Back to GetFilings.com



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

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 number: 0-32617


HORIZON TELCOM, INC.
(Exact name of Registrant as specified in its charter)


OHIO 31-1449037
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)


68 EAST MAIN STREET
CHILLICOTHE, OHIO 45601-0480
(Address of principal executive offices) (Zip Code)

(740) 772-8200
(Registrant's telephone number, including area code)


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 [X] No [ ]

As of November 11, 2002, there were 90,552 shares of class A common stock
outstanding and 271,926 shares of class B common stock outstanding.




HORIZON TELCOM, INC.
FORM 10-Q
THIRD QUARTER REPORT

TABLE OF CONTENTS



PAGE NO.
--------
PART I FINANCIAL INFORMATION

Item 1. Financial Statements........................................................3

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................22

Item 3. Quantitative and Qualitative Disclosures About Market Risk.................45

Item 4. Controls and Procedures....................................................46

PART II OTHER INFORMATION

Item 1. Legal Proceedings..........................................................47

Item 2. Changes in Securities and Use of Proceeds..................................47

Item 3. Defaults Upon Senior Securities............................................47

Item 4. Submission of Matters to a Vote of Security Holders........................47

Item 5. Other Information..........................................................47

Item 6. Exhibits and Reports on Form 8-K...........................................61



As used herein and except as the context may otherwise require, "the
Company," "we," "us," "our" or "Horizon Telcom" means, collectively, Horizon
Telcom, Inc., and its subsidiaries: Horizon PCS, Inc., The Chillicothe Telephone
Company, Horizon Technology, Inc., and Horizon Services, Inc. References to
"Horizon PCS" refer to Horizon PCS, Inc., and its subsidiaries: Horizon Personal
Communications, Inc. ("HPC"), and Bright Personal Communications Services, LLC
("Bright PCS").





2



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HORIZON TELCOM, INC., AND SUBSIDIARIES



Consolidated Balance Sheets
As of September 30, 2002, and December 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------------


September 30, December 31,
2002 2001
------------------ ----------------
(unaudited)
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents (includes $71,000,000 on deposit in
accordance with covenant amendment in 2002)..................... $ 117,010,782 $ 127,154,227
Restricted cash...................................................... 24,062,500 24,597,222
Investments, available-for-sale, at fair value....................... 469,650 3,537,720
Accounts receivable - subscriber, less allowance for doubtful
accounts of approximately $2,760,000 in 2002 and $2,662,000 in
2001............................................................. 23,134,809 15,275,708
Accounts receivable - interexchange carriers, access charge pools
and other, less allowance for doubtful accounts of approximately
$422,000 in 2002 and $477,000 in 2001............................ 3,948,192 5,691,105
Inventories.......................................................... 5,064,247 6,512,026
Prepaid expenses and other........................................... 2,971,031 2,403,904
------------------ ------------------
Total current assets........................................ 176,661,211 185,171,912
------------------ ------------------

OTHER ASSETS:
Intangibles, net..................................................... 40,996,035 42,840,534
Goodwill............................................................. 7,191,180 7,191,180
Restricted cash...................................................... 12,032,009 24,062,500
Debt issuance costs, net............................................. 21,401,335 20,584,960
Deferred personal communications services ("PCS") activation expense 5,485,129 3,808,618
Prepaid pension costs and other...................................... 4,804,849 4,976,942
------------------ ------------------
Total other assets.......................................... 91,910,537 103,464,734
------------------ ------------------

PROPERTY, PLANT AND EQUIPMENT, NET........................................ 319,975,041 289,277,220
------------------ ------------------
Total assets.......................................... $ 588,546,789 $ 577,913,866
================== ==================


(Continued on next page)




3


HORIZON TELCOM, INC., AND SUBSIDIARIES

Consolidated Balance Sheets (Continued)
As of September 30, 2002, and December 31, 2001
- --------------------------------------------------------------------------------




September 30, December 31,
2002 2001
------------------- -------------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
CURRENT LIABILITIES:
Line of credit..................................................... $ -- $ 19,167,338
Current maturities of long-term debt............................... 2,000,000 2,000,000
Accounts payable................................................... 20,683,151 28,773,270
Payable to Sprint.................................................. 14,865,582 10,244,529
Deferred PCS revenue............................................... 4,926,404 3,712,734
Accrued taxes...................................................... 4,434,489 4,886,100
Accrued interest, payroll and other accrued liabilities............ 14,711,558 11,997,165
------------------- ------------------
Total current liabilities................................. 61,621,184 80,781,136
------------------- ------------------

LONG-TERM DEBT AND OTHER LIABILITIES:
Long-term debt, net of discount.................................... 551,008,999 402,055,643
Deferred federal income taxes, net................................. 3,589,013 4,632,157
Postretirement benefit obligation.................................. 6,045,912 5,490,015
Deferred PCS activation revenue.................................... 5,485,129 3,808,618
Other long-term liabilities........................................ 12,007,626 12,273,617
------------------- ------------------
Total long-term debt and other liabilities................ 578,136,679 428,260,050
------------------- ------------------
Total liabilities..................................... 639,757,863 509,041,186
------------------- ------------------

CONVERTIBLE PREFERRED STOCK OF SUBSIDIARY............................... 154,067,678 145,349,043

COMMITMENTS AND CONTINGENCIES (Note 8)

STOCKHOLDERS' EQUITY (DEFICIT):
Common stock - class A, no par value, 200,000 shares authorized,
99,726 shares issued and 90,552 shares outstanding, stated at
$4.25 per share................................................. 423,836 423,836
Common stock - class B, no par value, 500,000 shares authorized,
299,450 shares issued and 271,926 outstanding, stated at $4.25
per share....................................................... 1,272,662 1,272,029
Treasury stock - 36,698 shares at cost............................. (5,504,700) (5,504,700)
Accumulated other comprehensive income (loss), net................. (552,154) 1,332,044
Additional paid-in capital......................................... 72,197,212 72,188,904
Deferred stock option compensation................................. (769,943) (1,079,610)
Retained deficit................................................... (272,345,665) (145,108,866)
------------------- ------------------
Total stockholders' equity (deficit)...................... (205,278,752) (76,476,363)
------------------- ------------------
Total liabilities and stockholders' equity (deficit).. $ 588,546,789 $ 577,913,866
================= ==================


The accompanying notes are an integral part of these consolidated financial statements.






4





HORIZON TELCOM, INC., AND SUBSIDIARIES

Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2002 and 2001 (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------


For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
2002 2001 2002 2001
---------------- --------------- ---------------- ---------------
OPERATING REVENUES:
PCS subscriber and roaming..................... $ 54,212,134 $ 33,149,798 $ 150,069,815 $ 74,515,536
PCS equipment.................................. 1,787,076 2,020,282 5,760,004 4,595,019
Basic local and long-distance service.......... 4,737,885 4,736,206 14,089,158 14,664,018
Network access................................. 5,217,569 5,449,395 16,548,336 14,489,849
Equipment systems sales, information services,
Internet access and other.................. 2,235,065 2,007,956 6,402,148 5,487,611
---------------- --------------- ---------------- ---------------
Total operating revenues................. 68,189,729 47,363,637 192,869,461 113,752,033
---------------- --------------- ---------------- ---------------

OPERATING EXPENSES:
Cost of goods sold ............................ 4,138,059 4,306,689 13,066,769 9,168,124
Cost of services (exclusive of items shown
separately below).......................... 47,968,070 32,690,677 132,454,286 78,899,383
Selling and marketing.......................... 13,429,825 13,025,403 40,192,224 31,145,073
General and administrative (exclusive of items
shown separately below).................... 14,878,317 11,175,404 41,578,153 29,765,174
Non-cash compensation.......................... 120,031 101,868 309,667 1,047,312
Depreciation and amortization.................. 11,583,788 7,244,585 36,934,783 18,618,708
---------------- --------------- ---------------- ---------------
Total operating expenses................. 92,118,090 68,544,626 264,535,882 168,643,774
---------------- --------------- ---------------- ---------------

OPERATING LOSS...................................... (23,928,361) (21,180,989) (71,666,421) (54,891,741)
---------------- --------------- ---------------- ---------------

NONOPERATING INCOME (EXPENSE):
Interest expense, net.......................... (17,023,096) (6,534,196) (46,151,847) (20,335,066)
Subsidiary preferred stock dividends........... (3,005,897) (2,816,052) (8,718,663) (8,169,630)
Interest income and other, net................. 718,937 518,944 2,405,629 4,949,482
Gain (Loss) on sale of property and equipment.. 9,961 -- (631,042) --
---------------- --------------- ---------------- ---------------
Total nonoperating expense............ (19,300,095) (8,831,304) (53,095,923) (23,555,214)
---------------- --------------- ---------------- ---------------

LOSS BEFORE INCOME TAX EXPENSE AND MINORITY INTEREST (43,228,456) (30,012,293) (124,762,344) (78,446,955)

INCOME TAX (EXPENSE) BENEFIT........................ 64,722 (458,383) (1,115,349) (1,482,351)

MINORITY INTEREST IN LOSS........................... -- -- -- 983,883
---------------- --------------- ---------------- ---------------

NET LOSS............................................ $ (43,163,734) $ (30,470,676) $ (125,877,693) $ (78,945,423)
================ =============== ================ ===============

Basic and diluted net loss per share................ $ (119.08) $ (84.10) $ (347.33) $ (219.35)
=============== =============== =============== ===============
Basic and diluted weighted-average common shares
outstanding ..................................... 362,478 362,320 362,413 359,904
================ =============== ================ ===============


The accompanying notes are an integral part of these consolidated financial statements.






5





HORIZON TELCOM, INC., AND SUBSIDIARIES

Consolidated Statements of Other Comprehensive Income (Loss)
For the Three and Nine Months Ended September 30, 2002 and 2001 (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------


For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------

NET LOSS......................................... $ (43,163,734) $ (30,470,676) $(125,877,693) $ (78,945,423)
============== ============== ============== ==============

OTHER COMPREHENSIVE INCOME (LOSS)................
Net unrealized gain (loss) on hedging
activities................................ 20,686 (326,108) 140,728 (679,181)
Net unrealized loss on securities
available-for-sale net of taxes of $67,667
and $1,043,144 for the three and nine
months ended September 30, 2002,
respectively............................. (131,353) -- (2,024,926) --
-------------- -------------- --------------- --------------

COMPREHENSIVE INCOME (LOSS)...................... $ (43,274,401) $ (30,796,784) $(127,761,891) $ (79,624,604)
============= ============= ============= ==============


The accompanying notes are an integral part of these consolidated financial statements.







6





HORIZON TELCOM, INC., AND SUBSIDIARIES

Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2002 and 2001 (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
For the Nine Months Ended
September 30,
---------------------------------------
2002 2001
----------------- ------------------

NET CASH USED IN OPERATING ACTIVITIES........................................ (51,254,563) (55,397,622)
----------------- ------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................... (66,084,898) (101,502,116)
Proceeds from sale of property, plant and equipment..................... 1,563,970 --
Proceeds from redemption of RTFC certificates........................... -- 2,895,647
----------------- ------------------
Net cash used in investing activities................................ (64,520,928) (98,606,469)
----------------- ------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long-term debt............................................ 135,000,000 5,650,000
Repayments on long-term debt............................................ (25,167,337) --
Dividends paid.......................................................... (1,359,106) (1,314,177)
Deferred financing fees................................................. (2,841,511) (1,177,673)
Treasury stock received as dividend..................................... -- (4,311)
---------------- -----------------
Net cash provided by financing activities............................ 105,632,046 3,153,839
----------------- -----------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... (10,143,445) (150,850,252)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................... 127,154,227 192,011,997
----------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD..................................... $ 117,010,782 $ 41,161,745
================= =================




7




HORIZON TELCOM, INC., AND SUBSIDIARIES

Notes to Consolidated Financial Statements
As of September 30, 2002, and December 31, 2001,
And for the Three and Nine Months Ended September 30, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------

NOTE 1 - GENERAL

The results of operations for the periods shown are not necessarily
indicative of the results to be expected for the fiscal year. In the opinion of
management, the information contained herein reflects all adjustments necessary
to make a fair statement of the results for the periods presented. All such
adjustments are of a normal recurring nature. The financial information
presented herein should be read in conjunction with the Company's Form 10-K for
the year ended December 31, 2001, which includes information and disclosures not
presented herein.

NOTE 2 - ORGANIZATION AND BUSINESS OPERATIONS

The Company is a facilities-based telecommunications carrier that provides
a variety of voice and data services to commercial, residential/small business
and local market segments. The Company provides wireless personal communications
service to a twelve-state region in the Midwest, including portions of Ohio,
Indiana, Pennsylvania, Virginia and West Virginia, as a PCS affiliate of Sprint
Corporation ("Sprint") through its majority-owned subsidiary, Horizon PCS, Inc.
The Company also provides landline telephone service, very-high-data-rate
digital subscriber line ("VDSL") television service and sells equipment to
business and residential customers to the southern Ohio region, principally in
and surrounding Chillicothe, Ohio, through its wholly-owned subsidiary, the
Chillicothe Telephone Company ("Chillicothe Telephone"). Through its
wholly-owned subsidiary, Horizon Technology, Inc., formerly known as United
Communications, Inc. ("Horizon Technology"), the Company offers dial-up and
broadband Internet access services, network services and resells long distance
services. The Company also owns 100% of Horizon Services, Inc. ("Horizon
Services"), which provides administrative services to other subsidiaries.
Administrative services provided by Horizon Services generally include such
functions as insurance, billing and, accounting services, computer access and
other information technology services and human resources services.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Note 1 in the Notes to Consolidated Financial Statements in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001, describes the
Company's significant accounting policies in greater detail than the disclosures
presented herein.

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements reflect the
operations of Horizon Telcom and its subsidiaries and have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles in the United States have been condensed or omitted
pursuant to such rules and regulations. All material intercompany transactions
and balances have been eliminated in consolidation.

ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ materially from those
estimates. See "Critical Accounting Policies" under "Item 2. Management's
Discussion and Analysis of Financial Results and Operations" of this Form 10-Q
for further information regarding estimates.




8


HORIZON TELCOM, INC., AND SUBSIDIARIES

Notes to Consolidated Financial Statements
As of September 30, 2002, and December 31, 2001,
And for the Three and Nine Months Ended September 30, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------


NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ACCOUNTING FOR RATE REGULATION

Chillicothe Telephone is subject to rate-regulation. Statement of Financial
Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain
Types of Rate Regulation" provides that rate-regulated public utilities account
for revenues and expenses and report assets and liabilities consistent with the
economic effect of the way in which the regulators establish rates. As of
September 30, 2002, the Company has recorded regulatory assets and liabilities
of approximately $130,000 and $930,000, respectively. As of December 31, 2001,
regulatory assets and liabilities were approximately $331,000 and $481,000,
respectively.

MINORITY INTEREST

As part of the acquisition of Bright PCS, the former members of Bright PCS
have approximately an 8% ownership in Horizon PCS. The Company accounts for this
ownership by recording the portion of net income (loss) attributable to the
minority shareholders as minority interest in earnings (loss) in the
accompanying condensed consolidated statements of operations. The minority
interest's share in the Company's losses during 2001 reduced the minority
interest's accounting basis to zero. There will be no further allocations to
minority interest until such time as Horizon PCS becomes profitable and any
unallocated losses to minority interest are offset with income in future
periods.

RESTRICTED CASH

In connection with Horizon PCS' December 2001 offering of $175,000,000 of
senior notes, the first four semi-annual interest payments due under the terms
of the notes were placed in escrow. Amounts to be paid toward interest payments
due within twelve months of the balance sheet date have been classified as
short-term. The first interest payment on Horizon PCS' senior notes was made in
June 2002.

INVESTMENTS

The classification of investments in debt and equity securities is
determined by management at the date individual investments are acquired. The
classification of those securities and the related accounting policies are as
follows:

Available-for-sale securities are debt and equity securities which the
Company intends to hold for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as available-for-sale would
be based on various factors, including changes in market conditions, liquidity
needs and similar criteria. Available-for-sale securities are carried at fair
value as determined by quoted market prices with unrealized gains and losses
reported in other comprehensive income.

Trading securities are debt and equity securities which the Company intends
to purchase and sell frequently and has the intent to sell in the near future.
Trading securities are carried at fair value with unrealized holding gains and
losses reported in the statement of operations.

Other investments in which the Company does not have a significant
ownership and for which there is no ready market are carried at cost.
Information regarding these and all other investments is reviewed periodically
for evidence of impairment and "other than temporary" declines in value.




9

HORIZON TELCOM, INC., AND SUBSIDIARIES

Notes to Consolidated Financial Statements
As of September 30, 2002, and December 31, 2001,
And for the Three and Nine Months Ended September 30, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, including improvements that extend useful
lives, are stated at original or acquisition cost while maintenance and repairs
are charged to operations as incurred. Construction work in progress includes
expenditures for the purchase of capital equipment, construction and items such
as direct payroll-related benefits and interest capitalized during construction.

The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value, less costs to
sell.

DERIVATIVE FINANCIAL INSTRUMENTS

The Company has adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for
Derivative Instruments and Certain Hedging Activities." These statements require
an entity recognize all derivative and hedging activities as an asset or
liability measured at fair value. Depending on the intended use of the
derivative, changes in its fair value will be reported in the period of change
as either a component of earnings or a component of other comprehensive income.
The Company uses interest rate swaps, designated as cash flow hedges, to manage
interest rate risk. The net amount paid or received on interest rate swaps is
recognized as an adjustment to interest expense. Outstanding temporary gains and
losses are netted together and shown as either a component of other assets or
other long-term liabilities.

REVENUE RECOGNITION

Horizon PCS sells handsets and accessories which are recorded at the time
of the sale as equipment revenue. After the handset has been purchased, the
subscriber purchases a service package, which is recognized monthly as service
is provided and is included as subscriber revenue. The Company defers monthly
service revenue billed in advance. Roaming revenue is recorded when Sprint PCS
subscribers, not based in the Company's network area, and non-Sprint PCS
subscribers roam onto Horizon PCS' network. The roaming rate with Sprint PCS is
determined between the Company and Sprint, while the roaming rate charged to
other wireless carriers is negotiated by Sprint on the Company's behalf.

Horizon PCS accounts for the recognition of activation fee revenue in
accordance with the current interpretations of SEC Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements." Accordingly,
activation fee revenue and direct activation-related expense are deferred and
will be recorded over the average life for those customers assessed an
activation fee, currently 30 months, as subscriber revenue and selling and
marketing, respectively.

