"). The Alteva members may exercise their Put with respect to half of their Alteva Shares within a 60-day period commencing on October 21, 2012 and the other half within a 60-day period commencing on December 15, 2012. The purchase price of the Put will be the greater of (i) the closing price of the Company's common stock on the date of exercise of the Put or (ii) $11.74. The Lock-up and Put Agreement also includes a purchase price protection for the Alteva selling shareholders. The purchase price protection provides that if the price of the Company's common stock for the 30 trading days immediately prior to October 21, 2012 or December 15, 2012 (but excluding the three trading days prior to and after the record date for any cash dividend declared by the Company) (the "Release Date Price") is less than $11.74, then the Company will issue to the Alteva members the aggregate number of shares of the Company's common stock equal to the difference between $1,600 and the

market value of 50% of the aggregate Alteva Shares on October 21, 2012 or December 15, 2012 or 100% of the aggregate Alteva Shares if the Release Date Price is less than $11.74 on both dates.

The Company will record the valuation as an estimated contingent liability using a binomial method based on significant inputs not observed in the market and thus will represent a Level 3 instrument. Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect the Company's own assumptions in measuring fair value. The final purchase price allocation and its effect on results of operations may differ significantly from the amounts included herein. The Company is in the process of obtaining third-party valuations of the assets acquired, liabilities assumed and the Lock-up and Put Agreement; thus, the allocation of the purchase price is subject to adjustment.

The Company has entered into two-year employment agreement with its Executive Vice President and Chief Operating Officer, its Executive Vice President and Chief Sales Officer, and its Executive Vice President and Chief Network Officer. Their annual salaries per the agreements are $235, $180 and $180, respectively.

XML

Document And Entity Information	9 Months Ended
	Sep. 30, 2011	Nov. 03, 2011
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q3
Entity Registrant Name	WARWICK VALLEY TELEPHONE CO
Entity Central Index Key	0000104777
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		5,757,439

XML

Debt Obligations

9 Months Ended

Sep. 30, 2011

Debt Obligations [Abstract]

Debt Obligations

NOTE 7: DEBT OBLIGATIONS

Debt obligations consisted of the following:

	September 30,		September 30,
		2011		2010
Long-term debt (current maturities) :
CoBank ACB, unsecured term credit facility	$	1,519	$	2,658
Short-term debt:
Cobank ACB promissory note		5,000		-
Provident Bank credit line		4,000		-
		9,000		-
Total debt obligations	$	10,519	$	2,658

Long-term debt:

As of September 30, 2011, $1,519 in principal amount was outstanding under the CoBank, ACB term credit facility. The final payment is due July 20, 2012.   We are required to make interest and outstanding principal payments in quarterly installments under the CoBank, ACB term credit facility.  The interest rate on the outstanding amount is variable and as of September 30, 2011 the rate was 2.87%. 

Short-term borrowings:

On August 3, 2011, the Company entered into a supplement to our master loan agreement with CoBank, ACB.  The supplement provides for a revolving loan facility in the principal amount of $5,000 (the "CoBank Revolving Loan").  Also on August 3, 2011, the Company drew down the entire $5,000 principal amount of the CoBank Revolving Loan to fund a portion of the purchase price of the Alteva acquisition.  The CoBank Revolving Loan becomes due and payable on August 2, 2012.  The CoBank Revolving Loan incurs interest at a variable rate determined by CoBank, ACB or, if selected by the Company, at LIBOR plus 3.50%.  Interest is payable quarterly in arrears.  The interest rate on the outstanding amount is variable and, as of September 30, 2011, the rate was 3.75%.  The Company paid CoBank, ACB a $50 origination fee in connection with the CoBank Revolving Loan.   Under the terms of the CoBank revolving loan, the Company is required to comply with certain loan covenants, which include, but are not limited to, the achievement of certain financial ratios, as set forth in the agreement, as well as certain financial reporting requirements.  As of September 30, 2011, the Company was in compliance with all loan covenants.

The Company has an unsecured line of credit in the amount of $4,000 with Provident Bank (the "Bank") and on August 1, 2011, the Company drew down its entire $4,000 line of credit with Provident Bank.  The Bank line of credit becomes due and payable on July 31, 2012.   Pursuant to the terms of the Alteva Agreement, the proceeds from this line of credit were deposited in an escrow account, of which, $3,351 is expected to be returned to the Company.   Any borrowings under this line of credit are on a demand basis without restrictions, and at a variable lending rate.  The interest rate on the outstanding amount is variable and as of September 30, 2011 the rate was 2.5% and the Company was in compliance with all loan covenants. The Company had no outstanding balance on this facility at December 31, 2010.

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Property, Plant And Equipment

9 Months Ended

Sep. 30, 2011

Property, Plant And Equipment [Abstract]

Property, Plant And Equipment

NOTE 12: PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are carried at cost, consisting of the following as of September 30, 2011 and December 31, 2010:

		2011		2010
Land, buildings and other support equipment	$	10,476	$	9,677
Network communications equipment		35,858		35,131
Telephone plant		30,410		29,847
Online plant		6,883		7,113
Plant in service		83,627		81,768
Plant under construction		1,088		108
		84,715		81,876
Less:  Accumulated depreciation		58,412		54,618
Property, plant and equipment, net	$	26,303	$	27,258

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Recent Accounting Pronouncements

9 Months Ended

Sep. 30, 2011

Recent Accounting Pronouncements [Abstract]

Recent Accounting Pronouncements

NOTE 3: RECENT ACCOUNTING PRONOUNCEMENTS

In May 2011, an accounting standards update regarding fair value measurement was issued. This standards update was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. This standards update also changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This standards update becomes effective for annual periods beginning after December 15, 2011. The Company does not believe this will have a material impact on its consolidated financial statements.