Horizon PCS records 100% of PCS subscriber revenues from its customers,
roaming revenues from Sprint PCS subscribers based outside its markets and
non-Sprint PCS roaming revenues. Sprint retains 8% of all collected service
revenue as a management fee. Collected service revenues include PCS subscriber
revenues and non-Sprint PCS roaming revenues, but exclude Sprint PCS roaming
revenues, roaming charges billed to Horizon PCS customers for roaming onto a
non-Sprint PCS network and revenues from sales of equipment. Horizon PCS reports
the amounts retained by Sprint as general and administrative expense.



10


HORIZON TELCOM, INC., AND SUBSIDIARIES

Notes to Consolidated Financial Statements
As of September 30, 2002, and December 31, 2001,
And for the Three and Nine Months Ended September 30, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------


NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The landline telephone services operating segment consists of basic local
and long-distance toll, network access services and other telephone service
revenue.

Intra-LATA, (Local Access and Transport Area) (i.e., the area of southern
Ohio, including Columbus originally covered by area code 614), basic local
exchange and long-distance service revenue consists of flat rate services and
measured services billed to customers utilizing Chillicothe Telephone's
telephone network. Long distance intraLATA/interstate revenue consists of
message services that terminate beyond the basic service area of the originating
wire center.

Network access revenue consists of revenue derived from the provision of
exchange access services to an interexchange carrier or to an end user beyond
the exchange carrier's network. Other revenue includes directory advertising
related to a telephone directory published annually.

Other revenues include Internet access services, equipment systems sales
and information services. Internet access revenues are monthly service fees and
other charges billed to customers of Horizon Technology's bright.net dial-up
Internet service. Equipment systems sales and information services revenues
consist of sales made by Chillicothe Telephone to various businesses or other
residential customers for equipment used on the telephone system.

Chillicothe Telephone is an independent local exchange carrier that
provides local telephone service within ten local exchanges. Chillicothe
Telephone follows an access charge system as ordered by the Federal
Communications Commission ("FCC") and the Public Utilities Commission of Ohio
("PUCO") in 1984. The access charge methodology provides a means whereby local
exchange carriers, including Chillicothe Telephone, provide their customers
access to the facilities of the long-distance carriers and charge long-distance
carriers for interconnection to local facilities.

The PUCO issued an Opinion and Order effective January 1, 1988, for
reporting intra-LATA (Local Access and Transport Area) toll revenues. This
methodology is defined as the Originating Responsibility Plan with a Secondary
Carrier Option (ORP-SCO). This plan calls for one or more primary carriers in
each LATA with other local exchange carriers acting as secondary carriers. The
secondary carriers provide the primary carrier with access to local facilities
and are compensated based upon applicable intra-LATA access charge tariffs.
Chillicothe Telephone is a primary carrier. Intra-LATA toll revenue is reflected
in basic and long-distance service revenue on the accompanying consolidated
statements of operations, and is recognized as such services are provided.
Estimated unbilled amounts are accrued at the end of each month.

Chillicothe Telephone recognizes revenue for billing and collection
services performed on behalf of certain interexchange carriers. Chillicothe
Telephone is reimbursed for this service based on the number of messages billed
on behalf of the interexchange carrier. The revenues from this service are
recognized in the same period the services are provided. Chillicothe Telephone
also recognizes advertising revenues from its telephone directory. Telephone
directory customers sign an annual contract which is billed in twelve equal
installments. The revenue derived from directory advertising is recognized
equally over the twelve-month period of the directory, consistent with the
ratemaking treatment. These items are recorded in other revenues on the
accompanying consolidated statements of operations.

Chillicothe Telephone recognizes revenues on the completed contract basis
for the installation of telecommunication and other related equipment. These
revenues are reported as equipment system sales on the accompanying consolidated
statements of operations. Maintenance revenues are recognized over the life of
the contract, and recorded as other revenues on the accompanying consolidated
statements of operations.




11



HORIZON TELCOM, INC., AND SUBSIDIARIES

Notes to Consolidated Financial Statements
As of September 30, 2002, and December 31, 2001,
And for the Three and Nine Months Ended September 30, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------



NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Horizon Technology is an FCC-licensed radio common carrier that primarily
provides Internet access services and resells long-distance service. Revenues on
equipment sales were recognized at the time of sale. Revenues for the Internet
and long distance services are recognized monthly as service is rendered.

NET LOSS PER SHARE

The Company computes net loss per common share in accordance with SFAS No.
128, "Earnings per Share" and SAB No. 98. Basic and diluted net loss per share
is computed by dividing net loss for each period by the weighted-average
outstanding common shares. No conversion of common stock equivalents has been
assumed in the calculations since the effect would be antidilutive. As a result,
the number of weighted-average outstanding common shares as well as the amount
of net loss per share is the same for basic and diluted net loss per share
calculations for all periods presented. There are three items that could
potentially dilute basic earnings per share in the future. These items include
common stock options, stock purchase warrants and convertible preferred stock.
These items will be included in the diluted earnings per share calculation when
dilutive.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2002 the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."
This Statement addresses financial accounting and reporting for costs associated
with exit or disposal activities by requiring that expenses related to the exit
of an activity or disposal of long-lived assets be recorded when they are
incurred and measurable. Prior to SFAS No. 146, these charges were accrued at
the time of commitment to exit or dispose of an activity. The Company will adopt
SFAS 146 on January 1, 2003, and it is not expected to have a material effect on
the Company's financial position, results of operations or cash flows.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 addresses the accounting for gains and losses from
the extinguishments of debt, economic effects and accounting practices of
sale-leaseback transactions and makes technical corrections to existing
pronouncements. The Company adopted SFAS No. 145 on July 1, 2002, and it has not
had a material effect on the Company's financial position, results of operations
or cash flows.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment of long-lived assets. The statement
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30. SFAS No. 144 removes goodwill from its scope,
as goodwill is addressed in the impairment test described under SFAS No. 142.
The Company adopted SFAS No. 144 on January 1, 2002. See Note 6 for discussion
on the impact of the adoption of this statement.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirements of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and the normal operation of a
long-lived asset. The Company will adopt this statement effective January 1,
2003, and it is not expected to have a material effect on the Company's
financial position, results of operations or cash flows.



12



HORIZON TELCOM, INC., AND SUBSIDIARIES

Notes to Consolidated Financial Statements
As of September 30, 2002, and December 31, 2001,
And for the Three and Nine Months Ended September 30, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------


NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Company adopted SFAS No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangible Assets" on January 1, 2002. As result of the
adoption, goodwill amortization ceased as of December 31, 2001, and the Company
is required to complete an impairment test of its remaining goodwill balance
annually (or more frequently if impairment indicators arise). As of September
30, 2002, Horizon PCS has goodwill of approximately $7,191,000, related to the
acquisition of Bright PCS. See Note 9 herein for additional information.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform with the 2002
presentation. Management believes the reclassifications are immaterial to
previously reported financial statements.

NOTE 4 - SEGMENT INFORMATION

The Company is organized around the differences in products and services it
offers. Under this organizational structure, the Company operates in two
reportable business segments as defined by SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." These segments are wireless
personal communications services and landline telephone services. The wireless
personal communications services segment includes three major revenue streams:
PCS subscriber revenues, PCS roaming revenues and PCS equipment sales. The
landline telephone services segment includes four major revenue streams: basic
local service, long-distance service, network access and other related telephone
service.

Other business activities of the Company include Internet access services,
equipment systems sales, and other miscellaneous revenues, which do not meet the
definition of a reportable segment under SFAS No. 131. Amounts related to these
business activities are included below under the heading "All other."
Unallocated administrative expenses represent general and administrative
expenses incurred at a corporate level. All other assets represent common assets
not identified to an operating segment.

The Company evaluates the performance of the segments based on operating
earnings before the allocation of administrative expenses. Information about
interest income and expense and income taxes is not provided on a segment level.
The accounting policies of the segments are the same as described in the summary
of significant accounting policies.




13


HORIZON TELCOM, INC., AND SUBSIDIARIES

Notes to Consolidated Financial Statements
As of September 30, 2002, and December 31, 2001,
And for the Three and Nine Months Ended September 30, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------

NOTE 4 - SEGMENT INFORMATION (CONTINUED)

The following table includes net revenues, intercompany revenues, operating
earnings (loss), depreciation and amortization expense and capital expenditures
for the three and nine months ended September 30, 2002 and 2001, and assets as
of September 30, 2002, and December 31, 2001, for each segment and reconciling
items necessary to total to amounts reported in the condensed consolidated
financial statements:




Net Revenues
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
2002 2001 2002 2001
--------------- --------------- -------------- ---------------
Wireless personal communications services... $ 55,999,210 $ 35,170,080 $ 155,829,819 $ 79,110,555
Landline telephone services................. 9,955,454 10,185,601 30,637,494 29,153,867
All other................................... 2,235,065 2,007,956 6,402,148 5,487,611
--------------- --------------- --------------- ---------------
Total net revenues...................... $ 68,189,729 $ 47,363,637 $ 192,869,461 $ 113,752,033
=============== =============== =============== ===============


Intercompany Revenues
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ----------------
Wireless personal communications services... $ 61,770 $ 34,024 $ 254,862 $ 118,616
Landline telephone services................. 280,886 222,560 1,086,141 669,471
All other................................... 99,738 151,816 318,477 204,308
------------------ --------------- --------------- ----------------
Total intercompany revenues............. $ 442,394 $ 408,400 $ 1,659,480 $ 992,395
================== =============== =============== ================


Operating Earnings (Loss)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
2002 2001 2002 2001
--------------- --------------- -------------- ---------------
Wireless personal communications services... $ (23,701,465) $ (21,518,608) $ (72,803,783) $ (55,789,754)
Landline telephone services................. 3,450,326 4,459,350 12,415,167 12,219,811
All other................................... (1,024,235) (999,155) (2,808,180) (2,060,806)
Unallocated administrative expense.......... (2,652,987) (3,122,576) (8,469,625) (9,260,992)
------------------ --------------- --------------- ---------------
Total operating loss.................... $ (23,928,361) $ (21,180,989) $ (71,666,421) $ (54,891,741)
================== =============== =============== ===============


Depreciation and Amortization Expense
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
2002 2001 2002 2001
--------------- --------------- -------------- ---------------
Wireless personal communications services... $ 9,302,721 $ 5,158,646 $ 30,232,128 $ 12,980,232
Landline telephone services................. 1,711,465 1,589,397 5,114,793 4,628,805
All other................................... 569,602 496,542 1,587,862 1,009,671
------------------ --------------- -------------- ---------------
Total depreciation and amortization..... $ 11,583,788 $ 7,244,585 $ 36,934,783 $ 18,618,708
================== =============== ============== ===============






14


HORIZON TELCOM, INC., AND SUBSIDIARIES

Notes to Consolidated Financial Statements
As of September 30, 2002, and December 31, 2001,
And for the Three and Nine Months Ended September 30, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------


NOTE 4 - SEGMENT INFORMATION (CONTINUED)




Capital Expenditures
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
2002 2001 2002 2001
--------------- --------------- -------------- ---------------
Wireless personal communications services.. $ 8,507,660 $ 24,331,396 $ 57,620,672 $ 90,350,650
Landline telephone services................. 2,014,624 3,005,081 5,868,406 6,508,718
All other................................... 928,340 1,014,080 2,595,820 4,642,748
--------------- --------------- -------------- ---------------
Total capital expenditures.............. $ 11,450,624 $ 28,350,557 $ 66,084,898 $ 101,502,116
=============== =============== ============== ==============



Assets
------------------------------------
September 30, December 31,
2002 2001
---------------- ---------------
Wireless personal communications services................ $ 490,572,467 $ 480,754,022
Landline telephone services.............................. 92,163,661 90,951,437
All other................................................ 5,810,661 6,208,407
---------------- ---------------
Total assets......................................... $ 588,546,789 $ 577,913,866
================ ===============






15


HORIZON TELCOM, INC., AND SUBSIDIARIES

Notes to Consolidated Financial Statements
As of September 30, 2002, and December 31, 2001,
And for the Three and Nine Months Ended September 30, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------

NOTE 4 - SEGMENT INFORMATION (CONTINUED)

Net operating revenues by product and service for each segment were as
follows:



Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -------------------------------
2002 2001 2002 2001
------------- ------------ ------------ -------------
Wireless personal communications services:
PCS subscriber revenues...................... $ 39,219,056 $ 21,356,842 $111,141,497 $ 48,870,231
PCS roaming revenues......................... 14,993,078 11,792,956 38,928,318 25,645,305
PCS equipment sales.......................... 1,787,076 2,020,282 5,760,004 4,595,019
------------- ------------ ------------ -------------
Total wireless personal communication services
55,999,210 35,170,080 155,829,819 79,110,555
------------- ------------ ------------ -------------

Landline telephone services:
Basic local service.......................... 3,641,695 3,618,523 10,905,384 10,857,809
Long-distance service........................ 300,115 297,906 878,529 1,147,635
Network access............................... 5,217,569 5,449,395 16,548,336 14,489,849
Other related telephone service.............. 796,075 819,777 2,305,245 2,658,574
------------- ------------ ------------ -------------
Total landline telephone services.......... 9,955,454 10,185,601 30,637,494 29,153,867
------------- ------------ ------------ -------------

Other:
Internet access services..................... 760,057 800,356 2,385,462 2,390,087
Equipment system sales....................... 315,667 372,911 936,620 1,081,657
Other miscellaneous revenues................. 1,159,341 834,689 3,080,066 2,015,867
------------- ------------ ------------ -------------
Total other................................ 2,235,065 2,007,956 6,402,148 5,487,611
------------- ------------ ------------ -------------
Total operating revenues............... $ 68,189,729 $ 47,363,637 $192,869,461 $ 113,752,033
============= ============ ============ =============



NOTE 5 - INVESTMENTS

The following summarizes unrealized gains and losses on investments at
September 30, 2002, and December 31, 2001:



2002:
Unrealized Unrealized Fair
Cost Gain Loss Value
----------- ------------ ------------ ------------
Equity securities available-for-sale $ 250,000 $ 219,650 $ -- $ 469,650
=========== ============ ============ ============

2001:
Unrealized Unrealized Fair
Cost Gain Loss Value
----------- ------------ ------------ ------------
Equity securities available-for-sale $ 250,000 $ 3,287,720 $ -- $ 3,537,720
=========== ============ ============ ============






16



HORIZON TELCOM, INC., AND SUBSIDIARIES

Notes to Consolidated Financial Statements
As of September 30, 2002, and December 31, 2001,
And for the Three and Nine Months Ended September 30, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------

NOTE 6 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:




September 30, December 31,
2002 2001
--------------- ----------------
Network assets.......................................... $ 281,552,694 $ 220,849,771
Switching equipment..................................... 67,151,493 35,253,986
Land and buildings...................................... 15,861,621 15,223,363
Computer and telecommunications equipment............... 15,779,287 14,292,341
Furniture, vehicles and office equipment................ 11,914,695 12,477,119
--------------- ---------------
Property, plant and equipment in service, at cost..... 392,259,790 298,096,580
Accumulated depreciation................................ (94,298,737) (68,604,457)
--------------- ---------------
Property, plant and equipment in service, net...... 297,961,053 229,492,123
Construction work in progress........................... 22,013,988 59,785,097
--------------- ---------------
Total property, plant and equipment, net......... $ 319,975,041 $ 289,277,220
=============== ===============


Applicable interest charges incurred during the construction of new
facilities and network assets are capitalized as one of the elements of cost and
are amortized over the assets' estimated useful lives, in accordance with SFAS
No. 34. The Company capitalized interest and labor-related expenses of
approximately $6,373,000 and $7,730,000 for the nine months ended September 30,
2002 and 2001, respectively.

During 2002, Horizon PCS launched switches in Tennessee and Pennsylvania
and decommissioned some switching equipment in Chillicothe, Ohio. As a result,
the Ohio switching equipment is considered an impaired asset as defined by SFAS
No. 144. Accordingly, depreciation and amortization expense for the nine months
ended September 30, 2002, includes approximately $3.5 million related to
accelerated depreciation on the impaired asset. The total amount of depreciation
recorded to date on this equipment is approximately $5.8 million. The residual
book value of $400,000 approximates fair market value at September 30, 2002,
based on quoted market prices.

NOTE 7 - LONG-TERM DEBT

The components of long-term debt outstanding are as follows:




Interest Rate at September 30, December, 31,
September 30, 2002 2002 2001
---------------------- --------------- ----------------
Horizon PCS:
Discount notes.......................... 14.00% $ 295,000,000 $ 295,000,000
Senior notes............................ 13.75% 175,000,000 175,000,000
Secured credit facility-term loan A..... 5.80% 105,000,000 --
Secured credit facility-term loan B..... 6.32% 50,000,000 50,000,000
Chillicothe Telephone:
2002 Senior Notes....................... 6.64% 30,000,000 --
1998 Senior Notes....................... 6.62% 12,000,000 12,000,000
1993 Senior Notes....................... 6.72% 2,000,000 8,000,000
--------------- ----------------
Long-term debt, par value............ 669,000,000 540,000,000
Less: Unaccreted interest portion of
Horizon PCS discount notes......... (115,991,001) (135,944,357)
Less: Current maturities................ (2,000,000) (2,000,000)
--------------- ----------------
Total long-term debt, net.......... $ 551,008,999 $ 402,055,643
=============== ================





17


HORIZON TELCOM, INC., AND SUBSIDIARIES

Notes to Consolidated Financial Statements
As of September 30, 2002, and December 31, 2001,
And for the Three and Nine Months Ended September 30, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------


NOTE 7 - LONG-TERM DEBT (CONTINUED)

As of September 30, 2002, Horizon PCS had $95.0 million committed under its
secured credit facility in the form of a line of credit at a variable interest
rate equal to the London Interbank Offered Rate ("LIBOR") plus 400 basis points
with restrictions on its availability.

Horizon PCS' secured credit facility includes financial covenants that must
be met each quarter. Horizon PCS did not meet the covenant for earnings before
interest, taxes, depreciation and amortization ("EBITDA") for the first quarter
of 2002. As a result of higher than expected gross and net additions to Horizon
PCS subscribers for that quarter, it incurred additional expenses to add those
customers. Although Horizon PCS ultimately benefits from the revenues generated
by new subscribers, it incurs one-time expenses associated with new subscribers,
including commissions, handset subsidies, set up costs for the network and
marketing expenses. As a result, these new subscriber costs negatively affect
EBITDA in the short-term during the period of the addition of new subscribers,
which led to non-compliance with the EBITDA covenant for the first quarter of
2002.

On June 27, 2002, Horizon PCS obtained a waiver of the non-compliance with
the EBITDA covenant for the first quarter of 2002 and entered into an amendment
of the secured credit facility. The amended facility primarily adjusts certain
financial covenants and increases the margin on the base interest by 25 basis
points, while also providing for the payment of fees to the banking group, an
increase in post-default interest rates, a new financial covenant regarding
minimum available cash, additional prepayment requirements, restrictions on
Horizon PCS' borrowings committed under the remaining $95.0 million revolving
credit facility and deposit requirements on the $105.0 million borrowed under
its secured credit facility in March 2002. This amendment and its requirements
are described in detail in the Form 8-K filed by Horizon PCS on June 27, 2002
(See also "Liquidity and Capital Resources" under "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this Form 10-Q).

The Note Purchase Agreement for the 1998 Senior Notes of Chillicothe
Telephone contains a covenant that restricts the amount of investments that
Chillicothe Telephone may make in loans, stock or other securities of another
company. For the quarter ended June 30, 2002, Chillicothe Telephone failed to
comply with the covenant related to these restricted investments, which
constitutes an event of default under the note purchase agreement. Chillicothe
Telephone entered into a waiver agreement with the noteholders to remedy the
non-compliance. The waiver was signed by both parties on August 8, 2002. This
waiver was extended on September 12, 2002.

The 1998 Senior Notes and the 1993 Senior Notes of Chillicothe Telephone
contain a covenant that restricts the amount of Chillicothe Telephone's funded
debt. Due to the issuance of the 2002 Senior Notes, coupled with the fact that
the last payment due on the 1993 Senior Notes was not made until November 1,
2002, Chillicothe Telephone failed to comply with this covenant at September 30,
2002. A waiver of non-compliance was obtained in anticipation of the violation
of the 1998 Senior Notes and signed by both parties on August 14, 2002. This
waiver was extended on September 12, 2002. Also, on August 14, 2002, the 1993
Senior Notes were amended to provide for the issuance of the 2002 Senior Notes.

In August 2002, Chillicothe Telephone issued $30,000,000 of 6.64% senior
notes ("2002 Senior Notes") due in full July 1, 2012. The proceeds of the
offering were used to retire both the short-term line of credit with Huntington
National Bank and the non-current portion of the 1993 Senior Notes. The current
portion of the 1993 Senior Notes was repaid on November 1, 2002. The remaining
funds will be used for general corporate purposes.

On November 12, 2002, Chillicothe Telephone amended and restated its 1998
$12,000,000 senior notes due 2018. The interest rate on the amended notes will
be 6.72%, an increase of 10 basis points, with the same maturity date as the
1998 Senior Notes. Chillicothe Telephone refinanced its 1998 Senior Notes in
order to align the debt covenants of those notes with the covenants of the 2002
Senior Notes, which are less restrictive then the covenants of the original 1998
Senior Notes.



18




HORIZON TELCOM, INC., AND SUBSIDIARIES

Notes to Consolidated Financial Statements
As of September 30, 2002, and December 31, 2001,
And for the Three and Nine Months Ended September 30, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------


NOTE 8 - COMMITMENTS AND CONTINGENCIES

SPRINT 3G DEVELOPMENT FEES

Recently, Sprint has sought to increase service fees during the remainder
of 2002 and beyond in connection with its development of 3G-related back-office
systems and platforms. Horizon PCS, along with the other PCS affiliates of
Sprint, are currently disputing the validity of Sprint's right to pass through
this fee to Horizon PCS. If this dispute is resolved unfavorably to Horizon PCS,
then Horizon PCS will incur additional expenses.

OPERATING LEASES

The Company leases office space and various equipment under several
operating leases. In addition, Horizon PCS has tower lease agreements with third
parties whereby it leases towers for substantially all its cell sites. The tower
leases are operating leases with a term of five to ten years with three
consecutive five-year renewal option periods.

Horizon PCS also leases space for its retail stores. At September 30, 2002,
Horizon PCS leased 39 of its 40 retail stores.

The following table summarizes the annual lease payments required under the
Company's existing lease agreements at September 30, 2002:

Year Amount
------------------------------------ --------------
Fourth quarter of 2002.............. $ 3,560,000
2003................................ 18,082,000
2004................................ 16,249,000
2005................................ 13,022,000
2006................................ 7,976,000
Thereafter.......................... 10,136,000
-------------

Future operating lease obligations.. $ 69,025,000
==============

CONSTRUCTION EXPENDITURES

Construction expenditures for the year ended December 31, 2002, are
estimated to be between approximately $70,000,000 and $85,000,000. The majority
of the estimated expenditures are for the build-out and upgrade of the PCS
network.

LEGAL MATTERS

The Company is party to legal claims arising in the normal course of
business. Although the ultimate outcome of the claims cannot be ascertained at
this time, it is the opinion of management that none of these matters, when
resolved, will have a material adverse impact on the Company's results of
operations, cash flows or financial condition.



19



HORIZON TELCOM, INC., AND SUBSIDIARIES

Notes to Consolidated Financial Statements
As of September 30, 2002, and December 31, 2001,
And for the Three and Nine Months Ended September 30, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------



NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTIUED)

ALLIANCES NETWORK AGREEMENT

The Alliances are two independent PCS providers offering service under the
NTELOS brand name. In August 1999, Horizon PCS entered into a network services
agreement with the Alliances for 13 of its markets in Virginia and West
Virginia. The initial term is through June 8, 2008, with four automatic ten-year
renewals. This agreement was amended in the third quarter of 2001. Under the
amended agreement, Horizon PCS is obligated to pay fixed minimum monthly fees
until December 2003, at a lower rate per minute than the prior agreement. Usage
in excess of the monthly minute allowance is charged at a set rate per minute.

The following table summarizes the minimum amounts required to be paid
under the network services agreement.

Period ending
Year December 31,
---- ---------------
Fourth quarter of 2002.......... $ 7,900,000
2003............................ 38,600,000
----------
Future obligation............... $ 46,500,000
=============

LONG-TERM DEBT COVENANTS

As discussed in Note 7 above, Horizon PCS entered into a covenant amendment
under its secured credit facility in June 2002. In addition to a number of
changes to its secured credit facility, including an increase in the margin on
the base interest rate, this amendment placed restrictions on Horizon PCS'
ability to draw on the $95.0 million line of credit and deposit requirements on
the $105.0 million term loan A borrowed under the secured credit facility in
March 2002.

The following table details the maximum amount available to be borrowed on
the line of credit under Horizon PCS' secured credit facility for the period
then ended:

Maximum amount
available to be
borrowed
----------------
September 30, 2002............. $ --
December 31, 2002.............. --
March 31, 2003................. --
June 30, 2003.................. 16,000,000
September 30, 2003............. 26,000,000
December 31, 2003.............. 33,000,000
March 31, 2004................. 52,000,000
April 1, 2004.................. 95,000,000




20


HORIZON TELCOM, INC., AND SUBSIDIARIES

Notes to Consolidated Financial Statements
As of September 30, 2002, and December 31, 2001,
And for the Three and Nine Months Ended September 30, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------


NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

The following table details the minimum balance requirements placed on cash
and cash equivalents under the amended terms of the secured credit facility:


Deposit balance
requirement
-------------------
At September 30, 2002................................. $ 71,000,000
October 1, 2002, through November 15, 2002............ 63,000,000
November 16, 2002, through December 31, 2002.......... 55,000,000
January 1, 2003, through February 15, 2003............ 33,000,000
February 16, 2003, through March 31, 2003............. 11,000,000
April 1, 2003, through May 15, 2003................... 5,500,000

NOTE 9 - GOODWILL AND INTANGIBLE ASSETS

During 1999 Horizon PCS entered into a joint venture agreement through the
purchase of 25.6% of Bright PCS. On June 27, 2000, the Company acquired the
remaining 74.4% of Bright PCS. The total purchase price was approximately
$49,300,000 and was treated as a purchase method acquisition for accounting
purposes. The purchase price exceeded the fair market value of the net assets
acquired by approximately $7,778,000. The resulting goodwill was amortized on a
straight-line basis over 20 years until December 31, 2001. At September 30,
2002, the remaining unamortized balance of goodwill was approximately
$7,191,000.

The Company adopted SFAS No. 142 on January 1, 2002 (See Note 3). As a
result of the adoption, goodwill amortization ceased as of December 31, 2001,
and the Company was required to complete an impairment test on its remaining
goodwill balance as of the date of adoption. The Company completed the first
step required by SFAS No. 142 and determined the goodwill remaining at January
1, 2002, was not impaired. The Company will complete an impairment test of the
remaining goodwill balance annually, or more frequently if impairment indicators
arise.

The following pro forma disclosure reconciles net loss available to common
stockholders, as presented on the accompanying consolidated statements of
operations, excluding the effect of goodwill amortization:




Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------- --------------------------------------
2002 2001 2002 2001
------------------ ------------------ ------------------ -----------------
Reported net loss.............. $ (43,163,734) $ (30,470,676) $ (125,877,693) $ (78,945,423)
Goodwill amortization.......... -- 97,222 -- 291,666
------------------ ------------------ ------------------ -----------------
Adjusted net loss........... (43,163,734) (30,373,454) (125,877,693) (78,653,757)
================== ================== ================== =================

Basic and diluted net loss per
share....................... $ (119.08) $ (84.10) $ (347.33) $ (219.35)
Goodwill amortization.......... -- 0.27 -- 0.81
------------------ ------------------ ------------------ -----------------
Adjusted basic and diluted
net loss per share........ $ (119.08) $ (83.83) $ (347.33) $ (218.54)
================== ================== ================== =================






21


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

The following discussion and analysis should be read in conjunction with
the consolidated financial statements and the related notes.

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
Securities Act), and Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act), which can be identified by the use of
forward-looking terminology such as: "may," "might," "could," "would,"
"believe," "expect," "intend," "plan," "seek," "anticipate," "estimate,"
"project" or "continue" or the negative thereof or other variations thereon or
comparable terminology. All statements other than statements of historical fact
included in this quarterly report on Form 10-Q, including without limitation,
the statements under "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and under "Item 5. Other Information" and
elsewhere herein regarding our financial position and liquidity are
forward-looking statements. These forward-looking statements also include, but
are not limited to:

o changes in industry conditions created by the Federal
Telecommunications Act of 1996 and related state and federal
legislation and regulations;

o recovery of the substantial costs which will result from the
implementation and expansion of our new businesses;

o retention of our existing customer base and our ability to attract new
customers;

o rapid changes in technology;

o our future compliance with debt covenants under our credit facilities;

o actions of our competitors;

o estimates of current and future population for our markets;

o forecasts of growth in the number of consumers and businesses using
personal communication services;

o estimates for churn and ARPU (defined below);

o statements regarding our plans for and costs of the build-out of our
PCS network;

o statements regarding our anticipated revenues, expense levels,
liquidity and capital resources and projections of when we will launch
commercial PCS and achieve break-even or positive EBITDA and operating
cash flow; and

o the anticipated impact of recent accounting pronouncements.

Although we believe the expectations reflected in such forward-looking
statements are reasonable, we can give no assurance such expectations will prove
to have been correct. Important factors with respect to any such forward-looking
statements, including certain risks and uncertainties that could cause actual
results to differ materially from our expectations (Cautionary Statements), are
disclosed in this quarterly report on Form 10-Q, including, without limitation,
in conjunction with the forward-looking statements included in this quarterly
report on Form 10-Q. Important factors that could cause actual results to differ
materially from those in the forward-looking statements included herein include,
but are not limited to:

o our potential need for additional capital or the need for refinancing
existing indebtedness;

o our dependence on our affiliation with Sprint and our dependence on
Sprint's back office services;



22


o our future compliance with debt covenants;

o the need to successfully complete the build-out of our portion of the
Sprint PCS network on our anticipated schedule;

o changes or advances in technology and the acceptance of new technology
in the marketplace;

o competition in the industry and markets in which we operate and the
creditworthiness of new customers;

o changes in government regulation; and

o general political economic and business conditions.

These forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. All
subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
Cautionary Statements. See "Item 5. Other Information," which is incorporated
herein by reference, for further information regarding several of these risks
and uncertainties.

OVERVIEW

Horizon Telcom is a holding company, which, in addition to its common stock
ownership of Horizon PCS, owns 100% of 1) Chillicothe Telephone, a local
telephone company, 2) Horizon Services, which provides administrative services
to other Horizon Telcom affiliates, and 3) Horizon Technology, a long-distance
and Internet services business.

Horizon Telcom provides a variety of voice and data services to commercial,
residential/small business and local market segments. Horizon Telcom provides
landline telephone service, VDSL television service and Internet access services
to the southern Ohio region, principally in and surrounding Chillicothe, Ohio.
Horizon Telcom also provides PCS operations to a twelve-state region in the
Midwest, including Ohio, Indiana, Virginia and West Virginia, as an affiliate of
Sprint PCS.

At September 30, 2002, Chillicothe Telephone serviced approximately 38,300
access lines in Chillicothe, Ohio and the surrounding area. Horizon Technology
provided Internet service to approximately 13,300 customers through its
bright.net Internet service. At September 30, 2002, Horizon PCS had launched
service covering approximately 7.4 million residents, or approximately 73% of
the total population in its territory, and serving approximately 241,900
customers.

CRITICAL ACCOUNTING POLICIES

Allowance for Doubtful Accounts. Estimates are used in determining our
allowance for doubtful accounts receivable, which are based on a percentage of
our accounts receivables by aging category. The percentage is derived by
considering our historical collections and write-off experience, current aging
of our accounts receivable and credit quality trends, as well as Sprint's credit
policy. However, our historical write-off and receivables trends for our
wireless customers are limited due to our strong subscriber growth and the
recent launch of new markets.

Under Sprint's service plans, wireless customers who do not meet certain
credit criteria can select any plan offered subject to an account spending
limit, referred to as ASL, to control credit risk exposure. Account spending
limits range from $125 to $200 depending on the credit quality of the customer.
Prior to May 2001, all of these customers were required to make a deposit that
could be credited against future billings. In May 2001, the deposit requirement
was eliminated on certain, but not all, credit classes ("No Deposit ASL" or
"NDASL"). As a result, a significant amount of our new wireless customer
additions (approximately 59% between May 1, 2001, and March 31, 2002) were under
the NDASL program.



23


This increase in sub-prime credit customers under the NDASL program has led
to higher churn rates (defined below) and an increase in account write-offs.
While the average balance written-off for an NDASL customer is lower than the
average write-off balances of non-account spending limit customers, the number
of NDASL write-offs has caused an increase in the total amount written-off each
quarter, resulting in the need for a higher allowance and provision for doubtful
accounts receivable.

Beginning in November 2001, the NDASL program was replaced by "Clear Pay",
which had tightened credit criteria. In April 2002, we replaced Clear Pay with
"Clear Pay II," which re-instated the deposit requirement for most credit
classes with account spending limits and featured increased back-office controls
with respect to credit qualification and account collections. We anticipate the
implementation of the Clear Pay II program will reduce our future bad debt
exposure. If the deposit requirement is later removed or if these allowances for
doubtful accounts receivable estimates are insufficient for any reason, our
operating income, EBITDA and available cash could be reduced. At September 30,
2002, the allowance for doubtful accounts was $2,760,000, which represents
approximately 11% of accounts receivable. At September 30, 2002, approximately
33% of the subscribers in our markets were account spending limit customers with
no deposit paid.

Our landline segment accounts receivable consist primarily of amounts
billed to interexchange carriers (like AT&T) for allowing their customers to
access our network when their customers place a call. Accounts receivable also
include charges for advertising in Chillicothe Telephone's yellow pages
directory and amounts billed to customers for monthly services. Our collection
history with interexchange carriers has been good. However, we do have some
exposure to WorldCom and WorldCom's MCI division, which declared bankruptcy on
July 21, 2002. We estimate amounts billed to WorldCom to be approximately
$600,000 at September 30, 2002, of which approximately $300,000 was related to
pre-petition bankruptcy balances. The allowance for doubtful landline segment
accounts receivable is approximately 10% of amounts billed at September 30,
2002.

Revenue Recognition. Horizon PCS sells wireless handsets and accessories,
which are recorded at the time of the sale as equipment revenue. After the
handset has been purchased, the subscriber purchases a service package that is
recognized monthly as service is provided and is included as subscriber revenue.
Horizon PCS defers a portion of the monthly service revenue that is billed in
advance.

Service revenues consist of PCS subscriber revenues and roaming revenues.
PCS subscriber revenues consist primarily of monthly service fees and other
charges billed to customers for Sprint PCS service in our territory under a
variety of service plans. Roaming revenues consist of Sprint PCS and non-Sprint
PCS roaming. We receive Sprint PCS roaming revenues at a per minute rate when
Sprint PCS subscribers based outside of our territory use our portion of the
Sprint PCS network. Non-Sprint PCS roaming revenues include charges to wireless
service providers, other than Sprint PCS, when those providers' subscribers roam
on our network. The Sprint PCS roaming rate is negotiated between the Company
and Sprint. The roaming rate charged to other wireless carriers for their use of
our network is negotiated by Sprint with the carrier on our behalf.

We record 100% of PCS subscriber revenues from our wireless customers,
Sprint PCS roaming revenues and non-Sprint PCS roaming revenues. Sprint retains
8% of all collected service revenue as a management fee. Collected service
revenues include PCS subscriber revenues and non-Sprint PCS roaming revenues,
but exclude Sprint PCS roaming revenues, roaming charges billed to our customers
for roaming onto a non-Sprint PCS network and revenues from sales of equipment.
We report the amounts retained by Sprint as general and administrative expense.

Horizon PCS' accounting policy for the recognition of activation fee
revenue is to record the revenue over the periods such revenue is earned in
accordance with the current interpretations of SAB No. 101, "Revenue Recognition
in Financial Statements." Accordingly, activation fee revenue and direct
customer activation expense are deferred and will be recorded over the average
life for those customers, currently estimated to be 30 months, that are assessed
an activation fee. Prior to January 1, 2002, we estimated the average life of a
customer to be 36 months. We reduced this estimate to 30 months in consideration
of an increase in churn (defined below) resulting from the NDASL program
discussed earlier.