In June 2011, an accounting standards update regarding the presentation of comprehensive income was issued. This standards update was issued to increase the prominence of items reported in other comprehensive income and requires that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This standards update becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not believe this will have a material impact on its consolidated financial statements.

In September 2011, an accounting standards update regarding the testing of goodwill for impairment was issued. The amendment allows a company to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount to determine whether it is necessary to perform the two-step goodwill impairment test. This amendment becomes effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and earlier adoption is permitted.  The Company does not believe this will have a material impact on its disclosures or consolidated financial statements.

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Comprehensive Income (Loss)

9 Months Ended

Sep. 30, 2011

Comprehensive Income (Loss) [Abstract]

Comprehensive Income (Loss)

NOTE 9: COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) consisted of the following for the three and nine months ended September 30, 2011 and 2010:

			Three Months Ended September 30,				Nine Months Ended September 30,
			2011		2010		2011		2010
Net income (loss) for the period		$	(1,689)	$	1,266	$	(1,057)	$	3,087
Other comprehensive income (loss), net of taxes
	Pension and postretirement benefit plans		97		120		290		360
	Unrealized gain (loss) on investments		23		73		32		(18)
	Other comprehensive income		120		193		322		342
	Total comprehensive income (loss)	$	(1,569)	$	1,459	$	(735)	$	3,429

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Pension And Postretirement Obligations

9 Months Ended

Sep. 30, 2011

Pension And Postretirement Obligations [Abstract]

Pension And Postretirement Obligations

NOTE 14: PENSION AND POSTRETIREMENT OBLIGATIONS

The components of net periodic cost (gain) for the nine months ended September 30, 2011 and 2010 are as follows:

	Pension Benefits				Postretirement Benefits
		2011		2010		2011		2010
Service cost	$	0	$	0	$	8	$	30
Interest cost		652		656		184		180
Expected return on plan assets		(615)		(613)		(121)		(121)
Amortization of transition asset		0		0		21		21
Amortization of prior service cost		42		42		(248)		(247)
Amortization of net loss		654		663		71		75
Net periodic benefit cost (gain)	$	733	$	748	$	(85)	$	(62)

The components of net periodic cost (gain) for the three months ended September 30, 2011 and 2010 are as follows:

	Pension Benefits				Postretirement Benefits
		2011		2010		2011		2010
Service cost	$	0	$	0	$	2	$	11
Interest cost		217		217		61		61
Expected return on plan assets		(205)		(204)		(40)		(42)
Amortization of transition asset		0		0		7		7
Amortizaton of prior service cost		14		14		(83)		(82)
Amortization of net loss		218		221		24		25
Net periodic benefit cost (gain)	$	244	$	248	$	(29)	$	(20)

The Company expects to contribute a total of $529 to its pension and postretirement benefit plans in 2011.   For the nine months ended September 30, 2011, the Company has contributed $397 of this amount to its pension and postretirement benefit plans.

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Segment Information

9 Months Ended

Sep. 30, 2011

Segment Information [Abstract]

Segment Information

NOTE 10: SEGMENT INFORMATION

The Company's segments are strategic business units that offer different products and services and are managed as Telephone and Online services. The Company evaluates the performance of the segments based upon factors such as revenue growth, expense containment, market share and operating results.

The Telephone segment provides telecommunications services including local, network access, wholesale, conferencing, long distance services, wireless and directory services. The Online segment provides high speed and dial-up Internet services, VoIP, DIRECTV and video. The Company's Alteva and USA Datanet businesses are part of the Online segment.

The Company evaluates depreciation, amortization, impairment charges and interest expense on a total company basis because the Company does not allocate assets or debt to specific segments. As a result, these items, along with other non-operating income or expenses, are not assigned to any segment. Therefore, the segment results presented below are not necessarily indicative of the results of operations these segments would have achieved had they operated as stand-alone entities during the periods presented.

Segment income statement information for the nine months ended September 30, 2011 and 2010 is set forth below:

			2011		2010
	Segment operating revenues
		Telephone	$	14,727	$	14,402
		Online		6,027		5,352
		Eliminations		(1,936)		(1,557)
	Total operating revenues		$	18,818	$	18,197
	Segment operating expenses, exclusive of depreciation and amortization
		Telephone	$	17,238	$	14,388
		Online		7,174		5,613
		Eliminations		(1,726)		(1,346)
	Total operating expenses, exclusive of depreciation and amortization		$	22,686	$	18,655
	Segment operating loss, exclusive of depreciation and amortization
		Telephone	$	(2,511)	$	14
		Online		(1,147)		(261)
		Eliminations		(210)		(211)
	Total operating loss, exclusive of depreciation and amortization		$	(3,868)	$	(458)
The following table reconciles segment operating loss to net income before taxes for the nine months ended September 30, 2011 and 2010:
			2011		2010
	Operating loss		$	(3,868)	$	(458)
	Total depreciation and amortization			(4,103)		(4,210)
	Interest income (expense), net			4		23
	Income from equity investments, net			6,744		9,105
	Other income, net			46		212
	Income (loss) before income taxes		$	(1,177)	$	4,672

Certain regulatory revenue, which includes Universal Service Funds ("USF") and National Exchange Carrier Association ("NECA") pool settlements, accounted for 12% and 16% of the Company's revenues for the nine months ended September 30, 2011 and 2010, respectively. Accounts receivable for certain regulatory revenue represents 7% and 12% of consolidated accounts receivable at September 30, 2011 and 2010, respectively. Accounts Payable for certain carrier costs represents 16% and 18% of consolidated accounts payable at September 30, 2011 and 2010, respectively.