The landline telephone services operating segment consists of basic local
and long-distance toll, network access services and other related telephone
service revenue. Intra-LATA, (Local Access and Transport Area) (i.e., the area
of southern Ohio, including Columbus originally covered by area code 614), basic
local exchange and long-distance service revenue consists of flat rate services


24


and measured services billed to customers utilizing Chillicothe Telephone's
landline telephone network. Long distance intraLATA/interstate revenue consists
of message services that terminate beyond the basic service area of the
originating wire center. Network access revenue consists of revenue derived by
our landline telephone services segment from the provision of exchange access
services to an interexchange carrier or to an end user beyond the exchange
carrier's network. Other related telephone service revenue includes directory
advertising related to a telephone directory published annually.

Other revenues include Internet access services, equipment systems sales
and information services. Internet access revenues for our bright.net services
are monthly service fees and other charges billed to our bright.net customers.
Service fees primarily consist of monthly recurring charges billed to customers.
Equipment system sales and other revenues consist of sales made by Chillicothe
Telephone to various businesses or other residential customers for equipment
used on the telephone system.

Chillicothe Telephone is an independent local exchange carrier that
provides local telephone service within ten local exchanges. Chillicothe
Telephone follows an access charge system as ordered by the Federal
Communications Commission ("FCC") and the PUCO in 1984. The access charge
methodology provides a means whereby local exchange carriers, including
Chillicothe Telephone, provide their customers access to the facilities of the
long-distance carriers and charge long-distance carriers for interconnection to
local facilities.

The PUCO issued an Opinion and Order effective January 1, 1988, for
reporting intra-LATA (Local Access and Transport Area) toll revenues. This
methodology is defined as the Originating Responsibility Plan with a Secondary
Carrier Option (ORP-SCO). This plan calls for one or more primary carriers in
each LATA with other local exchange carriers acting as secondary carriers. The
secondary carriers provide the primary carrier with access to local facilities
and are compensated based upon applicable intra-LATA access charge tariffs.
Chillicothe Telephone is a primary carrier. Intra-LATA toll revenue is reflected
in basic and long-distance service revenue on the accompanying consolidated
statements of operations, and is recognized as such services are provided.
Estimated unbilled amounts are accrued at the end of each month.

Chillicothe Telephone recognizes revenue for billing and collection
services performed on behalf of certain interexchange carriers. Chillicothe
Telephone is reimbursed for this service based on the number of messages billed
on behalf of the interexchange carrier. The revenues from this service are
recognized in the same period the services are provided. Chillicothe Telephone
also recognizes advertising revenues from its telephone directory. Telephone
directory customers sign an annual contract which is billed in twelve equal
installments. The revenue derived from directory advertising is recognized
equally over the twelve-month period of the directory, consistent with the
ratemaking treatment. These items are recorded in other revenues on the
accompanying consolidated statements of operations.

Chillicothe Telephone recognizes revenues on the completed contract basis
for the installation of telecommunication and other related equipment. These
revenues are reported as equipment system sales on the accompanying consolidated
statements of operations. Maintenance revenues are recognized over the life of
the contract, and recorded as other revenues on the accompanying consolidated
statements of operations.

Horizon Technology is an FCC-licensed radio common carrier that primarily
provides Internet access services and resells long-distance service. Revenues on
equipment sales were recognized at the time of sale. Revenues for the Internet
and long distance services are recognized monthly as service is rendered.





25



RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 2001

OVERVIEW OF THE THIRD QUARTER

We have focused a significant amount of our operational efforts over the
past twelve months on upgrading our wireless network to be able to provide the
first level of third generation ("3G") network services marketed by Sprint
nationally as "PCS Vision." In conjunction with Sprint's nationwide launch of
PCS Vision, Horizon PCS began providing 3G services across our network in
mid-August 2002. This upgrade provides users of 3G service a new experience with
wireless devices. Subscribers are now able to surf the Internet with their
handsets, PDAs, and laptops at speeds of up to 144 kilobits per second ("kbps").
The average user will experience peak rates of 75-80 kbps, which is two to three
times faster than historical dial-up speeds. We can now offer a host of new
products and services to our subscribers and we believe PCS Vision will entice
subscribers of other wireless carriers to move to our robust offerings.

However, the positive momentum generated by 3G was offset by a larger than
anticipated number of NDASL customers being involuntarily disconnected. During
the second half of 2001 and first half of 2002, a significant number of our
customer additions were under the NDASL program. These lower credit quality
customers activated under the NDASL program led to higher churn rates and an
increased amount of bad debt during the third quarter of 2002 as a significant
number of these customers were disconnected and written-off.

Sprint has discontinued the NDASL program and replaced it with Clear Pay,
which tightened credit restrictions, and Clear Pay II, which re-instituted
deposit requirements for most lower credit quality customers and introduces
additional controls on loss exposure. In addition, we have focused our marketing
efforts into recruiting higher quality customers. As a result, our percentage of
prime credit customers in our subscriber portfolio increased to 70% at September
30, 2002, from 65% at March 31, 2002. We expect our churn rate to be consistent
to slightly lower in the fourth quarter of 2002 than the 3.9% we experienced in
the third quarter.

In response to increased competition from other carriers and to improve
focus on penetrating our markets with PCS Vision, Horizon PCS implemented on an
operational reorganization on October 1, 2002. We realigned our internal
geographic markets and added a vice president to oversee our marketing and
retail operations teams. We look forward to the benefits of this new
organizational alignment and believe it will result in higher gross additions
and a better retention effort.

Chillicothe Telephone continued to upgrade its landline network with fiber
optic cabling. This upgrade will expand bandwidth capacity, improve network
efficiency and extend the reach of our network. Through this upgrade, we
expanded the availability of our VDSL product and saw steady growth in the
number of new VDSL subscribers. Our VDSL subscribers can currently enjoy over
100 digital cable channels, high-speed Internet access and basic landline
telephone service.

This discussion and analysis is presented on an operating segment basis.
The following table details the consolidated statements of income by operating
segment for the three months ended September 30, 2002 and 2001:




26





For the Three Months Ended, September 30,
Wireless Personal
Communications Landline Telephone
Services Services All Other
(Dollars in thousands) ------------------------ ----------------------- -----------------------
OPERATING REVENUES: 2002 2001 2002 2001 2002 2001
----------- ----------- ----------- ----------- ----------- -----------
PCS subscriber and roaming..............$ 54,212 $ 33,150 $ -- $ -- $ -- $ --
PCS equipment........................... 1,787 2,020 -- -- -- --
Basic local and long-distance service... -- -- 4,738 4,736 -- --
Network access.......................... -- -- 5,218 5,450 -- --
Equipment systems sales, information
services, Internet access and other... -- -- -- -- 2,235 2,008
----------- ----------- ----------- ----------- ----------- -----------
Total operating revenues............. 55,999 35,170 9,956 10,186 2,235 2,008
----------- ----------- ----------- ----------- ----------- -----------

OPERATING EXPENSES:
Cost of goods sold .................... 3,974 4,126 -- -- 164 181
Cost of services....................... 43,807 29,187 2,379 2,297 1,782 1,207
Selling and marketing.................. 13,027 12,636 150 108 252 281
General and administrative............. 9,491 5,475 2,263 1,731 3,125 3,969
Non-cash compensation.................. 99 106 1 1 19 (5)
Depreciation and amortization.......... 9,303 5,159 1,712 1,589 570 497
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses............. 79,701 56,689 6,505 5,726 5,912 6,130
----------- ----------- ----------- ----------- ----------- -----------

OPERATING INCOME (LOSS)................... (23,702) (21,519) 3,451 4,460 (3,677) (4,122)
----------- ----------- ----------- ----------- ----------- -----------

NONOPERATING INCOME (EXPENSE):
Interest expense, net.................. (15,890) (5,997) (1,133) (537) -- --
Subsidiary preferred stock dividends... (3,006) (2,816) -- -- -- --
Interest income and other, net......... 720 581 5 (67) (6) 5
Gain (Loss) on disposal of assets...... 10 -- -- -- -- --
----------- ----------- - ----------- ----------- ----------- -----------
Total nonoperating expense........... (18,166) (8,232) (1,128) (604) (6) 5
----------- ----------- ----------- ----------- ----------- -----------

LOSS BEFORE INCOME TAX EXPENSE AND
MINORITY INTEREST...................... (41,868) (29,751) 2,323 3,856 (3,683) (4,117)

INCOME TAX (EXPENSE) BENEFIT.............. -- -- (161) (744) 225 285
----------- ----------- ----------- ----------- ----------- -----------

NET INCOME (LOSS)......................... $ (41,868) $ (29,751) $ 2,162 $ 3,112 $ (3,458)$ (3,832)
=========== =========== =========== =========== =========== ===========

OTHER COMPREHENSIVE INCOME (LOSS)
Net unrealized gain (loss) on hedging
activities.......................... 21 (326) -- -- -- --
Net unrealized loss on securities
available-for-sale, net of taxes of
approximately $68 for the three
months ended September 30, 2002..... -- -- (131) -- -- --
----------- ----------- ----------- ----------- ----------- -----------

COMPREHENSIVE INCOME (LOSS)............... (41,847) (30,077) 2,031 3,112 (3,458) (3,832)
=========== =========== =========== =========== =========== ===========





27



WIRELESS PERSONAL COMMUNICATIONS SERVICES SEGMENT

The following discussion details key operating metrics and the results of
operations for our wireless personal communications segment over the last fiscal
quarter. Our wireless personal communications segment consists entirely of the
operations of Horizon PCS.

KEY METRICS - HORIZON PCS

Customer Additions. As of September 30, 2002, we provided personal
communication service directly to approximately 241,900 customers. For the three
months ended September 30, 2002 and 2001, Horizon PCS net subscribers increased
by approximately 6,800 and 40,300 customers, respectively. Gross activations
during the third quarter of 2002 were 21% lower than the same period in 2001 due
in part to changes in deposit requirements for new low credit quality
subscribers. Additionally, an increase in the churn of NDASL and Clear Pay
subscribers resulted in overall lower net customer additions for the three
months ended September 30, 2002, compared to the three months ended September
30, 2001.

Cost Per Gross Addition. CPGA summarizes the average cost to acquire new
customers during the period. CPGA is computed by adding the income statement
components of selling and marketing, cost of equipment and activation costs
(which are included as a component of cost of service) and reducing that amount
by the equipment revenue recorded. That net amount is then divided by the total
new customers acquired during the period. CPGA was $365 for the three months
ended September 30, 2002, compared to $307 for the three months ended September
30, 2001. This increase is primarily the result of lower gross activations in
2002 compared to 2001.

Churn. Churn is the monthly rate of customer turnover that both voluntarily
and involuntarily discontinued service during the month. Churn is computed by
dividing the number of customers that discontinued service during the month, net
of 30-day returns, by the beginning customer base for the period. Quarterly
churn is an average of the three months in the quarter. Churn for the three
months ended September 30, 2002, was 3.9 % compared to 2.1% for the three months
ended September 30, 2001. This increase in churn is a result of an increase in
the amount of sub-prime credit quality customers Horizon PCS added whose service
was involuntarily discontinued during the period.

Average Revenue Per Unit. ARPU summarizes the average monthly revenue per
customer. ARPU is computed by dividing service revenue and roaming revenues for
the period by the average subscribers for the period.

The following summarizes ARPU for the three months ended September 30:

2002 2001
------------- --------------
Service revenues
Recurring...................... $ 40 $ 45
Minute sensitive............... 12 14
Features and other............. 3 (2)
------------- -------------
Total service revenues....... 55 57
------------- -------------

Roaming revenues.................. 21 31
------------- -------------
ARPU....................... $ 76 $ 88
------------- -------------

Recurring service ARPU has declined as more customers activated or migrated
to service plans in the $29.99 to $39.99 monthly recurring charge range.
Additionally, recent service plans are offering more available minutes at a
lower monthly charge due to increased competition in the wireless industry.
These additional minutes have driven down the ARPU received when customers use
more minutes than their plan allows. We anticipate this trend to continue on
voice-only service plans, but we anticipate higher service ARPU in the future as
subscribers activate on data and voice plans which offer more features, but at a
higher monthly charge. ARPU from features and other has increased as we are
offering fewer promotional credits and have charged more contract termination
fees in 2002 as a result of higher deactivation and churn rates.



28


On April 27, 2001, Sprint and its affiliates announced an agreement on a
new Sprint PCS roaming rate; the receivable and payable roaming rate decreased
from $0.20 per minute to $0.15 per minute effective June 1, 2001, and decreased
further to $0.12 per minute effective October 1, 2001. The Sprint PCS roaming
rate changed to $0.10 per minute on January 1, 2002. After 2002, the rate will
be changed to "a fair and reasonable return" which has not yet been determined.
However, based on preliminary discussions with Sprint, we anticipate a
significant additional reduction in the rate. The decreases in the rate will
reduce our revenue and expense per minute, but we anticipate this rate reduction
will be offset by volume increases from the continued build-out of our network
and subscriber growth, resulting in greater overall roaming revenue and expense
in the future. Somewhat offsetting that rate reduction in Sprint PCS roaming
revenue was an increase in non-Sprint PCS revenue as a result of expanding
roaming agreements with other wireless carriers.

RESULTS OF OPERATIONS

Revenues. Subscriber revenues for the three months ended September 30,
2002, were approximately $39.2 million, compared to approximately $21.4 million
for the three months ended September 30, 2001, an increase of approximately
$17.8 million. The growth in subscriber revenues is primarily the result of the
growth in our customer base. We managed approximately 241,900 customers at
September 30, 2002, compared to approximately 146,600 at September 30, 2001. Our
customer base has grown because we have launched additional markets and
increased our sales force.

Roaming revenues increased from approximately $11.8 million during the
three months ended September 30, 2001, to approximately $15.0 million for the
three months ended September 30, 2002, an increase of approximately $3.2
million. This increase resulted from expanding roaming agreements with wireless
carriers and from launching additional markets over the past year, including
markets covering major interstate highways. This increase was offset somewhat by
the decrease in the Sprint PCS roaming rate discussed above.

PCS equipment revenues for the three months ended September 30, 2002, were
approximately $1.8 million, compared to approximately $2.0 million for the three
months ended September 30, 2001, representing a decrease of approximately
$200,000. This decrease is attributable to a decline in the sales price of the
handset as the average sales price, net of discounts and rebates, decreased to
$85 for the three months ended September 30, 2002, from $114 for the same period
in 2001.

Cost of goods sold. Cost of equipment includes the cost of handsets and
accessories sold by our stores and direct sales force to our customers. Cost of
equipment for the three months ended September 30, 2002, was approximately $4.0
million, compared to approximately $4.1 million for the three months ended
September 30, 2001, a decrease of approximately $100,000. The decrease in the
cost of equipment is the result of the lower growth in our wireless customers.
For competitive and marketing reasons, we have sold handsets to our customers
below our cost and expect to continue to sell handsets at a price below our cost
for the foreseeable future. Additionally, we expect to incur additional expense
as existing customers upgrade their handsets to newer models to take advantage
of new services that may be available with 3G, including high-speed data
applications.

Cost of service. Cost of service includes costs associated with operating
our network, including site rent, utilities, engineering personnel and other
expenses related to operations. Cost of service also includes interconnection
expenses, customer care, Sprint back office and customer care charges, and
roaming fees. We pay roaming fees to Sprint when our customers use Sprint PCS'
network outside of our territory. We pay non-Sprint PCS roaming fees to other
wireless service providers when our customers use their networks.

Also included in cost of service are costs incurred under our network
services agreement with the Alliances. In the third quarter of 2001, Horizon PCS
negotiated an amendment to its agreement with the Alliances and a related
amendment to its Sprint agreements. Under the Alliances amendment, Horizon PCS
is obligated to pay a minimum monthly fee for a stated minimum period. Horizon
PCS expects to incur lower overall fees under this new arrangement at expected
usage levels as compared to the previous agreement that was based on a per
minute fee. The Alliances are also obligated to upgrade their networks to
provide 3G technology.

Sprint provides back-office and other services to Horizon PCS. Recently,
Sprint has sought to increase service fees during the remainder of 2002 and
beyond in connection with its development of 3G-related back-office systems and
platforms. Horizon PCS, along with the other Sprint affiliates, is currently
disputing the validity of Sprint's right to pass through this fee to the


29


affiliates. If this dispute is resolved unfavorably to Horizon PCS, then Horizon
PCS will incur additional expenses which could have a material adverse impact on
our liquidity and financial results.

Horizon PCS' cost of service for the three months ended September 30, 2002,
was approximately $43.8 million, compared to approximately $29.2 million for the
three months ended September 30, 2001, an increase of approximately $14.6
million. This increase reflects an increase in roaming expense and long distance
charges of approximately $3.7 million and the increase in costs incurred under
our network services agreement with the Alliances of approximately $3.8 million,
both as a result of our subscriber growth during 2001 and 2002. Additionally, at
September 30, 2002, our network covered approximately 7.4 million people versus
approximately 6.6 million residents at September 30, 2001. As a result, cost of
service in 2002 was higher than 2001 due to the increase in network operations
expense, including tower lease expense, circuit costs and payroll expense, of
approximately $5.2 million. Growth in our customer base resulted in increased
customer care, activations, and billing expense of approximately $1.7 million
and other variable expenses, including interconnection and national platform
expenses, of approximately $200,000. Overall, the average cost of providing
service per the average subscriber on our network decreased from $77 to $61 for
the three months ended September 30, 2001 and 2002, respectively, as we have
increased our subscriber base.

Selling and marketing expenses. Selling and marketing expenses consist of
costs associated with operating our retail stores, including marketing,
advertising, payroll and sales commissions. Selling and marketing expense also
includes commissions paid to national and local third party distribution
channels and subsidies on handsets sold by third parties for which we do not
record revenue. Selling and marketing expenses rose to approximately $13.0
million for the three months ended September 30, 2002, compared to approximately
$12.6 million for the three months ended September 30, 2001, an increase of
approximately $400,000. This includes a decrease in commissions paid to third
parties of approximately $300,000, a decrease in subsidies on handsets sold by
third parties of approximately $1.2 million and an increase in marketing and
advertising in our sales territory of approximately $1.9 million. We expect
selling and marketing expense to increase in the aggregate as we expand our
coverage, launch additional stores and add customers.

General and administrative expenses. General and administrative costs
include the Sprint management fee (which is 8% of "collected revenues" defined
above), a provision for doubtful accounts receivable and costs related to
corporate support functions including costs associated with functions performed
for us by Horizon Services under our services agreement. These services include
finance and accounting functions, computer access and administration,
consulting, human resources and other administrative services. Horizon Services'
costs for these functions are charged to us using a standard FCC cost allocation
methodology. Under this methodology, all costs that can be specifically
identified to us are directly charged to us, and all costs that are specifically
identified to other subsidiaries of Horizon Telcom are charged to them. Costs
incurred by Horizon Services that cannot be specifically identified to a company
for which Horizon Services provides service are apportioned among the Horizon
Telcom subsidiaries based on appropriate measures. Because of the economies of
scale inherent in a centralized service company, we believe we are able to
receive these services less expensively through this arrangement than if we
provided them ourselves.

General and administrative expenses for the three months ended September
30, 2002, were approximately $9.5 million compared to approximately $5.5 million
in 2001, an increase of approximately $4.0 million. The increase reflects an
increase in the provision for doubtful accounts of approximately $2.8 million,
primarily due to the write-off of NDASL and ClearPay customers, and an increase
in the Sprint management fee of approximately $1.4 million, as a result of
higher subscriber revenues in 2002, offset by a decrease in other general
expenses of approximately $200,000.

Non-cash compensation expense. For both the three months ended September
30, 2002 and 2001, Horizon PCS recorded stock-based compensation expense of
approximately $100,000 for each of the three month periods. Stock-based
compensation expense will continue to be recognized through the conclusion of
the vesting period for these options in 2005. The annual non-cash compensation
expense expected to be recognized for these stock options is approximately
$681,000 in 2002, $622,000 in 2003, $193,000 in 2004, and $71,000 in 2005.

Depreciation and amortization expense. Depreciation and amortization
expenses increased by approximately $4.1 million to a total of approximately
$9.3 million during the three months ended September 30, 2002. The increase
reflects the continuing construction of our wireless network as we funded
approximately $57.6 million of capital expenditures during the nine months ended
September 30, 2002.



30


Since our acquisition of Bright PCS was accounted for as a purchase
transaction, we recorded purchase method goodwill and recorded intangible assets
related to the acquisition of Bright PCS' license agreement with Sprint.
Amortization expense of the intangible asset was approximately $400,000 during
the three months ended September 30, 2002 and 2001. Goodwill amortization was
approximately $100,000 during the three months ended September 30, 2001.
Goodwill amortization ceased as of December 31, 2001, with the adoption of SFAS
No. 142.

Amortization expense also includes amortization of an intangible asset
recorded in September 2000 related to the grant of new markets to us by Sprint
in September 2000. We agreed to grant warrants to Sprint in exchange for the
right to provide service in these additional markets. The warrants will be
issued to Sprint at the earlier of an initial public offering of the Company's
common stock or July 31, 2003. The intangible asset is being amortized over the
remaining term of the Sprint management agreement, resulting in approximately
$800,000 of amortization expense per year. Accordingly, amortization expense
related to this intangible asset was approximately $200,000 for the three months
ended September 30, 2002 and 2001.

Gain on sale of property and equipment. During the three months ended
September 30, 2002, we realized a gain of approximately $10,000 related to the
sale of miscellaneous equipment. The sale resulted in proceeds of approximately
$20,000.

Interest expense, net. Interest expense for the three months ended
September 30, 2002, was approximately $15.9 million, compared to approximately
$6.0 million in 2001. The increase in interest expense was a result of our
additional indebtedness. Interest on the outstanding balance of our secured
credit facility accrues at LIBOR plus a specified margin. On June 29, 2001, we
agreed to several changes in the secured credit facility including a 25 basis
point increase in the margin on the annual interest rate. At September 30, 2002,
the interest rate on the $105.0 million term loan A borrowed under our secured
credit facility was 5.80%, while the interest rate on the $50.0 million term
loan B was 6.32%. Interest expense on the secured credit facility was
approximately $2.7 million and $1.1 million during the three months ended
September 30, 2002 and 2001, respectively.

Horizon PCS accrues interest at a rate of 14.00% annually on its discount
notes issued in September 2000 and will begin paying interest semi-annually in
cash beginning in October 2005. Unaccreted interest expense on the discount
notes was approximately $116.0 million at September 30, 2002. Interest expense
on the discount notes was approximately $6.8 million and $5.9 million during the
three months ended September 30, 2002 and 2001, respectively.

On June 15, 2002, Horizon PCS began making semi-annual interest payments on
its senior notes issued in December 2001, at an annual rate of 13.75%. Interest
expense accrued on the senior notes was approximately $6.0 million during the
three months ended September 30, 2002. Under the terms of the senior notes, cash
to cover the first four semi-annual interest payments was placed in an escrow
account.

Interest expense also includes approximately $800,000 and $200,000 during
the three months ended September 30, 2002 and 2001, respectively, of
amortization from the deferred financing fees related to Horizon PCS' secured
credit facility, its discount notes and its senior notes. Additionally, interest
expense includes approximately $300,000 and $800,000, in commitment fees Horizon
PCS paid on the unused portion of its secured credit facility during the three
months ended September 30, 2002 and 2001, respectively.

Capitalized interest reduced interest expense during the three months ended
September 30, 2002 and 2001, by approximately $700,000 and $2.0 million,
respectively. We expect Horizon PCS' interest expense to increase in the future
as we borrow under its secured credit facility to fund our wireless network
build-out and operating losses.

Preferred stock dividend. Horizon PCS' convertible preferred stock pays a
stock dividend at the rate of 7.5% per annum, payable semi-annually, commencing
May 1, 2001. The dividends are paid with additional shares of convertible
preferred stock. Through September 30, 2002, we have issued an additional
3,245,134 shares of convertible preferred stock in payment of dividends,
including 1,060,201 shares on May 1, 2002. An additional 1,099,958 were issued
on November 1, 2002, and are not included in the total above.

Interest income and other, net. Interest income and other income for the
three months ended September 30, 2002, was approximately $700,000 of income,
compared to approximately $600,000 in 2001 and consisted primarily of interest
income.



31


Income taxes. Until September 26, 2000, Horizon PCS was included in the
consolidated Federal income tax return of Horizon Telcom. We provided for
Federal income taxes on a pro rata basis, consistent with a consolidated
tax-sharing agreement. As a result of the sale of the convertible preferred
stock on September 26, 2000, Horizon PCS is not able to participate in the
tax-sharing agreement. Additionally, Horizon PCS is not able to recognize any
net operating loss benefits until it generates taxable income. Horizon PCS did
not record any income tax benefit for the three months ended September 30, 2002
or 2001, because of the uncertainty of generating future taxable income to be
able to recognize current net operating loss carryforwards.

Net loss. Horizon PCS' net loss for the three months ended September 30,
2002, was approximately $41.9 million compared to approximately $29.8 million
for the three months ended September 30, 2001. The increase in Horizon PCS' loss
reflects the continued expenses related to launching its wireless markets and
building its wireless customer base. We expect Horizon PCS to incur significant
operating losses and to generate significant negative cash flow from operating
activities while it continues to construct its wireless network and increase its
customer base.

Other comprehensive income (loss). During 2001, we entered into two,
two-year interest rate swaps which effectively fix $50.0 million of term loan B
borrowed under the secured credit facility. We do not expect the effect of these
swaps to have a material impact to interest expense for the remainder of their
lives. We recorded an unrealized gain of $21,000 in other comprehensive income
during the second quarter of 2002 related to the change in market value of the
derivate instrument.

LANDLINE TELEPHONE SERVICES SEGMENT AND ALL OTHER SERVICES

The following discussion details the results of operations of our landline
telephone services segment and all other services not assigned to a segment for
the last fiscal quarter.

RESULTS OF OPERATIONS

Revenues. Network access revenue decreased by approximately $200,000 for
the three months ended September 30, 2002, to approximately 5.9 million, as the
Company saw lower revenue from pooled interexchange carriers. Basic local, long
distance and other landline services revenues was essentially flat, increasing
by only several thousand dollars due to an increase in basic local and long
distance revenues, partially offset by a decrease in other related telephone
services.

Other revenues increased by approximately $200,000 to $2.2 million for the
three months ended September 30, 2002. Other revenues were impacted by increased
VDSL revenue as we continue to build our customer base, which was somewhat
offset by lower bright.net dial-up Internet service subscribers. We believe a
number of these lost dial-up customers have switched to high-speed VDSL service.

Cost of goods sold. Cost of goods sold for Chillicothe Telephone and
Horizon Technology primarily consists of business system sales and customer
maintenance expenses. Cost of goods sold for landline telephone and other
services was essentially flat at approximately $200,000 for the three months
ended September 30, 2002 and 2001.

Cost of services. Cost of services include customer care support, and
network-related costs, including switching, access and circuit expenses. Cost of
services also includes expenses related to the installation of Chillicothe
Telephone's VDSL service.

Cost of services for the three months ended September 30, 2002, was
approximately $4.2 million, compared to approximately $3.5 million for the three
months ended September 30, 2001, an increase of approximately $700,000. The
majority of the increase was related to the continued installation and
programming expenses associated with our VDSL service, while Horizon
Technology's long distance service saw an increase in cost of services due to a
higher numbers of subscribers.

Selling and marketing expenses. Selling and marketing expenses consist of
costs associated with local marketing and advertising programs. Selling and
marketing expenses for landline telephone and other related services was


32


approximately $400,000, for each of the three months ending September 30, 2002
and 2001. We continue to market our VDSL product extensively through our
landline market.

General and administrative expenses. General and administrative expenses
include the costs related to corporate support functions. These include finance
functions, billing and collections, accounting services, computer access and
administration, executive, supervisory, consulting, customer relations, human
resources and other administrative services. General and administrative expenses
decreased by approximately $300,000 to approximately $5.4 million for the three
months ended September 30, 2002, primarily due to a decrease in legal fees, rent
expense and other general expenses.

Non-cash compensation expense. Non-cash compensation expense is the
amortization of the value of stock options granted in November 1999. Stock-based
compensation expense will continue to be recognized through the conclusion of
the vesting period for these options in 2005.

Depreciation and amortization expense. Depreciation and amortization
expenses for landline telephone and other services increased by approximately
$200,000 to a total of approximately $2.3 million during the three months ended
September 30, 2002. The increase reflects the continuing construction of our
VDSL network.

Interest expense, net. Interest expense for the three months ended
September 30, 2002, was approximately $1.1 million, compared to approximately
$537,000 for the three months ended September 30, 2001. The increase in interest
expense was a result of our additional debt outstanding during the three months
ended September 30, 2002, compared to the same period in 2001.

In August 2002, Chillicothe Telephone issued $30,000,000 of 6.64% Senior
Notes. A portion of the proceeds was used to retire the line of credit on
September 28, 2002. Interest expense on the 2002 Senior Notes was approximately
$262,000 during the third quarter of 2002. Interest expense on the retired line
of credit and the retired 1993 Senior Notes was approximately $675,000 and
$391,000 during the third quarter of 2002 and 2001, respectively. Interest
expense on Chillicothe Telephone's 1998 Senior Notes was approximately $200,000
in 2002 and 2001. Capitalized construction interest was approximately $24,000
and $54,000. Amortization of debt issuance costs associated with the 2002 Senior
Notes was approximately $20,000 in 2002.

Interest income and other, net. The landline telephone service segment had
essentially no interest income or other expenses in the third quarter of 2002.
In 2001, an expense was recorded related to non-operating corporate charges.

Income tax expense. Income tax expense for the three months ended September
30, 2002, was a benefit of approximately $100,000 compared to an expense of
approximately $500,000 in 2001. Before September 26, 2000, Horizon PCS was
included in the consolidated Federal income tax return of Horizon Telcom.
Horizon PCS provided for Federal income taxes on a pro-rata basis, consistent
with a consolidated tax-sharing agreement. As a result of the sale of Horizon
PCS convertible preferred stock in September 2000, Horizon PCS is not able to
participate in the tax sharing agreement with its parent nor is Horizon Telcom
able to recognize any net operating loss benefits from Horizon PCS. We expect to
continue to record income tax expense as a result of this tax deconsolidation.

Other comprehensive income (loss). During the third quarter of 2002, the
landline telephone segment recorded an unrealized loss, net of associated tax,
of approximately $131,000, on its investment in marketable securities classified
as available-for-sale. The decline in fair value of the security is reflective
of the volatility in the general market for technology stocks over the past
twelve months.




33



RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2001

The following table details the consolidated statements of income by
operating segment for the nine months ended September 30, 2002 and 2001.





For the Nine Months Ended, September 30,
----------------------------------------------------------------------------
Wireless PCS Landline Telephone
Services Services All Other
(Dollars in thousands) ------------------------ ----------------------- ------------------------
OPERATING REVENUES: 2002 2001 2002 2001 2002 2001
----------- ----------- ----------- ----------- ----------- ------------
PCS subscriber and roaming..............$ 150,070 $ 74,516 $ -- $ -- $ -- $ --
PCS equipment........................... 5,760 4,595 -- -- -- --
Basic local and long-distance service... -- -- 14,089 14,664 -- --
Network access.......................... -- -- 16,548 14,490 -- --
Equipment systems sales, information
services, Internet access and other... -- -- -- -- 6,402 5,487
----------- ----------- ----------- ----------- ----------- ------------
Total operating revenues............. 155,830 79,111 30,637 29,154 6,402 5,487
----------- ----------- ----------- ----------- ----------- ------------

OPERATING EXPENSES:
Cost of goods sold .................... 12,635 8,628 -- -- 432 540
Cost of services....................... 120,648 68,263 7,058 7,114 4,748 3,523
Selling and marketing.................. 38,959 30,039 411 375 822 731
General and administrative............. 25,862 14,053 5,634 4,812 10,082 10,900
Non-cash compensation.................. 298 937 4 4 8 106
Depreciation and amortization.......... 30,232 12,980 5,115 4,629 1,588 1,010
----------- ----------- ----------- ----------- ----------- ------------
Total operating expenses............. 228,634 134,900 18,222 16,934 17,680 16,810
----------- ----------- ----------- ----------- ----------- ------------

OPERATING INCOME (LOSS)................... (72,804) (55,789) 12,415 12,220 (11,278) (11,323)
----------- ----------- ----------- ----------- ----------- ------------

NONOPERATING INCOME (EXPENSE):
Interest expense, net.................. (44,084) (18,674) (2,067) (1,642) (1) (19)
Subsidiary preferred stock dividends... (8,719) (8,170) -- -- -- --
Interest income and other, net......... 2,464 4,838 (65) 23 7 89
Gain (Loss) on disposal of assets...... (631) -- -- -- -- --
------------ ----------- ----------- ----------- ----------- ------------
Total nonoperating expense........... (50,970) (22,006) (2,132) (1,619) 6 70
----------- ----------- ----------- ----------- ----------- ------------

LOSS BEFORE INCOME TAX EXPENSE and
minority interest...................... (123,774) (77,795) 10,283 10,601 (11,272) (11,253)

INCOME TAX (EXPENSE) BENEFIT.............. -- -- (1,707) (1,977) 592 495

MINORITY INTEREST IN LOSS................. -- -- -- -- -- 984
----------- ----------- ----------- ----------- ----------- -------------
NET INCOME (LOSS)......................... $ (123,774) $ (77,795) $ 8,576 $ 8,624 $ (10,680) $ (9,774)
============ ============ =========== =========== ============ ============

OTHER COMPREHENSIVE INCOME (LOSS)
Net unrealized gain (loss) on hedging
activities.......................... 141 (679) -- -- -- --
Net unrealized loss on securities
available-for-sale.................. -- -- (2,025) -- -- --
----------- ----------- ----------- ----------- ----------- ------------

COMPREHENSIVE INCOME (LOSS)............... (123,633) (78,474) 6,551 8,624 (10,680) (9,774)
============ ============ =========== =========== =========== ============





34




WIRELESS PERSONAL COMMUNICATIONS SERVICES SEGMENT

The following discussion details key operating metrics and the results of
operations for our wireless personal communications service segment over the
past nine months. Our wireless personal communications segment consists entirely
of the operations of Horizon PCS.

KEY METRICS - HORIZON PCS

Customer Additions. During the nine months ended September 30, 2002 and
2001, Horizon PCS net subscribers increased by approximately 47,800 and 80,200
customers, respectively. Gross activations during the first nine months of 2002
and 2001 were 132,900 and 108,800, respectively. The increase in gross
activations was offset by an increase in the churn of NDASL and Clear Pay
subscribers during the first nine months of 2002 resulting in lower net customer
additions for the nine months ended September 30, 2002, compared to the prior
year period.

Cost Per Gross Addition. Cost per gross addition for the nine months ended
September 30, 2002, was $356, compared to $337 for the nine months ended
September 30, 2001. This increase reflects slightly higher costs offset by an
increase in the number of activations.

Churn. Churn for the nine months ended September 30, 2002, was 3.5%
compared to 2.1% for the nine months ended September 30, 2001. This increase is
due to an increase in the churn of NDASL and Clear Pay customers.

Average Revenue Per Unit. The following summarizes ARPU for the nine months
ended September 30:

2002 2001
------------- ---------------
Service revenues
Recurring......................... $ 40 $ 44
Minute sensitive.................. 12 15
Features and other*............... 4 (4)
-------------- ---------------
Total service revenues.......... 56 55
-------------- ---------------

Roaming revenues..................... 19 29
-------------- ---------------
ARPU.......................... $ 75 $ 84
-------------- ---------------

---------------------
* Excludes impact of a non-recurring adjustment to access revenue.

Recurring service ARPU has declined as more customers activated or migrated
to service plans in the $29.99 to $39.99 monthly recurring charge range.
Additionally, recent service plans are offering more minutes at a lower monthly
charge due to increased competition in the wireless industry. These additional
minutes have driven down the ARPU received when customers use more minutes than
their plan allows. We anticipate this trend to continue on voice-only service
plans, but we anticipate higher service ARPU in the future as subscribers
activate on data and voice plans which offer more features, but at a higher
monthly charge. ARPU from features and other has increased as we are offering
fewer promotional credits and have charged more contract termination fees in
2002 as a result of higher deactivation and churn rates.