Segment income statement information for the three months ended September 30, 2011 and 2010 is set forth below:

			2011		2010
	Segment operating revenues
		Telephone	$	4,881	$	5,149
		Online		2,618		1,748
		Eliminations		(670)		(647)
	Total operating revenues		$	6,829	$	6,250
	Segment operating expenses, exclusive of depreciation and amortization
		Telephone	$	7,146	$	5,022
		Online		2,986		2,061
		Eliminations		(1,225)		(577)
	Total operating expenses, exclusive of depreciation and amortization		$	8,907	$	6,506
	Segment operating loss, exclusive of depreciation and amortization
		Telephone	$	(2,265)	$	127
		Online		(368)		(313)
		Eliminations		555		(70)
	Total operating loss, exclusive of depreciation and amortization		$	(2,078)	$	(256)
The following table reconciles segment operating loss to net income before taxes for the three months ended September 30, 2011 and 2010:
			2,011		2010
	Operating loss		$	(2,078)	$	(256)
	Total depreciation and amortization			(1,365)		(1,370)
	Interest income (expense), net			(55)		37
	Income from equity investments, net			1,328		3,362
	Other (expenses) income, net			31		81
	Income (loss) before income taxes		$	(2,139)	$	1,854

Certain regulatory revenue, which includes USF and NECA pool settlements, accounts for 9% and 18% of the Company's revenues for the three months ended September 30, 2011 and 2010, respectively.

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Earnings (Loss) Per Share

9 Months Ended

Sep. 30, 2011

Earnings (Loss) Per Share [Abstract]

Earnings (Loss) Per Share

NOTE 8: EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share are computed by dividing net income (loss) applicable to common shares by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed by dividing net income applicable to common shares by the weighted average number of common shares adjusted to include the effect of potentially dilutive securities. Potentially dilutive securities include incremental shares issuable upon exercise of outstanding stock options and shares of unvested restricted stock. Diluted earnings per share exclude all dilutive securities if their effect is anti-dilutive.

The weighted average number of shares of common stock used in diluted earnings per share for the three and nine months ended September 30, 2011 and 2010 is as follows:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2011  (1)	2010	2011  (1)	2010
Weighted average shares of common stock
used in basic earnings per share	5,424,927	5,362,433	5,408,603	5,360,485
Effects of stock options	0	26,687	0	24,634
Effects of restricted stock	0	18,072	0	16,412
	5,424,927	5,407,192	5,408,603	5,401,531

(1) Basic and diluted weighted average shares were the same for the three months and nine months ended September 30, 2011 because the effects of the potentially diluted securities were anti-dilutive and they were excluded from the calculation.

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Summary Of Significant Accounting Policies

9 Months Ended

Sep. 30, 2011

Summary Of Significant Accounting Policies [Abstract]

Summary Of Significant Accounting Policies

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Warwick Valley Telephone Company (the "Company") is a full-service telecommunications company. As a regional Incumbent Local Exchange Carrier operating in southern Orange County, New York and northern New Jersey, the Company provides its historic local and toll telephone service to residential and business customers, Internet high speed broadband service, video service and DIRECTV. Through its acquisitions of the Alteva (see Note 2) and USA Datanet businesses, the Company delivers cloud-based Unified Communications solutions including Voice over Internet Protocol ("VoIP"), hosted Microsoft Communication Services, fixed mobile convergence and advanced voice applications for a broad customer base including enterprise customers, small and medium-sized busineses and other business customers.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the Company's management, all adjustments consisting only of normal recurring adjustments considered necessary for fair presentation have been included. Operating results and cash flows for the nine-month period ended September 30, 2011 are not necessarily indicative of the results that may be expected for the entire year.

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

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and any disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period.  Actual results could differ from those estimates.  The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's latest Annual Report on Form 10-K for the year ended December 31, 2010.

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Investments

9 Months Ended

Sep. 30, 2011

Investments [Abstract]

Investments

NOTE 4: INVESTMENTS

The following is a summary of the Company's short-term investments classified as available for sale at September 30, 2011 and December 31, 2010:

				Unrealized		Fair Value
		Amortized		Gains		Carrying
		Cost		(Losses)		Value
September 30, 2011
Bank certificate of deposit	$	258	$	0	$	258
December 31, 2010
Bank certificate of deposit	$	257	$	0	$	257
Corporate bonds		2,143		(44)		2,099
Foreign bonds		284		(4)		280
	$	2,684	$	(48)	$	2,636

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Fair Value

9 Months Ended

Sep. 30, 2011

Fair Value [Abstract]

Fair Value

NOTE 5: FAIR VALUE

The following table represents the Company's fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of September 30, 2011:

		Level 1 (1)		Level 2 (2)		Level 3 (3)		Total
Short-term investments	$	258	$	0	$	0	$	258

The following table represents the Company's fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of December 31, 2010:

		Level 1 (1)		Level 2 (2)		Level 3 (3)		Total
Short-term investments	$	257	$	2,379	$	0	$	2,636

(1) Quoted prices in active markets for identical assets or liabilities.

(2) Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Short-term investments classified as Level 2 are comprised of corporate and municipal bonds.

(3) Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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Orange County-Poughkeepsie Limited Partnership

9 Months Ended

Sep. 30, 2011

Orange County-Poughkeepsie Limited Partnership [Abstract]

Orange County-Poughkeepsie Limited Partnership

NOTE 13: ORANGE COUNTY-POUGHKEEPSIE LIMITED PARTNERSHIP

The Company is a limited partner in the Orange County-Poughkeepsie Limited Partnership ("O-P") and had a 8.108% equity interest as of September 30, 2011 and 2010, which is accounted for under the equity method of accounting. The majority owner and general partner is Verizon Wireless of the East LP.