On April 27, 2001, Sprint and its affiliates announced an agreement on a
new Sprint PCS roaming rate; the receivable and payable roaming rate decreased
from $0.20 per minute to $0.15 per minute effective June 1, 2001, and decreased
further to $0.12 per minute effective October 1, 2001. The Sprint PCS roaming
rate changed to $0.10 per minute on January 1, 2002. After 2002, the rate will
be changed to "a fair and reasonable return" which has not yet been determined.
However, based on preliminary discussions with Sprint, we anticipate a
significant additional reduction in the rate. The decreases in the rate will
reduce our revenue and expense per minute, but we anticipate this rate reduction
will be offset by volume increases from the continued build-out of our network
and subscriber growth, resulting in greater overall roaming revenue and expense
in the future. Somewhat offsetting that rate reduction in Sprint PCS roaming
revenue was an increase in non-Sprint PCS revenue as a result of expanding
roaming agreements with other wireless carriers.




35



RESULTS OF OPERATIONS

Revenues. Subscriber revenues for the nine months ended September 30, 2002,
were approximately $111.1 million, compared to approximately $48.9 million for
the nine months ended September 30, 2001, an increase of approximately $62.2
million. The growth in subscriber revenues is primarily the result of the growth
in our wireless customer base. We managed approximately 241,900 customers at
September 30, 2002, compared to approximately 146,600 at September 30, 2001. Our
wireless customer base has grown because we have launched additional markets and
increased our sales force.

Sprint assesses access charges to long distance carriers on Horizon PCS'
behalf for the termination of landline-originated calls in our markets. Though
regulations generally entitle a carrier that terminates a call on the behalf of
another to be compensated for providing that service, these regulations were
developed in a period where services of this nature were provided exclusively by
local exchange carriers. Certain long distance carriers, including AT&T, have
disputed Sprint's assessment of these charges as well as the corresponding rate
at which the charges were determined. In July 2002, the FCC ruled that AT&T was
not required to pay these charges unless AT&T had agreed to do so in its
contract with Sprint and remanded the case to a U.S. District Court for further
proceedings. Because the case is still pending we cannot predict, with
certainty, the final outcome of this action. As a result, we recorded a
reduction in revenue in the second quarter of 2002 of approximately $1.3 million
representing previously billed and recognized access revenue. The Company plans
to cease recognition of this type of revenue in future quarters, unless there is
ultimately a favorable ruling by the courts or the FCC on this issue. Sprint has
asserted the right to recover from us amounts previously billed on our behalf
and remitted to us by Sprint. We will continue to assess the ability of Sprint
or other carriers to recover these charges. We are also continuing to review the
availability of defenses we may have against Sprint's claim to recover these
revenues from us.

Roaming revenues increased from approximately $25.6 million for the nine
months ended September 30, 2001, to approximately $38.9 million for the nine
months ended September 30, 2002, an increase of approximately $13.3 million.
This increase resulted from expanding roaming agreements with other wireless
carriers and from launching additional markets over the past year, including
markets covering major interstate highways. This increase was offset somewhat by
the decrease in the Sprint PCS roaming rate discussed above.

Equipment revenues for the nine months ended September 30, 2002, were
approximately $5.8 million, compared to approximately $4.6 million for the nine
months ended September 30, 2001, an increase of approximately $1.2 million. The
increase in equipment revenues is the result of an increase in the number of
handsets sold, somewhat offset by a lower sales price of the handset as the
average sales price, net of discounts and rebates, decreased to $99 for the nine
months ended September 30, 2002, from $119 for the same period in 2001.

Cost of service. Cost of service for the nine months ended September 30,
2002, was approximately $120.6 million, compared to approximately $68.3 million
for the nine months ended September 30, 2001, an increase of approximately $52.3
million. This increase reflects the increase in roaming expense, including long
distance charges, of approximately $15.4 million; the increase in costs incurred
under our wireless network services agreement with the Alliances of
approximately $9.8 million; the increase in wireless network operations,
including tower lease expense, circuit costs and payroll expense, of
approximately $16.7 million; increased customer care, activations, and billing
expense of approximately $8.9 million; and the increase in other variable
expenses, including interconnection and national platform expenses, of
approximately $1.5 million. Overall, the average cost of providing service per
the average subscriber on our network decreased from $77 to $60 for the nine
months ended September 30, 2001 and 2002, respectively, as we have increased our
subscriber base.

Cost of equipment. Cost of equipment for the nine months ended September
30, 2002, was approximately $12.6 million, compared to approximately $8.6
million for the nine months ended September 30, 2001, an increase of
approximately $4.0 million. The increase in the cost of equipment is the result
of the growth in our wireless customers, partially offset by the decreasing unit
cost of the handsets. For competitive and marketing reasons, we have sold
handsets to our customers below our cost and expect to continue to sell handsets
at a price below our cost for the foreseeable future. Additionally, we expect to
incur additional expense as existing customers upgrade their handsets to newer
models and to take advantage of new services that may be available with 3G,
including high-speed data applications.



36


Selling and marketing expenses. Selling and marketing expenses rose to
approximately $39.0 million for the nine months ended September 30, 2002,
compared to approximately $30.0 million for the same period in 2001, an increase
of approximately $9.0 million. This increase reflects the increase in the costs
of operating our 40 retail stores, including marketing and advertising in our
sales territory, of approximately $6.6 million, the increase in subsidies on
handsets sold by third parties of approximately $900,000, and the increase in
commissions paid to third parties of approximately $1.5 million.

General and administrative expenses. General and administrative expenses
for the nine months ended September 30, 2002 were approximately $25.9 million
compared to approximately $14.1 million in 2001, an increase of approximately
$11.8 million. The increase reflects an increase in the provision for doubtful
accounts receivable of approximately $8.2 million primarily due to the write-off
of NDASL and Clear Pay customers and an increase in the Sprint management fee of
approximately $4.6 million as a result of higher subscriber revenues in 2002,
offset by a decrease in other general expenses of approximately $1.0 million.
During the nine months ended September 30, 2001, we recognized approximately
$1.3 million of legal and consulting expenses related to the exploration of
strategic business alternatives.

Non-cash compensation expense. For the nine months ended September 30, 2002
and 2001, Horizon PCS recorded stock-based compensation expense of approximately
$300,000 and $900,000 respectively. The expense recorded in 2001 includes
approximately $700,000 related to the distribution of 7,249 shares of Horizon
Telcom stock to employees of Horizon PCS and $200,000 for stock options granted.
The expense in 2002 relates to the amortization of the value of stock options
granted in 1999 and 2000.

Depreciation and amortization expense. Depreciation and amortization
expenses increased by approximately $17.2 million to a total of approximately
$30.2 million in 2002. The increase reflects the continuing construction of our
wireless network as we funded approximately $57.6 million of capital
expenditures during the nine months ended September 30, 2002.

During 2002, Horizon PCS launched switches in Tennessee and Pennsylvania
and disconnected some wireless switching equipment in Chillicothe, Ohio. As a
result, the Ohio switching equipment is considered an impaired asset as defined
by SFAS No. 144. Accordingly, depreciation and amortization expense for the
three and nine months ended September 30, 2002, includes approximately $3.5
million of expense related to accelerated depreciation on the impaired assets.

Amortization expense of the intangible asset related to the Bright PCS
acquisition was approximately $1.3 million during the nine months ended
September 30, 2002 and 2001. Goodwill amortization was approximately $300,000
during the nine months ended September 30, 2001. Goodwill amortization ceased as
of December 31, 2001, with the adoption of SFAS No. 142.

Amortization expense also includes amortization of an intangible asset
recorded in September 2000 related to the grant of new markets to Horizon PCS by
Sprint in September 2000. Amortization expense related to this intangible asset
was approximately $600,000 for the nine months ended September 30, 2002 and
2001.

Loss on sale of property and equipment. During the nine months ended
September 30, 2002, Horizon PCS incurred a loss of approximately $600,000
related to the sale of network equipment and corporate-owned vehicles. The sale
resulted in proceeds of approximately $1.5 million. The vehicles were
subsequently leased back from the purchaser.

Interest expense, net. Interest expense for the nine months ended September
30, 2002, was approximately $44.1 million, compared to approximately $18.7
million in 2001. The increase in interest expense was a result of Horizon PCS'
additional indebtedness. Interest on the outstanding balance of Horizon PCS'
secured credit facility accrues at LIBOR plus a specified margin. On June 29,
2001, Horizon PCS agreed to several changes in the secured credit facility
including a 25 basis point increase in the margin on the annual interest rate.
At September 30, 2002, the interest rate on Horizon PCS' $105.0 million term
loan A borrowed under its secured credit facility was 5.80%, while the interest
rate on the $50.0 million term loan B was 6.32%. Interest expense on the secured
credit facility was $6.6 million and $3.6 million during the nine months ended
September 30, 2002 and 2001, respectively.



37


Horizon PCS accrues interest at a rate of 14.00% annually on its discount
notes issued in September 2000 and will pay interest semi-annually in cash
beginning in October 2005. Unaccreted interest expense on the discount notes was
approximately $116.0 million at September 30, 2002. Interest expense on Horizon
PCS' discount notes were approximately $20.0 million and $17.4 million during
the nine months ended September 30, 2002 and 2001, respectively.

On June 15, 2002, Horizon PCS began making semi-annual interest payments on
its senior notes issued in December 2001 at an annual rate of 13.75%. Interest
expense accrued on the senior notes was approximately $18.0 million during the
nine months ended September 30, 2002. Under the terms of the senior notes, cash
to cover the first four semi-annual interest payments was placed in an escrow
account.

Interest expense also includes approximately $2.0 million and $600,000
during the nine months ended September 30, 2002 and 2001, respectively, of
amortization from the deferred financing fees related to Horizon PCS' secured
credit facility, discount notes and senior notes. Also contributing to Horizon
PCS' interest expense during the nine months ended 2002 was approximately $1.3
million in commitment fees Horizon PCS paid on the unused portion of its secured
credit facility.

Capitalized interest during the nine months ended September 30, 2002 and
2001, was approximately $3.8 million and $5.1 million, respectively.

Preferred stock dividend. Horizon PCS' convertible preferred stock pays a
stock dividend at the rate of 7.5% per annum, payable semi-annually commencing
May 1, 2001. The dividends are paid with additional shares of convertible
preferred stock. Through September 30, 2002, Horizon PCS has issued an
additional 3,245,134 shares of convertible preferred stock in payment of
dividends, including 1,060,201 shares on May 1, 2002. An additional 1,099,958
were issued on November 1, 2002, and are not included in the total above.

Interest income and other, net. Interest income and other income for the
nine months ended September 30, 2002, was approximately $2.5 million compared to
approximately $4.8 million in 2001 and consisted primarily of interest income.
This decrease was due primarily to a lower average balance of cash investments
during 2002, as compared to the same period in 2001 and due to a lower
short-term interest rate environment in 2002.

Income taxes. Until September 26, 2000, Horizon PCS was included in the
consolidated federal income tax return of Horizon Telcom. Horizon PCS provided
for federal income taxes on a pro-rata basis, consistent with a consolidated
tax-sharing agreement. As a result of the sale of Horizon PCS' convertible
preferred stock on September 26, 2000, Horizon PCS will not be able to
participate in the tax sharing agreement nor will they be able to utilize any
net operating loss benefits until they start to generate taxable income. Horizon
PCS did not record any income tax benefit for the nine months ended September
30, 2002 because of the uncertainty of generating future taxable income to be
able to recognize current net operating losses.

Net loss. Horizon PCS' net loss for the nine months ended September 30,
2002, was approximately $123.8 million compared to approximately $77.8 million
for the nine months ended September 30, 2001. The increase in Horizon PCS' loss
reflects the continued expenses related to launching its markets and building
its customer base. Horizon PCS is expected to incur significant operating losses
and to generate significant negative cash flow from operating activities while
it continues to construct its wireless network and increase its customer base.

Other comprehensive income (loss). During 2001, Horizon PCS entered into
two, two-year interest rate swaps, effectively fixing $50.0 million of the term
loan B borrowed under the secured credit facility. We do not expect the effect
of these swaps to have a material impact to interest expense for the remainder
of their lives. Horizon PCS recovered approximately $141,000 of previously
unrealized losses in other comprehensive income during the first nine months of
2002.

LANDLINE TELEPHONE SERVICES SEGMENT AND ALL OTHER SERVICES

The following discussion details the results of operations of our landline
telephone services segment and all other services not assigned to a segment for
the nine months ended September 30, 2002 and 2001.



38


RESULTS OF OPERATIONS

Revenues. Long-distance service revenue decreased for the nine months ended
September 30, 2002, as the Company continues to see lower usage for
long-distance service. We expect this trend to continue for the foreseeable
future, as more customers use wireless devices where long distance is included
for one monthly fee. The increase in network access is due to a recent ruling by
the United States Court of Appeals that deals with a similar landline
telecommunications company and its related carrier access rates. As a result of
this ruling, the Company recognized an additional $2.1 million of revenue during
the second quarter that had previously been set aside to settle future over
earnings claims by other carriers.

Other revenues were impacted by increased VDSL revenue as we continue to
build our customer base, offset somewhat by lower sales of business systems.

Cost of goods sold. Cost of goods sold for the nine months ended September
30, 2002, was approximately $400,000, compared to approximately $500,000 for the
nine months ended September 30, 2001, a decrease of approximately $100,000 due
to lower sales of business systems.

Cost of services. Cost of services for the nine months ended September 30,
2002, was approximately $11.8 million, compared to approximately $10.6 million
for the nine months ended September 30, 2001, an increase of approximately $1.2
million. Of the increase, $300,000 was related to additional personnel charges
and approximately $900,000, was related to the continued installation and
programming expenses associated with our VDSL service as we build out the
network and increase the subscriber base.

Selling and marketing expenses. Selling and marketing expenses rose to
approximately $1.2 million for the nine months ended September 30, 2002 compared
to approximately $1.1 million for the same period in 2001, an increase of
approximately $100,000, which was mostly related to additional payroll expenses.

General and administrative expenses. General and administrative expenses
were essentially flat at approximately $15.7 million for the nine months ended
September 30.

Non-cash compensation expense. This compensation expense is the
amortization of the value of stock options granted in November 1999.

Depreciation and amortization expense. Depreciation and amortization
expenses increased by approximately $1.1 million to a total of $6.7 million in
2002. The increase reflects the continuing upgrade of our landline network to
optical fiber cabling.

Interest expense, net. Interest expense for the nine months ended September
30, 2002, was approximately $2.1 million, compared to approximately $1.7 million
for the nine months ended September 30, 2001. The increase in interest expense
was a result of our additional debt outstanding during the nine months ended
September 30, 2002, compared to the same period in 2001.

In August 2002, Chillicothe Telephone issued $30,000,000 of 6.64% Senior
Notes. A portion of the proceeds was used to retire the line of credit on
September 28, 2002. Interest expense on the 2002 Senior Notes was approximately
$262,000 for the nine months ended September 30, 2002. Interest expense on the
retired line of credit and the retired 1993 Senior Notes was approximately $1.3
million and $1.3 million for the nine months ended September 30, 2002 and 2001,
respectively. Interest expense on Chillicothe Telephone's 1998 Senior Notes was
approximately $600,000 in 2002 and 2001. Capitalized construction interest was
approximately $83,000 and $170,000. Amortization of debt issuance costs was
approximately $29,000 in 2002 and approximately $14,000 in 2001.

Interest income and other, net. The landline telephone service segment had
approximately $58,000 of expense for the nine months ended September 30, 2002
compared to approximately $100,000 of income for the same period in 2001.

Income tax expense. Income tax expense for the nine months ended September
30, 2002, was approximately $1.1 million compared to approximately $1.5 million
in 2001, reflecting lower net income before taxes. Before September 26, 2000,


39


Horizon PCS was included in the consolidated Federal income tax return of
Horizon Telcom. Horizon PCS provided for Federal income taxes on a pro-rata
basis, consistent with a consolidated tax-sharing agreement. As a result of the
sale of Horizon PCS convertible preferred stock in September 2000, Horizon PCS
is not able to participate in the tax sharing agreement with its parent nor is
Horizon Telcom able to utilize any net operating loss benefits from Horizon PCS.
We expect to continue to record income tax expense as a result of this tax
deconsolidation. Horizon PCS is unable to recognize any tax benefits from its
net operating losses until it generates taxable income. Thus, Horizon PCS filed
a separate Federal income tax return for the short period after the
deconsolidation through December 31, 2000 and will file a separate return for
all subsequent periods.

Minority interest in loss. As part of the acquisition of Bright PCS, the
former members of Bright PCS have approximately an 8% ownership in Horizon PCS,
excluding the impact of the possible conversion of convertible preferred stock
and exercise of options and warrants. Horizon Telcom accounts for this ownership
by recording the portion of net loss attributable to the minority shareholders
as minority interest in loss in the accompanying condensed consolidated
statements of operations. There will not be any further allocations to minority
interests until such time as Horizon PCS becomes profitable and any unallocated
losses to minority interests are offset with income in future periods.

Other comprehensive income (loss). For the nine months ended September 30,
2002, the landline telephone segment recorded an unrealized loss, net of
associated tax, of approximately $2.0 million, on its investment in marketable
securities classified as available-for-sale. The decline in fair value of the
security is reflective of the volatility in the general market for technology
stocks over the past twelve months.

LIQUIDITY AND CAPITAL RESOURCES

For our debt outstanding at September 30,2002, the following table presents
the estimated future outstanding long-term debt at the end of each year and
future required annual principal payments for each year associated with our
financing based on our projected level of long-term indebtedness:




(Dollars in millions) Years Ending December 31,
------------------------------------------------------------------
2002 2003 2004 2005 2006 Thereafter
------------ ------------ ------------ ----------- ------------ -----------
Horizon PCS:
Secured credit facility,
due 2008....................... $ 155.0 $ 155.0 $ 146.7 $ 126.5 $ 99.7 $ 99.7
Variable interest rate (1) . 5.97% 5.97% 5.97% 5.97% 5.97% 5.97%
Principal payments.......... $ - $ - $ 8.3 $ 20.2 $ 26.8 $ 99.7
Discount notes, due 2010 (2)..... $ 186.3 $ 217.5 $ 253.1 $ 283.7 $ 286.1 $ 295.0
Fixed interest rate......... 14.00% 14.00% 14.00% 14.00% 14.00% 14.00%
Principal payments.......... $ - $ - $ - $ - $ - $ 295.0
Senior notes, due 2011........... $ 175.0 $ 175.0 $ 175.0 $ 175.0 $ 175.0 $ 175.0
Fixed interest rate......... 13.75% 13.75% 13.75% 13.75% 13.75% 13.75%
Principal payments.......... $ - $ - $ - $ - $ - $ 175.0

Chillicothe Telephone:
1998 Senior notes, due 2018 (4).. $ 12.0 $ 12.0 $ 12.0 $ 12.0 $ 12.0 $ 12.0
Fixed interest rate......... 6.62% 6.72% 6.72% 6.72% 6.72% 6.72%
Principal payments.......... $ - $ - $ - $ - $ - $ 12.0
2002 Senior notes, due 2012 (3).. $ 30.0 $ 30.0 $ 30.0 $ 30.0 $ 30.0 $ 30.0
Fixed interest rate......... 6.64% 6.64% 6.64% 6.64% 6.64% 6.64%
Principal payments.......... $ - $ - $ - $ - $ - $ 30.0



- --------------------------
(1) Interest rate on the secured credit facility equals the LIBOR plus a
margin that varies from 400 to 450 basis points. At September 30,
2002, $50.0 million was effectively fixed at 8.53% through two
interest rate swaps discussed in "Item 3. Quantitative and Qualitative
Disclosures About Market Risk." The nominal interest rate is assumed
to equal 5.97% for all periods ($50.0 million at 6.32% and $105.0
million at 5.80%).

(2) Face value of the discount notes is $295.0 million. End of year
balances presented here are net of the discount and assume accretion
of the discount as interest expense at an annual rate of 14.00%.



40


(3) In August 2002, Chillicothe Telephone issued $30,000,000 of 6.64%,
10-year Senior notes due in full July 1, 2012. The proceeds of the
offering were used to retire both the short-term line of credit and
the non-current portion of the 1993 Senior Notes.

(4) On November 12, 2002, Chillicothe Telephone amended and restated its
1998 $12,000,000 senior notes due 2018. The interest rate on the
amended notes will be 6.72%, an increase of 10 basis points, with the
same maturity date as the 1998 Senior Notes.

Statement of Cash Flows

At September 30, 2002, we had cash and cash equivalents of approximately
$117.0 million, including Horizon PCS' deposit requirements discussed below, and
working capital of approximately $115.0 million. At December 31, 2001, we had
cash and cash equivalents of approximately $127.2 million and working capital of
approximately $104.4 million. Horizon PCS was also required to escrow funds
sufficient to cover the first four interest payments on the senior notes. These
funds are presented as restricted cash on the consolidated balance sheet. The
decrease in cash and cash equivalents of approximately $10.1 million is
primarily attributable to the funding of our loss from continuing operations of
approximately $125.9 million (this loss also includes certain non-cash charges)
and funding our capital expenditures of approximately $66.1 million during the
first nine months ended September 30, 2002, offset by the $105.0 million draw on
Horizon PCS' secured credit facility.

Net cash used in operating activities for the nine months ended September
30, 2002, was approximately $51.3 million. This reflects the continuing use of
cash for our operations to build our customer base, including but not limited to
providing service in our markets and the costs of acquiring new customers. The
net loss of approximately $125.9 million was partially offset by increases to
depreciation, non-cash interest expense and the provision for doubtful accounts
receivable, offset by increases to accounts receivable. We expect to continue to
see negative cash flows from operations for the remainder of 2002 and through
2003. We expect to be EBITDA positive in 2004.

Net cash used in investing activities was approximately $64.5 million for
the nine months ended September 30, 2002, reflecting the continuing build-out of
the Horizon PCS network as well as the deployment of capital necessary to offer
VDSL service. At September 30, 2002, we operated approximately 791 cell sites in
our PCS network (an additional 507 cell sites were operated by the Alliances in
our territories). This represents an addition of approximately 187 sites during
the nine months ended September 30, 2002. In addition to the sites, we have
increased the number of PCS switching stations in our territory and have
increased our number of PCS retail stores from 38 at the end of 2001, to 40 at
September 30, 2002. We will incur additional capital expenditures as we complete
the build-out of our network, including the launch of additional PCS retail
stores, completing additional cell sites for 3G compatibility and expanding
capacity at our switches as needed but anticipate future expenditures to be less
than historical levels.

Net cash provided by financing activities for the nine months ended
September 30, 2002, was approximately $105.6 million consisting primarily of
$105.0 million draw Horizon PCS' term loan A required under the secured credit
facility. We incurred approximately $2.8 million of deferred financing fees
related to the amendment of Horizon PCS' covenants under its secured credit
facility. In August 2002, Chillicothe Telephone issued $30,000,000 of 6.64%, 10
year Senior notes due in full July 1, 2012 ("2002 Senior Notes"). The proceeds
of the offering were used to retire both the short-term line of credit with
Huntington National Bank ($18,400,000 at repayment) and the non-current portion
of the 1993 Senior Notes ($6,000,000 at repayment). The remaining funds will be
used for general corporate purposes.

On November 12, 2002, Chillicothe Telephone amended and restated its 1998
$12,000,000 senior notes due 2008. The interest rate on the amended notes will
be 6.72%, an increase of 10 basis points, with the same maturity dates as the
1998 Senior Notes. Chillicothe Telephone refinanced its 1998 Senior Notes in
order to align the debt covenants of those notes with the covenants of the 2002
Senior Notes, which are less restrictive than the covenants of the original 1998
Senior Notes.

Debt Covenants

Horizon PCS' secured credit facility includes financial covenants that must
be met each quarter. Horizon PCS did not meet the covenant for EBITDA for the
first quarter of 2002. As a result of higher than expected gross and net
additions to Horizon PCS subscribers for the quarter, Horizon PCS incurred
additional expenses to add those customers. Although Horizon PCS believes it
will ultimately benefit from the revenues generated by new subscribers, Horizon
PCS incurs one-time expenses associated with new subscribers, including
commissions, handset subsidies, set up costs for the network and marketing
expenses. As a result, these new subscriber costs negatively affected EBITDA


41


during the period of the addition of new subscribers, which led to
non-compliance with the EBITDA covenant for the first quarter of 2002.

On June 27, 2002, Horizon PCS entered into a fourth amendment to its
secured credit facility with its bank group. The amendment adjusts certain
financial covenants and increases the margin on the base interest rate by 25
basis points to LIBOR plus 400 to 450 basis points, while also providing for the
payment of fees to the banking group, an increase in post-default interest
rates, a new financial covenant regarding minimum available cash, additional
prepayment requirements, restrictions on Horizon PCS' borrowings under the
remaining $95.0 million line of credit and deposit requirements on the $105.0
million borrowed under the secured credit facility in March 2002. The amendment
and details on the requirements and restrictions were filed with the Company's
Form 8-K on June 27, 2002.

The following table details the maximum amount available to be borrowed on
the line of credit under Horizon PCS' secured credit facility for the period
then ended:


Maximum amount
available to be
borrowed
------------------
September 30, 2002.................................. $ --
December 31, 2002................................... --
March 31, 2003...................................... --
June 30, 2003....................................... 16,000,000
September 30, 2003.................................. 26,000,000
December 31, 2003................................... 33,000,000
March 31, 2004...................................... 52,000,000
April 1, 2004....................................... 95,000,000

The following table details the minimum balance requirements placed on cash
and cash equivalents under the amended terms of Horizon PCS' secured credit
facility:

Deposit balance
requirement
-------------------
At September 30, 2002................................. $ 71,000,000
October 1, 2002, through November 15, 2002............ 63,000,000
November 16, 2002, through December 31, 2002.......... 55,000,000
January 1, 2003, through February 15, 2003............ 33,000,000
February 16, 2003, through March 31, 2003............. 11,000,000
April 1, 2003, through May 15, 2003................... 5,500,000

As of September 30, 2002, Horizon PCS was in compliance with all of the
applicable covenants, as amended.

Chillicothe Telephone's 1998 Senior Notes contain a covenant that restricts
the amount of investments that Chillicothe Telephone may make in loans, stock or
other securities of another company. For the covenant reporting quarter ended
June 30, 2002, Chillicothe Telephone failed to comply with the covenant related
to these restricted investments, which constitutes an event of default under the
note purchase agreement. Additionally the 1993 Senior Notes contain a covenant
that restricts the amount of Chillicothe Telephone's funded debt. Due to the
issuance of the 2002 Senior Notes, the proceeds of which were used to retire the
non-current portion of the 1993 Senior Notes, coupled with the current portion
of the 1993 Senior Notes, Chillicothe Telephone failed to comply with this
covenant at September 30, 2002. A waiver of non-compliance on the intercompany
investment covenant violation on the 1998 Senior Notes on the 1998 Senior Notes
was obtained on August 8, 2002, and a waiver of non-compliance on the funded
debt covenant violation ont he 1998 Senior Notes was obtained on August 14,
2002. Both waivers were extended on September 12, 2002. Also, on August 14,
2002, the 1993 Senior Notes were amended to provide for the issuance fo the 2002
Senior Notes.

Credit Ratings

On September 26, 2000, Horizon PCS received $149.7 million from the
issuance of $295.0 million of discount notes. The discount notes accrete in
value at a rate of 14% compounded semi-annually. The Company is required to
begin making semi-annual cash interest payments on the discount notes on October
1, 2005. The discount notes were subject to an exchange offer that was completed
in 2001. At September 30, 2002, the discount notes were rated by Standard and
Poors ("S&P") as "B-", which means a company's obligation is vulnerable to
non-payment under adverse business, financial or economic conditions, but the
obligor of an issue


42


currently has the capacity to meet its financial commitment on its obligation.
On October 29, 2002, S&P downgraded our corporate debt rating to "CCC+" with a
negative outlook, which means an obligation "is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation." At September 30, 2002, Moody's Investors Services ("Moody's") rated
the notes as "Caa1", which means an issue is in "poor standing." On October 28,
2002, Moody's downgraded it's rating on our discount notes to "C," which is
Moody's lowest bond rating. The CUSIP on the discount notes is 44043UAC4.

On December 7, 2001, Horizon PCS received $175.0 million from the issuance
of unsecured senior notes. Cash interest payments on the senior notes are made
semi-annually at an annual rate of 13.75%. A portion of the offering proceeds
was placed in an escrow account to fund the first four semi-annual interest
payments and is classified as restricted cash. The first interest payment was
made on June 15, 2002. The senior notes were subject to an exchange offer that
was completed in 2002. At September 30, 2002, the senior notes were rated by S&P
as "B-." On October 29, 2002, S&P downgraded our corporate debt rating to "CCC+"
with a negative outlook. Moody's rated the senior notes as "Caa1", which is a
bond in "poor standing." On October 28, 2002, Moody's downgraded its rating on
our senior notes to "C," which is Moody's lowest bond rating. The CUSIP on the
senior notes is 44043UAH3.

Funding Requirements

At September 30, 2002, Horizon PCS had a $95.0 million line of credit
committed under its secured credit facility with restrictions. We believe the
available borrowings under Horizon PCS' secured credit facility will be adequate
to fund the PCS network build-out, anticipated operating losses and working
capital requirements until Horizon PCS achieves positive EBITDA, which we now
expect to occur in first quarter of 2004. We believe the increase in churn and
subsequent write-offs of involuntary NDASL deactivations combined with a slow
down in activation growth during the second and third quarters of 2002 has
extended the time it will take to reach positive EBITDA.

For the year ended December 31, 2002, we anticipate our annual funding
needs will be approximately $165.0 million, of which approximately $70.0 million
to $85.0 million will be used for capital expenditures; the remainder will be
used to fund working capital and operating losses. The terms of their respective
credit agreements prohibit or severely restrict the ability of Chillicothe
Telephone and Horizon PCS to provide funds to their affiliates in the event the
affiliate experiences a shortfall. The actual funds required to build-out and
upgrade our wireless network and to fund operating losses, working capital needs
and other capital needs may vary materially from our estimates and additional
funds may be required because of unforeseen delays, cost overruns, unanticipated
expenses, regulatory changes, engineering design changes and required
technological upgrades and other technological risks. Additionally, Sprint is
planning to continually upgrade their nationwide wireless network to deploy
higher data-rate speeds, which may require us to outlay additional capital
expenditures in future years that have not been determined at this point. Should
the Company be required to upgrade its network to provide 3G services that meet
Sprint's standards, we may need to obtain additional financing to fund those
capital expenditures.

Other future cash expenditures that may require additional borrowings
include:

O expanding the coverage within our existing operating markets or
improving call quality with fill-in coverage;

O opening additional retail stores, beyond our current plan of 51
stores;

O mergers or acquisitions of other PCS affiliates of Sprint or other
compatible PCS carriers;

O the grant to us by Sprint of additional markets under our Sprint
agreements; and/or



43


O expanding our PCS network, if economically justifiable, by exercising
our right to build our own network in our markets which are covered by
our network services agreement with the Alliances under the terms of
that amended agreement.

If we are unable to obtain any necessary additional financing, or if we
incur further restrictions on the availability of our current funding to meet
the covenants imposed under our credit facilities or Horizon PCS is unable to
complete its network upgrades and build-out as required by the management
agreements, Sprint may terminate our agreements; we will no longer be able to
offer Sprint PCS products and services. In this event, Sprint may purchase our
operating assets or capital stock under terms defined in our agreements with
Sprint. Also, any delays in our build-out may result in penalties under our
Sprint agreements, as amended. ` Other factors that would impact liquidity are:

O we may not be able to sustain our growth or obtain sufficient revenue
to achieve and sustain positive cash flow from operations or
profitability;

O we may experience a higher churn rate, which could result in lower
revenue;

O new customers may be of lower credit quality, which may require a
higher provision for doubtful accounts;

O increased competition causing declines in ARPU;

O our failure to comply with restrictive financial and operational
covenants under the secured credit facility; and

O our upgrade to 3G services, due to which we have incurred significant
capital expenditures, may not be successful in the marketplace and may
not result in incremental revenue.

Income from ongoing operations and EBITDA are not measures of financial
performance under generally accepted accounting principles and should not be
considered alternatives to net income (loss) as measures of performance or to
cash flows as a measure of liquidity.

SEASONALITY

Our local and long-distance telephone, Internet and data services
businesses are not subject to seasonal influences. Our wireless telephone
business is subject to seasonality because the wireless industry has been
historically heavily dependent on calendar fourth quarter results. Among other
things, that industry relies on significantly higher customer additions and
handset sales in the calendar fourth quarter as compared to the other three
calendar quarters. A number of factors contribute to this trend, including:

O the increasing use of retail distribution, which is more dependent
upon the year-end holiday shopping season;

O the timing of new product and service announcements and introductions;

O competitive pricing pressures; and

O aggressive marketing and promotions.

INFLATION

We believe that inflation has not had an adverse effect on our results of
operations.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2002 the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities by
requesting that expenses related to the exit of an activity or disposal of
long-lived assets be recorded when they are incurred and measurable. Prior to
SFAS No. 146, these charges were accrued at the time of commitment to exit or


44


dispose of an activity. The Company will adopt SFAS No. 146 on January 1, 2003
and has not yet determined the financial impact the adoption of this
pronouncement will have on its financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 addresses the accounting for gains and losses from
the extinguishments of debt, economic effects and accounting practices of
sale-leaseback transactions and makes technical corrections to existing
pronouncements. The Company adopted SFAS No. 145 on July 1, 2002, and it has not
had a material effect on the Company's financial position, results of operations
or cash flows.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment of long-lived assets. The statement
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30. SFAS No. 144 removes goodwill from its scope,
as goodwill is addressed in the impairment test described above under SFAS No.
142. The Company adopted SFAS No. 144 on January 1, 2002. See Note 6 in the
"Notes to Consolidated Financial Statements" for discussion on the impact of
adoption of this statement.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirements of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and (or) the normal operation of a
long-lived asset. The Company will adopt this statement effective January 1,
2003 and is not expected to have a material effect on the Company's financial
position, results of operations or cash flows.

The Company adopted SFAS No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangible Assets." on January 1, 2002. As a result of the
adoption, goodwill amortization ceased as of December 31, 2001, and the Company
is required to complete an impairment test of its remaining goodwill balance
annually (more frequently if impairment indicators arise). As of September 30,
2002, Horizon PCS has goodwill of approximately $7,191,000, net of accumulated
amortization, related to the acquisition of Bright PCS. See Note 9 in the "Notes
to Consolidated Financial Statements" for additional information.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not engage in commodity futures trading activities and do not enter
into derivative financial instruments for trading or other speculative purposes.
We also do not engage in transactions in foreign currencies that would expose us
to market risk.

In the normal course of business, our operations are exposed to interest
rate risk. Our primary interest rate risk exposure relates to (i) Horizon PCS'
variable-rate secured credit facility, (ii) our ability to refinance our
fixed-rate notes at maturity at market rates, and (iii) the impact of interest
rate movements on our ability to meet interest expense requirements and meet
financial covenants under our debt instruments. We manage the interest rate risk
on our outstanding long-term debt through the use of fixed and variable-rate
debt and interest rate swaps.

In the first quarter of 2001, we entered into a two-year interest rate
swap, effectively fixing $25.0 million of term loan B borrowed under Horizon
PCS' secured credit facility. In the third quarter of 2001, we entered into
another two-year interest rate swap effectively fixing the remaining $25.0
million of term loan B. The following table compares the current market rates on
the balances subject to the swap agreements:

(Dollars in millions) At September 30, 2002
------------------------------------------
Balance Market rate Swap rate
------------ -------------- ------------
Swap 1..................... $25.0 6.32% 9.40%
Swap 2..................... $25.0 6.32% 7.65%

Since our swap interest rates are currently greater than the market
interest rates on our underlying debt, our results from operations currently
reflect a higher interest expense than had we not hedged our position. Since
inception and through September 30, 2002, we have recognized approximately


45


$200,000 in losses due to the ineffectiveness of these swaps in the consolidated
statements of operations. At September 30, 2002, the Company recognized
approximately $700,000 in other comprehensive losses on the balance sheet.

While we cannot predict our ability to refinance existing debt, we continue
to evaluate our interest rate risk on an ongoing basis. If we do not renew our
swaps, or, if we do not hedge incremental variable-rate borrowings under our
secured credit facility, we will increase our interest rate risk, which could
have a material impact on our future earnings. As of September 30, 2002,
approximately 84% of our long-term debt is fixed-rate or is variable-rate that
has been swapped under fixed-rate hedges, thus reducing our exposure to interest
rate risk. Currently, a 100 basis point increase in interest rates would
increase our interest expense approximately $1.1 million.