On May 26, 2011, the Company entered into an agreement with Verizon Wireless of the East LP, the general partner and a limited partner, and Cellco Partnership, the other limited partner, in the O-P to make certain changes to the O-P partnership agreement which, among other things, specifies that the O-P will provide 4G cellular services (the "4G Agreement"). The 4G Agreement provides that the O-P's business will be converted from a wholesale business to a retail business. The 4G Agreement provides for guaranteed annual cash distributions to the Company from the O-P through 2013.  For 2011, annual cash distributions from the O-P will be $13,600 and for 2012 and 2013 the annual cash distribution will be $13,000.  Annual cash distributions will be paid in equal quarterly amounts. The 4G Agreement also gives the Company the right (the "Put") to require one of the O-P's limited partners to purchase all the Company's ownership interest in the O-P during April 2013 or April 2014 for an amount equal to the greater of (a) $50,000 or (b) the product of five (5) times 0.081081 times the O-P's EBITDA, as defined in the 4G Agreement for the calendar year preceding the exercise of the Put.

The conversion of the O-P from a wholesale business to a retail business pursuant to the 4G Agreement will increase the cellular service costs and operating expenses incurred by the O-P, which is expected to cause a subsequent reduction in the O-P's net income due primarily to the inclusion of sales and marketing expenses. Although the Company's share of the O-P net income recorded in the Company's income statement is expected to decrease, the annual cash distributions the Company receives from the O-P will remain unchanged pursuant to the terms of the 4G Agreement. Regardless of the O-P's net income, pursuant to the 4G Agreement, the Company will receive from the O-P an annual cash distribution of $13,600 in 2011 and annual cash distributions of $13,000 in 2012 and 2013.

Pursuant to the equity method accounting of the Company's investment income, the Company is required to record the income from the O-P as an increase to the Company's investment account.  The Company is required to apply the cash payments made under the 4G Agreement as a return on its investment when received.  Under equity method accounting, the Company currently reports as income its proportionate share of the O-P income, which is less than the guaranteed cash distributions it receives from the O-P.   The cash distributions the Company receives from the O-P that are in excess of the Company's proportionate share of the O-P income is applied to its investment account.  As a result of receiving the fixed guaranteed cash distributions from the O-P in excess of the Company's proportionate share of the O-P income, the investment account is expected to be reduced to zero within the first six months of 2012. Thereafter, the Company will record the fixed guaranteed cash distributions that are received from the O-P in excess of the proportionate share of the O-P income directly to the Company's statement of operations as other income. 

The following is a summary of the Company's investment in O-P as of:

		September 30,		December 31,
	2011		2010
Investment, beginning of period	$	7,681	$	7,669
Income from equity method investment		6,744		12,578
Cash distributions		(9,878)		(12,566)
	$	4,547	$	7,681

The following summarizes the income statement (unaudited) for the nine months ended September 30, 2011 and 2010 that the O-P provided to the Company:

		2011  (1)		2010
Net sales	$	193,208	$	137,110
Cellular service cost		73,123		16,193
Operating expenses		36,925		9,290
Operating income		83,160		111,627
Other income		15		675
Net income	$	83,175	$	112,302
Company share	$	6,744	$	9,105

(1) The nine months ended September 30, 2011 income statement represents four months of the O-P operating as a wholesale business and five months of the O-P operating as a retail business in accordance with Amendment 6 to the O-P Limited Partnership Agreement effective May 1, 2011.

The following summarizes the income statement (unaudited) for the three months ended September 30, 2011 and 2010 that O-P provided to the Company:

		2011		2010
Net sales	$	77,043	$	49,925
Cellular service cost		40,615		5,524
Operating expenses		20,057		3,176
Operating income		16,371		41,225
Other income		1		244
Net income	$	16,372	$	41,469
Company share	$	1,328	$	3,362

The following summarizes the balance sheet as of September 30, 2011(unaudited) and December 31, 2010 that O-P provided to the Company:

		2011		2010
Current assets	$	25,397	$	10,916
Property, plant and equipment, net		38,418		34,294
Total assets	$	63,815	$	45,210
Total liabilities	$	49,888	$	818
Partners' capital		13,927		44,392
Total liabilities and partners' capital	$	63,815	$	45,210

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Goodwill And Intangible Assets

9 Months Ended

Sep. 30, 2011

Goodwill And Intangible Assets [Abstract]

Goodwill And Intangible Assets

NOTE 6: GOODWILL AND INTANGIBLE ASSETS

The following table presents details of the Company's goodwill:

		Amount
Balance as of December 31, 2010	$	0
Goodwill acquired in Alteva aquistion		8,299
Balance as of September 30, 2011	$	8,299

The Company performs an annual goodwill impairment test during the fourth quarter of the fiscal year and when triggering events are present.

The following table presents details of the Company's total purchased intangible assets:

	Estimated		Gross		Accumulated		Net
	Useful Lives		Value		Amortization		Value
As of September 30, 2011
Customer contracts acquired in Alteva acquisition	7 years	$	8,367	$	(199)	$	8,168
Telephone seat licenses	5 years		339		(192)		147
Total		$	8,706	$	(391)	$	8,315

	Estimated		Gross		Accumulated		Net
	Useful Lives		Value		Amortization		Value
As of December 31, 2010
Telephone seat licenses	5 years	$	318	$	(101)	$	217
Total		$	318	$	(101)	$	217

Telephone seat licenses are user licenses that are assigned to each telephone set placed in service at the customer's location.   The amortization expense is recorded in the Consolidated Statements of Operations under depreciation and amortization in the amount of $290 and $43 for the nine months ended September 30, 2011 and 2010, respectively, and $257 and $14 for the three months ended September 30, 2011 and 2010, respectively.

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Shareholders' Equity

9 Months Ended

Sep. 30, 2011

Shareholders' Equity [Abstract]

Shareholders' Equity

NOTE 16: SHAREHOLDERS' EQUITY

The Company has 10,000,000 authorized shares of common stock at a par value of $0.01; 5,000 authorized Preferred Shares at a par value of $100; and 10,000,000 authorized shares of preferred stock at a par value of $0.01.

A summary of the changes to shareholders' equity for the nine months ended September 30, 2011 and 2010 is provided below:

		2011		2010
Shareholders' equity, beginning of period	$	36,425	$	37,905
Net income (loss)		(1,057)		3,087
Dividends paid on common stock		(4,273)		(3,896)
Dividends paid on preferred stock		(19)		(19)
Stock and stock option compensation		821		252
Treasury stock purchases		(1,474)		(17)
Exercise of stock options		1,138		36
Changes in unrealized gain (loss) on investments		32		(18)
Changes in pension and postretirement benefit plans		290		360
Shareholders' equity, end of period	$	31,883	$	37,690

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Condensed Consolidated Statements Of Cash Flows (USD $) In Thousands	9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
CASH FLOW FROM OPERATING ACTIVITIES
Net Income (loss)	$ (1,057)	$ 3,087
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	4,103	4,210
Stock-based compensation expense	821	252
Deferred income taxes	433	140
Income from equity investments, net of distributions	3,134	217
Changes in assets and liabilities, net of effects of business acquisition
Accounts receivable	361	358
Other accounts receivable	(194)	84
Materials and supplies	16	(44)
Prepaid income taxes	(1,993)	451
Prepaid expenses	(139)	(198)
Other assets	(91)	(33)
Accounts payable	194	(89)
Customers' deposits	(36)	(36)
Advance billing and payment	(55)	55
Accrued taxes	(528)	46
Pension and postretirement benefit obligations	13	133
Other accrued expenses	(371)	540
Net cash provided by operating activities	4,611	9,173
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures	(1,939)	(951)
Purchase of intangibles	(55)	(33)
Sale of short-term investments	2,409	0
Purchase of short-term investments	0	(1,752)
Business acquisition, net of cash acquired	(10,250)	0
Net cash used in investing activities	(9,835)	(2,736)
CASH FLOW FROM FINANCING ACTIVITIES
Repayment of long-term debt	(1,139)	(1,139)
Repayment of capital leases	(649)	0
Proceeds from notes payable	9,000	0
Increase in restricted cash	(3,351)	0
Exercise of stock options	1,138	36
Treasury stock purchases	(1,474)	(17)
Dividends (Common and Preferred)	(4,291)	(3,915)
Net cash provided by/(used) in financing activities	(766)	(5,035)
Net change in cash and cash equivalents	(5,990)	1,402
Cash and cash equivalents at beginning of period	10,899	9,286
Cash and cash equivalents at end of period	4,909	10,688
Suplemental disclosure of non-cash investing and financing activities:
Amounts due in connection with business acquisition	$ 7,340	$ 0

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Stock Based Compensation

9 Months Ended

Sep. 30, 2011

Stock Based Compensation [Abstract]

Stock Based Compensation

NOTE 17: STOCK BASED COMPENSATION

The Company adopted and, at the annual meeting held on April 29, 2011, its shareholders approved the Amended and Restated 2008 Long-Term Incentive Plan (the "Amended and Restated LTIP") to assist the Company and its affiliates in attracting, motivating and retaining selected individuals to serve as employees, directors, consultants and advisors of the Company and its affiliates by providing incentives to such individuals through the ownership and performance of the Company's common stock. The Amended and Restated LTIP increases the total number of shares authorized under the Amended and Restated LTIP from 500,000 shares to 1,100,000 shares of common stock and is subject to receiving approval from the PSC and the BPU. Shares available for grant under the Amended and Restated LTIP may be either authorized but unissued shares or shares that have been reacquired by the Company and designated as treasury shares. As of September 30, 2011, 134,095 shares of common stock were available for grant under the Amended and Restated LTIP. The Amended and Restated LTIP permits the issuance by the Company of awards in the form of stock options, stock appreciation rights, restricted stock and restricted stock units and performance shares. The exercise price per share of the Company's common stock purchasable under any stock option or stock appreciation right may not be less than 100% of the fair market value of one share of common stock on the date of grant. The term of any stock option or stock appreciation may not exceed ten years. The Amended and Restated LTIP also provides plan participants with a cashless mechanism to exercise their stock options. As of September 30, 2011, the Company purchasedtreasury stock of $1,477 as a result of plan participants using the cashless mechanism when exercising stock options. Issued restricted stock, stock options and restricted stock units are subject to vesting restrictions.

Restricted Common Stock Awards

The following table summarizes the restricted common stock activity with certain eligible participants during the nine months ended September 30, 2011:

				Grant Date
	Date Issued	Shares		Fair Value per Share
Restricted stock granted	1/6/2011	10,573	$	14.16
Restricted stock granted	2/25/2011	19,861	$	14.70
Restricted stock granted	3/9/2011	25,542	$	14.85
Restricted stock granted	4/29/2011	200	$	15.00
Restricted stock granted	6/15/2011	2,500	$	14.80
Restricted stock granted	8/3/2011	217	$	13.92
Restricted stock granted	8/8/2011	2,000	$	13.65
Forfeited		(29)	$	12.78
Total restricted stock granted		60,864

Stock-based compensation expense for restricted stock awards was $578 and $200 for the nine months ended September 30, 2011 and 2010, respectively, and $130and $71 for in the three months ended September 30, 2011 and 2010, respectively. Restricted stock awards are amortized over their respective vesting periods of two or three years. The Company records stock-based compensation for grants of restricted stock awards on a straight-line basis. The Company has determined expected forfeitures based on recent activity and is recognizing compensation expense only for those restricted common shares expected to vest.

The following table summarizes the restricted common stock activity during the nine-month periods ended September 30, 2011 and 2010:

	2011			2010
			Grant Date Weighted Average Price per Share			Grant Date Weighted Average Price per Share
Unvested Shares	Shares			Shares
Balance - Beginning of period	47,373	$	12.64	21,626	$	11.03
Granted	60,893		14.64	35,004		13.22
Vested	(37,052)		13.05	(7,346)		10.69
Forfeited	(29)		12.78	(300)		12.78
Balance - End of period	71,185	$	14.13	48,984	$	12.65

The total fair value of restricted stock vested during the nine-month periods ended September 30, 2011 and 2010 was $484 and $78, respectively.

Stock Options

The following tables summarize stock option activity for the nine-month periods ended September 30, 2011 and 2010, along with stock options exercisable at the end of the period:

	2011			2010
Options	Shares		Weighted Average Exercise Price	Shares		Weighted Average Exercise Price
Outstanding - beginning of period	160,733	$	11.33	123,631	$	10.76
Stock options granted	148,381		14.83	43,768		12.88
Exercised	(103,319)		11.01	(3,333)		10.78
Forfeited	0		0.00	0		0.00
Outstanding - end of period	205,795	$	13.89	164,066	$	11.31
Vested and expected to vest at September 30	205,795			164,066
Exercisable at September 30	70,740			63,155

Stock options vest over a three-year period. The following table summarizes information about fixed-price stock options outstanding at September 30, 2011:

			Weighted	Weighted Average
			Average	Remaining		Aggregate
	Shares		Exercise	Contractual		Instrinsic
Exercise Price Per Share	Outstanding		Price	Life (Years)		Value
$10.78	15,166	$	10.78	6.9		29
$10.02	4,051		10.02	7.4		11
$11.20	7,517		11.20	7.5		11
$12.97	7,000		12.97	8.1		0
$12.76	1,000		12.76	8.2		0
$12.88	22,680		12.88	8.5		0
$14.70	19,761		14.70	9.4		0
$14.85	128,620		14.85	9.4		0
	205,795	$	11.31	9.0	$	51
Exercisable at September 30, 2011	70,740	$	13.58	8.3	$	0

Stock-based compensation expense for stock option awards was $243 and $52 for the nine months ended September 30, 2011 and 2010, respectively, and $65 and $17 for the three months ended September 30, 2011 and 2010, respectively.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company's closing stock price on the last trading day, September 30, 2011, and the exercise price times the number of shares) that would have been received by the option holders had all the option holders exercised in-the-money stock options on September 30, 2011. This amount changes based on the fair market value of the Company's common stock.

The fair value of the above stock-based option awards was estimated using the Black-Scholes model with the following weighted-average assumptions for the nine months ended September 30, 2011 and 2010:

Options		2011		2010
Expected life (in years)		10		10
Interest rate		3.40%		3.78%
Volatility		32.77%		31.70%
Dividend yield		7.00%		6.83%
Weighted-average fair value per share at grant date	$	2.16	$	1.92

The following table sets forth the total stock-based compensation expense resulting from stock options and restricted stock granted to employees, as well as the effects of the acceleration of the vesting of stock options and restricted stock which had been granted to the former Chief Financial Officer in the amount of $345, which are included in the Company's consolidated statements of income for the three and nine month periods ended September 30, 2011:

		Three Months				Nine Months
Stock-Based Compensation Expense		2011		2010		2011		2010
Cost of services and products	$	17	$	1	$	51	$	4
Selling, general and administrative expenses		178		87		770		248
	$	195	$	88	$	821	$	252

As of September 30, 2011, $915 of total unrecognized compensation expense related to stock options and restricted common stock is expected to be recognized over a weighted average period of approximately 1.3 years.

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Subsequent Events

9 Months Ended

Sep. 30, 2011

Subsequent Events [Abstract]

Subsequent Events

NOTE 19: SUBSEQUENT EVENTS

On October 21, 2011, the PSC approved the Company's petition for authority to issue common stock as partial consideration for the purchase of the assets of Alteva. On September 22, 2011, the BPU also approved the Company's petition for authority to issue stock.

As of October 21, 2011, the Company issued a total of 272,479 shares of common stock to the members of Alteva in connection with the Lock-up and Put Agreement signed by the members of Alteva, LLC with the Company effective as of October 21,2011.

On October 25, 2011, the Company's Board of Directors declared a regular quarterly dividend of $.26 per share of the Company's common stock and $1.25 per share of the Company's preferred stock. The dividends are payable on December 27, 2011 to the shareholders of record on December 16, 2011.

On November 3, 2011, Alteva LLC, received a notice of a patent infringement lawsuit from Klausner Technologies, Inc.  The Company is gathering information in order to respond to this lawsuit on behalf of Alteva, LLC and believes this suit is without merit.

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Business Acquisition

9 Months Ended

Sep. 30, 2011

Business Acquisition [Abstract]

Business Acquisition

NOTE 2: BUSINESS ACQUISITION

On August 5, 2011, Warwick Valley Networks, Inc. ("WVN"), a wholly-owned subsidiary of the Company, purchased substantially all of the assets and assumed certain of the liabilities of Alteva, LLC ("Alteva"), a cloud-based Unified Communications solutions provider and enterprise hosted VoIP provider, in exchange for cash and stock with an estimated value of approximately $17,590 pursuant to the terms of the asset purchase agreement between the Company and Alteva (the "Alteva Agreement"). The issuance of the Company's common stock contemplated under the Alteva Agreement was subject to regulatory approval by the New York State Public Service Commission ("PSC") and the New Jersey Board of Public Utilities ("BPU"), both of which have approved the transaction (see Note 19). The assets acquired included Alteva's VoIP line of business, which provides communication services for commercial customers and unified communication lines of business. This acquisition extends the Company's VoIP services to New Jersey, Pennsylvania and various other states and continues the Company's corporate strategy to expand its business beyond its regulated franchise area.

Pursuant to the Alteva Agreement, WVN purchased substantially all of the assets of Alteva.  WVN assumed only certain of Alteva's liabilities, including certain of its contracts, debt owed under specified capital leases and certain accounts payable.

In exchange for the assets purchased and the liabilities assumed from Alteva, WVN made the following payments:

·$10,250 in cash was paid to Alteva; and

·$4,000 in cash was placed in escrow, which amount is to be (i) returned to the WVN upon the issuance of unregistered shares of the Company's common stock, having a value of approximately $4,000, upon receipt of the PSC and the BPU approvals, or (ii) be released to Alteva in the event that the PSC and BPU approvals were not received prior to December 3, 2011, in which case WVN was to pay Alteva $4,000 cash in lieu of the Company's common stock.

As of October 21, 2011, the Company has obtained the necessary approvals from the PSC and BPU. As a result, the Company issued 272,479 shares of common stock to the members of Alteva as of October 21, 2011 and $3,351 of the remaining amount placed in escrow will be returned to WVN. (See Note 19).

The results of Alteva's operations have been included in the Company's consolidated financial statements since August 5, 2011.

The Company's use of funds to acquire certain assets of Alteva consisted of the following:

Cash (1)	$	10,250
Cash in escrow (2)		4,000
Contingent consideration (3)		2,000
Hold-back payable (4)		750
Working capital payable adjustment (5)		590
Total consideration	$	17,590

1)$ 5,000 of this amount was borrowed from CoBank, ACB (see Note 7).

2)Cash placed in escrow, pending issuance of 272,479 shares of the Company's common stock. This amount was borrowed from Provident Bank (see Note 7).

3)Up to a total of $2,000 in cash is payable to Alteva on August 5, 2012 and 2013 (or prior to January 1, 2013 depending on certain tax law changes), if certain performance-based conditions are satisfied.   

4)This hold-back amount, withheld at closing, is payable on August 5, 2012, less any amounts offset against such amount pursuant to the terms of the Alteva Agreement.

5)This is the estimated additional working capital adjustment payable to Alteva based on preliminary calculations.

The preliminary estimated purchase price has been allocated as follows:

Accounts receivable, net	$	818
Other receivables - cash		41
Inventory		235
Prepaid expenses		63
Other assets		12
Property, plant and equipment		865
Intangible assets		8,367
Goodwill		8,299
Total assets acquired		18,700
Capital leases		(671)
Accounts payable		(185)
Accrued expenses		(137)
Customer deposits		(67)
Deferred revenue, net		(50)
Total liabilities assumed		(1,110)
Total	$	17,590

The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date. The excess of the purchase consideration over the fair value of the net assets acquired has been allocated to goodwill. The preliminary purchase price allocation may be adjusted after obtaining more information regarding, among other things, valuations of assets acquired, liabilities assumed, and revisions of preliminary estimates and finalization of the working capital adjustment. The preliminary purchase price may also be adjusted for the valuation of the put option the members of Alteva have under the Lock-up and Put Agreement (as defined below).

The Company entered into a Lock-up and Put Agreement, effective October 21, 2011, with the members of Alteva (the "Lock-up and Put Agreement)" pursuant to which each of the members agreed to certain restrictions on their ability to sell shares of the Company's common stock they will be issued in connection with the Alteva Agreement (the "Alteva Shares"). Under the Lock-up and Put Agreement, each member of Alteva may transfer to any of the permitted transferees up to 50% of their Alteva Shares between October 21, 2012 and December 14, 2012. The members of Alteva may sell their remaining Alteva Shares without restriction beginning on December 15, 2012. In addition, the Lock-up and Put Agreement gives each member of Alteva the option to sell their Alteva Shares to the Company within a certain prescribed time period at a predetermined price (the "Put"). The Alteva members may exercise their Put with respect to half of their Alteva Shares within a 60-day period commencing on October 21, 2012 and the other half within a 60-day period commencing on December 15, 2012. The purchase price of the Put will be the greater of (i) the closing price of the Company's common stock on the date of exercise of the Put or (ii) $11.74. The Lock-up and Put Agreement also includes a purchase price protection for the Alteva selling shareholders. The purchase price protection provides that if the price of the Company's common stock for the 30 trading days immediately prior to October 21, 2012 or December 15, 2012 (but excluding the three trading days prior to and after the record date for any cash dividend declared by the Company) (the "Release Date Price") is less than $11.74, then the Company will issue to the Alteva

members the aggregate number of shares of the Company's common stock equal to the difference between $1,600 and the market value of 50% of the aggregate Alteva Shares on October 21, 2012 or December 15, 2012, or 100% of the aggregate Alteva Shares if the Release Date Price is less than $11.74 on both dates.

The Company will record the valuation as an estimated contingent liability using a binomial method based on significant inputs not observed in the market and thus will represent a Level 3 instrument. Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect the Company's own assumptions in measuring fair value. The final purchase price allocation and its effect on results of operations may differ significantly from the amounts included herein. The Company is in the process of obtaining third-party valuations of the assets acquired, liabilities assumed and the Lock-up and Put Agreement; thus, the allocation of the purchase price is subject to adjustment.

The $8,367 of acquired intangible assets assigned to customer lists has a weighted-average useful life of approximately seven years. The Company recorded $8,250 in goodwill and for tax purposes intangibles will be amortized over 15 years.

The Company incurred $669 of acquisition-related costs as general and administrative expenses in the Consolidated Statements of Operations in the three and nine-month periods ended September 30, 2011. The revenue from Alteva included in the Company's statement of operations for the three months and nine months ended September 30, 2011 was $1,117 and net loss before income taxes was $273.

The following unaudited pro forma condensed consolidated results of operations for the Company for the three and nine months ended September 30, 2011 and 2010, respectively, assume that the purchase of certain assets and the assumption of certain liabilities of Alteva occurred January 1, 2011 and 2010. The unaudited pro forma information presents the combined operating results of the acquired Alteva business and the Company, with the results prior to the date of the Alteva Agreement adjusted for amortization of intangibles and depreciation of fixed assets, based on the preliminary purchase price allocation and the elimination of acquisition related costs.

The unaudited pro forma results shown in the table below do not purport to be indicative of the results that would have been obtained if the Alteva Agreement did not occur as of January 1, 2011 nor does the unaudited pro forma data intend to be a projection of results that may be obtained in the future.

		Three Months Ended September 30,				Nine Months Ended September 30,
			2011		2010		2011		2010
Operating revenues		$	7,471	$	7,752	$	22,879	$	22,630
Operating expenses
	Cost of services and products (exclusive of
	depreciation and amortization expense)		4,083		3,547		11,707		10,546
	Selling, general and administrative expenses		4,856		4,402		14,765		12,318
	Depreciation and amortization		1,762		1,749		5,242		5,350
	Total operating expenses		10,701		9,698		31,714		28,214
	Operating loss		(3,230)		(1,946)		(8,835)		(5,584)
	Other income (expense)		725		3,426		6,040		9,175
	Income (loss) before income taxes	$	(2,505)	$	1,480	$	(2,795)	$	3,591
	Basic earnings (loss) per share	$	(0.36)	$	0.16	$	(0.47)	$	0.35
	Dilluted earnings (loss) per share	$	(0.36)	$	0.16	$	(0.47)	$	0.35

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Materials And Supplies

9 Months Ended

Sep. 30, 2011

Materials And Supplies [Abstract]

Materials And Supplies

NOTE 11: MATERIALS AND SUPPLIES

Material and supplies are carried at average cost. As of September 30, 2011 and December 31, 2010, material and supplies consisted of the following:

		2011		2010
Inventory for outside plant	$	339	$	368
Inventory for inside plant		287		295
Inventory for online equipment		494		227
Inventory for video equipment		68		72
Inventory for equipment held for sale or lease		17		24
	$	1,205	$	986

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Income Taxes

9 Months Ended

Sep. 30, 2011

Income Taxes [Abstract]

Income Taxes

NOTE 15: INCOME TAXES

Generally for interim tax reporting, one overall estimated annual effective tax rate is computed for tax jurisdictions not subject to valuation allowance and applied to the year to date ordinary income (loss).

The accounting standard regarding accounting for uncertainty in income taxes requires uncertain tax positions to be classified as non-current income tax liabilities unless expected to be paid within one year. As of September 30, 2011, the Company has no liability for unrecognized tax benefits.

The Company and its subsidiaries file a U.S. federal consolidated income tax return.   The U.S. federal statute of limitations remains open for the years 2007 and thereafter.

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Condensed Consolidated Balance Sheets (USD $) In Thousands	Sep. 30, 2011	Dec. 31, 2010
Assets
Cash and cash equivalents	$ 4,909	$ 10,899
Cash held in escrow - restricted	3,351	0
Short term investments	258	2,636
Accounts receivable - net of allowance for uncollectibles - $483 and $350 in 2011 and 2010, respectively	2,949	2,451
Other accounts receivable	288	94
Materials and supplies	1,205	986
Prepaid expenses	752	538
Prepaid income taxes	1,993	0
Total current assets	15,705	17,604
Property, plant and equipment, net	26,303	27,258
Unamortized debt issuance costs	64	21
Intangible assets, net	8,315	217
Investments	4,547	7,681
Goodwill	8,299	0
Other assets	322	294
Total assets	63,555	53,075
Liabilities and Shareholders' Equity
Short-term borrowings	9,000	0
Accounts payable	1,897	1,174
Current maturities of long-term debt	1,519	1,519
Amounts due in connection with business acquisition	6,018	0
Advance billing and payments	392	397
Customer deposits	87	56
Deferred income taxes	0	38
Accrued taxes	513	1,041
Pension and postretirement benefit obligations	529	529
Other accrued expenses	2,028	2,262
Total current liabilities	21,983	7,016
Long-term debt, net of current maturities	0	1,139
Amounts due in connection with business acquisition	1,000	0
Deferred income taxes	2,412	1,941
Pension and postretirement benefit obligations	6,277	6,554
Total liabilities	31,672	16,650
Commitments and contingencies
Shareholders' equity
Preferred shares - $100 par value; authorized and issued shares of 5,000; $0.01 par value authorized and unissued shares of 10,000,000	500	500
Common stock - $0.01 par value; authorized shares of 10,000,000 issued 6,218,787 and 6,054,741 shares at September 30, 2011 and December 31, 2010, respectively	62	60
Treasury stock - at cost, 733,694 and 635,189 shares of common stock at September 30, 2011 and December 31, 2010, respectively	(6,244)	(4,770)
Additional paid in capital	6,020	4,063
Accumulated other comprehensive loss	(2,463)	(2,784)
Retained earnings	34,008	39,356
Total shareholders' equity	31,883	36,425
Total liabilities and shareholders' equity	$ 63,555	$ 53,075