ITEM 4. CONTROLS AND PROCEDURES

With the participation of management, the Company's chief executive officer
and chief financial officer evaluated the Company's disclosure controls and
procedures within the 90 days preceding the filing date of this quarterly
report. Based upon this evaluation, the chief executive officer and chief
financial officer concluded that the Company's disclosure controls and
procedures are effective in ensuring that material information required to be
disclosed is included in the reports that it files with the Securities and
Exchange Commission.

There were no significant changes in the Company's internal controls or, to
the knowledge of the management of the Company, in other factors that could
significantly affect these controls subsequent to the evaluation date.



46



PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

The Note Purchase Agreement for the 1998 Senior Notes of Chillicothe
Telephone contains a covenant that restricts the amount of investments that
Chillicothe Telephone may make in loans, stock or other securities of another
company. For the quarter ended June 30, 2002, Chillicothe Telephone failed to
comply with the covenant related to these restricted investments, which
constitutes an event of default under the note purchase agreement. Chillicothe
Telephone entered into a waiver agreement with the noteholders to remedy the
non-compliance. The waiver was signed by both parties on August 8, 2002. This
waiver was extended on September 12, 2002. Also on August 14, 2002, the 1993
Senior Notes were amended to provide for the issuance of the 2002 Senior Notes.

The 1998 Senior Notes and the 1993 Senior Notes of Chillicothe Telephone
contain a covenant that restricts the amount of Chillicothe Telephone's funded
debt. Due to the issuance of the 2002 Senior Notes, coupled with the fact that
the last payment due on the 1993 Senior Notes was not made until November 1,
2002, Chillicothe Telephone failed to comply with this covenant at September 30,
2002. A waiver of non-compliance was obtained in anticipation of the violation
of the 1998 Senior Notes and signed by both parties on August 14, 2002. This
waiver was extended on September 12, 2002. Also, on August 14, 2002, the 1993
Senior Notes were amended to provide for the issuance of the 2002 Senior Notes.

In August 2002, Chillicothe Telephone issued $30,000,000 of 6.64% senior
notes ("2002 Senior Notes") due in full July 1, 2012. The proceeds of the
offering were used to retire both the short-term line of credit with Huntington
National Bank and the non-current portion of the 1993 Senior Notes. The current
portion of the 1993 Senior Notes was repaid on November 1, 2002. The remaining
funds will be used for general corporate purposes.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

RISK FACTORS

RISKS RELATED TO CHILLICOTHE TELEPHONE, LONG DISTANCE AND INTERNET BUSINESS

The information set forth under this heading describes risk factors
relating to the business of our wholly-owned subsidiaries the Chillicothe
Telephone Company, Horizon Technology and Horizon Services. References under
this heading to "we," "us" and "our" are to those subsidiaries.

SIGNIFICANT COMPETITION IN TELECOMMUNICATIONS SERVICES IN OUR MARKETS MAY CAUSE
US TO LOSE CUSTOMERS.

We face, or will face, significant competition in the markets in which we
currently provide local telephone, long distance, data and Internet services.
Many of our competitors are substantially larger and have greater financial,
technical and marketing resources than we do. In particular, larger competitors
have certain advantages over us, which could cause us to lose customers and
impede our ability to attract new customers, including:

O long-standing relationships and greater name recognition with
customers;

O financial, technical, marketing, personnel and other resources
substantially greater than ours;



47


O more capital to deploy services; and

O potential to lower prices of competitive services.

These factors place us at a disadvantage when we respond to our
competitors' pricing strategies, technological advances and other initiatives.
Additionally, our competitors may develop services that are superior to ours or
that achieve greater market acceptance.

We face competition from other current and potential market entrants,
including:

O domestic and international long distance providers seeking to enter,
re-enter or expand entry into our local communications marketplace;

O other domestic and international competitive communications providers,
resellers, cable television companies and electric utilities; and

O providers of broadband and Internet services.

A continuing trend toward combinations and strategic alliances in the
communications industry could give rise to significant new competitors. This
could cause us to lose customers and impede our ability to attract new
customers.

WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE NEW TECHNOLOGIES OR RESPOND
EFFECTIVELY TO CUSTOMER REQUIREMENTS.

The communications industry is subject to rapid and significant changes in
technology, frequent new service introductions and evolving industry standards.
We cannot predict the effect of these changes on us or our industry.
Technological developments may reduce the competitiveness of our networks and
require unbudgeted upgrades or the procurement of additional products that could
be expensive and time consuming. If we fail to adapt successfully to
technological changes or obsolescence or fail to obtain access to important new
technologies, we could lose customers and be limited in our ability to attract
new customers.

IF OUR BACK OFFICE AND CUSTOMER CARE SYSTEMS ARE UNABLE TO MEET THE NEEDS OF OUR
CUSTOMERS, WE MAY LOSE CUSTOMERS.

Sophisticated back office processes and information management systems are
vital to our anticipated growth and our ability to achieve operating
efficiencies. We are dependent on third-party vendors for billing, service and
customer support systems. We cannot assure you that these systems will perform
as expected as we increase our number of customers. If they fail to perform as
expected, we could lose customers. The following could prevent our back office
and customer care systems from meeting the needs of our customers:

O failure of third-party vendors to deliver products and services in a
timely manner at acceptable costs;

O our failure to identify key information and processing needs;

O our failure to integrate products or services effectively;

O our failure to upgrade systems as necessary; or

O our failure to attract and retain qualified systems support personnel.

Furthermore, as our suppliers revise and upgrade their hardware, software
and equipment technology, we could encounter difficulties in integrating this
new technology into our business or find that such new hardware, software and
technology is not appropriate for our business. In addition, our right to use
such hardware, software and technology depends upon license agreements with
third party vendors. Vendors may cancel or elect not to renew some of these
agreements, which may adversely affect our business.



48


BECAUSE WE OPERATE IN A HEAVILY REGULATED INDUSTRY, CHANGES IN REGULATION COULD
HAVE A SIGNIFICANT EFFECT ON OUR REVENUES AND COMPLIANCE COSTS.

We are subject to significant regulation that could change in a manner
adverse to us. We operate in a heavily regulated industry, and the majority of
our revenues generally have been supported by regulations, including in the form
of support for the provision of telephone services in rural areas. Laws and
regulations applicable to us and our competitors may be, and have been,
challenged in the courts, and could be changed by Congress or regulators at any
time. In addition, any of the following have the potential to have a significant
impact on us:

RISK OF LOSS OR REDUCTION OF NETWORK ACCESS CHARGE REVENUES. Approximately
12% of the Company's total revenues for the year ended December 31, 2001,
came from network access charges, which are paid to us by intrastate
carriers and interstate long distance carriers for originating and
terminating calls in the regions we serve. The amount of access charge
revenues that we receive is calculated based on guidelines set by federal
and state regulatory bodies, and such guidelines could change at any time.
The FCC continues to reform the federal access charge system. States often
mirror these federal rules in establishing intrastate access charges. It is
unknown at this time how changes to the FCC's access charge regime will
affect us. Federal policies being implemented by the FCC strongly favor
access charge reform, and our revenues from this source could be at risk.
Regulatory developments of this type could adversely affect our business.

RISK OF LOSS OR REDUCTION OF UNIVERSAL SERVICE SUPPORT. We receive
Universal Service Support Fund, or USSF, revenues to support the high cost
of our operations in rural markets. If Chillicothe Telephone were unable to
receive support from the Universal Service Support Fund, or if such support
was reduced, Chillicothe Telephone would be unable to operate as profitably
as before such reduction.

In addition, potential competitors generally cannot, under current laws,
receive the same universal service support enjoyed by Chillicothe
Telephone. Chillicothe Telephone therefore enjoys a competitive advantage,
which could, however, be removed by regulators at any time. The
Telecommunications Act of 1996 (the "Telecom Act") provides that
competitors could obtain the same support as we do if the Public Utilities
Commission of Ohio determines that granting such support to competitors
would be in the public interest. If such universal service support were to
become available to potential competitors, we might not be able to compete
as effectively or otherwise continue to operate as profitably in our
Chillicothe Telephone markets. Any shift in universal service regulation
could, therefore, have an adverse effect on our business.

The method for calculating the amount of such support could change in 2002.
It is unclear whether the chosen methodology will accurately reflect the
costs incurred by Chillicothe Telephone, and whether it will provide for
the same amount of universal service support that Chillicothe Telephone
enjoyed in the past. The outcome of any of these proceedings or other
legislative or regulatory changes could affect the amount of universal
service support that we receive, and could have an adverse effect on our
business.

RISK OF LOSS OF PROTECTED STATUS UNDER INTERCONNECTION RULES. Chillicothe
Telephone takes the position that it does not have to comply with more
burdensome requirements in the Telecom Act governing the rights of
competitors to interconnect to our traditional telephone companies'
networks due to our status as a rural telephone company. If state
regulators decide that it is in the public's interest to impose these
interconnection requirements on us, more competitors could enter our
traditional telephone markets than are currently expected and we could
incur additional administrative and regulatory expenses as a result of such
newly imposed interconnection requirements.

RISKS POSED BY COSTS OF REGULATORY COMPLIANCE. Regulations create
significant compliance costs for us. Our subsidiary that provides
intrastate services is also generally subject to certification, tariff
filing and other ongoing regulatory requirements by state regulators.
Challenges to these tariffs by regulators or third parties could cause us
to incur substantial legal and administrative expenses.

REGULATORY CHANGES IN THE TELECOMMUNICATIONS INDUSTRY INVOLVE UNCERTAINTIES, AND
THE RESOLUTION OF THESE UNCERTAINTIES COULD ADVERSELY AFFECT OUR BUSINESS BY
FACILITATING GREATER COMPETITION AGAINST US, REDUCING POTENTIAL REVENUES OR
RAISING OUR COSTS.



49


The Telecom Act provides for significant changes in the telecommunications
industry, including the local telecommunications and long distance industries.
This federal statute and the related regulations remain subject to judicial
review and additional rulemakings of the FCC, thus making it difficult to
predict what effect the legislation will have on us, our operations and our
competitors. Several regulatory and judicial proceedings have recently
concluded, are underway or may soon be commenced, that address issues affecting
our operations and those of our competitors, which may cause significant changes
to our industry. We cannot predict the outcome of these developments, nor can we
assure that these changes will not have a material adverse effect on us.

RISKS RELATED TO HORIZON PCS, OUR WIRELESS PERSONAL COMMUNICATIONS SERVICES
BUSINESS

WE HAVE NOT HAD ANY PROFITABLE YEARS IN THE PAST FIVE YEARS, AND WE MAY NOT
ACHIEVE OR SUSTAIN OPERATING PROFITABILITY OR POSITIVE CASH FLOW FROM OPERATING
ACTIVITIES.

We expect to incur significant operating losses and to generate significant
negative cash flow from operating activities until 2004 while we continue to
construct our network and grow our customer base. Our operating profitability
will depend upon many factors, including our ability to market our services,
achieve our projected market penetration and manage customer turnover rates. If
we do not achieve and maintain operating profitability and positive cash flow
from operating activities on a timely basis, we may not be able to meet our debt
service requirements.

IF WE FAIL TO COMPLETE THE BUILD-OUT OF OUR NETWORK, SPRINT PCS MAY TERMINATE
THE SPRINT PCS AGREEMENTS AND WE WOULD NO LONGER BE ABLE TO OFFER SPRINT PCS
PRODUCTS AND SERVICES FROM WHICH WE GENERATE SUBSTANTIALLY ALL OUR REVENUES.

Our long-term affiliation agreements with Sprint PCS, which we refer to as
the Sprint PCS agreements, require us to build and operate the portion of the
Sprint PCS network located in our territory in accordance with Sprint PCS'
technical specifications and coverage requirements. The agreements also require
us to provide minimum network coverage to the population within each of the
markets that make up our territory by specified dates.

Under our original Sprint PCS agreements, we were required to complete the
build-out in several of our markets in Pennsylvania and New York by December 31,
2000. Sprint PCS and HPC agreed to an amendment of the build-out requirements,
which extended the dates by which we were to launch coverage in several markets.
The amended Sprint PCS agreement provides for monetary penalties to be paid by
us if coverage is not launched by these extended contract dates. The amounts of
the penalties depends on the market and length of delay in launch, and in some
cases, whether the shortfall relates to an initial launch in the market or
completion of the remaining build-out. The penalties must be paid in cash or, if
both Horizon PCS and Sprint PCS agree, in shares of Horizon PCS stock.

Under the amended Sprint PCS agreement, portions of the New York, Sunbury,
Williamsport, Oil City, Dubois, Erie, Meadville, Sharon, Olean, Jamestown,
Scranton, State College, Stroudsburg, Allentown and Pottsville markets were
required to be completed and launched by October 31, 2001. Although we launched
service in portions of each of these markets, we did not complete all of the
build-out requirements. We notified Sprint PCS in November 2001 that it was our
position that the reasons for the delay constitutes events of "force majeure" as
described in the Sprint PCS agreements and that, consequently, no monetary
penalties or other remedies were applicable. The delay was primarily caused due
to delays in obtaining the required backhaul services from local exchange
carriers and zoning and other approvals from governmental authorities. On
January 30, 2002, Sprint PCS notified us that, as a result of these force
majeure events, it does not consider our build-out delay to be a breach of the
Sprint PCS agreement. We agreed to use commercially reasonable efforts to
complete the build-out by June 30, 2002. We have not been able to complete some
of the sites in some markets due to continuing force majeure issues.

We will require additional expenditures of significant funds for the
continued development, construction, testing, deployment and operation of our
network. These activities are expected to place significant demands on our
managerial, operational and financial resources. A failure to meet our build-out
requirements for any of our markets, or to meet Sprint PCS' technical
requirements, would constitute a breach of the Sprint PCS agreements that could
lead to their termination if not cured within the applicable cure period. If
Sprint PCS terminates these agreements, we will no longer be able to offer
Sprint PCS products and services.



50


OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND
PREVENT US FROM FULFILLING OUR LONG-TERM DEBT OBLIGATIONS.

As of September 30, 2002, our total debt outstanding was $625.0 million,
comprised of $155.0 million borrowed under our secured credit facility, $175.0
million due under our senior notes issued in December 2001 and $295.0 million
represented by our discount notes (which are reported on our balance sheet at
September 30, 2002, net of a discount of approximately $116.0 million).

Our substantial debt will have a number of important consequences,
including the following:

o we may not have sufficient funds to pay interest on, and principal of,
our debt;

o we have to dedicate a substantial portion of any positive cash flow
from operations to the payment of interest on, and principal of, our
debt, which will reduce funds available for other purposes;

o we may not be able to obtain additional financing for currently
unanticipated capital requirements, capital expenditures, working
capital requirements and other corporate purposes;

o some borrowings likely will be at variable rates of interest, which
will result in higher interest expense in the event of increases in
market interest rates;

o due to the liens on substantially all of our assets and the pledges of
equity ownership of our subsidiaries that secure our secured credit
facility, our lenders may control our assets upon a default;

o our debt increases our vulnerability to general adverse economic and
industry conditions;

o our debt limits our flexibility in planning for, or reacting to,
changes in our business and the industry in which we operate; and

o our debt places us at a competitive disadvantage compared to our
competitors that have less debt.

TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH. OUR
ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL.

Our ability to make payments on and to refinance our indebtedness, and to
fund our network build-out, anticipated operating losses and working capital
requirements will depend on our ability to generate cash in the future. This, to
a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control.

We cannot be certain that our business will generate sufficient cash flow
from operations or that future borrowings will be available to us under our
secured credit facility in an amount sufficient to enable us to pay our
indebtedness or to fund our other liquidity needs. We may need to refinance all
or a portion of our indebtedness, including the notes, on or before maturity. We
may not be able to refinance any of our indebtedness on commercially reasonable
terms, or at all.

IF WE FAIL TO PAY OUR DEBT, OUR LENDERS MAY SELL OUR LOANS TO SPRINT PCS GIVING
SPRINT PCS THE RIGHTS OF A CREDITOR TO FORECLOSE ON OUR ASSETS.

If the lenders accelerate the amounts due under our secured credit
facility, Sprint PCS has the right to purchase our obligations under that
facility and become a senior lender. To the extent Sprint PCS purchases these
obligations, Sprint PCS' interests as a creditor could conflict with ours.
Sprint PCS' rights as a senior lender would enable it to exercise rights with
respect to our assets and Sprint PCS' continuing relationship in a manner not
otherwise permitted under the Sprint PCS agreements.

IF SPRINT PCS TERMINATES THE SPRINT PCS AGREEMENTS, THE BUY-OUT PROVISIONS OF
THOSE AGREEMENTS MAY DIMINISH THE VALUATION OF OUR COMPANY.



51


Provisions of the Sprint PCS agreements could affect our valuation and
decrease our ability to raise additional capital. If Sprint PCS terminates these
agreements, Sprint PCS may purchase our operating assets or capital stock for
80% of the "Entire Business Value" as defined by the agreement. If the
termination is due to our breach of the Sprint PCS agreements, the percent is
reduced to 72% instead of 80%. Under our Sprint PCS agreements, the Entire
Business Value is generally the fair market value of our wireless business
valued on a going concern basis as determined by an independent appraiser and
assumes that we own the FCC licenses in our territory. In addition, Sprint PCS
must approve any change of control of our ownership and consent to any
assignment of the Sprint PCS agreements. Sprint PCS also has a right of first
refusal if we decide to sell our operating assets in our Bright PCS markets. We
are also subject to a number of restrictions on the transfer of our business
including a prohibition on selling our company or our operating assets to a
number of identified and yet to be identified competitors of Sprint PCS or
Sprint. These and other restrictions in the Sprint PCS agreements may limit the
marketability of and reduce the price a buyer may be willing to pay for the
Company and may operate to reduce the Entire Business Value of the Company.

THE TERMINATION OF OUR STRATEGIC AFFILIATION WITH SPRINT PCS OR SPRINT PCS'
FAILURE TO PERFORM ITS OBLIGATIONS UNDER THE SPRINT PCS AGREEMENTS WOULD
SEVERELY RESTRICT OUR ABILITY TO CONDUCT OUR BUSINESS.

Because Sprint PCS owns the FCC licenses that we use in our territory, our
ability to offer Sprint PCS products and services on our network is dependent on
the Sprint PCS agreements remaining in effect and not being terminated. Sprint
PCS may terminate the Sprint PCS agreements for breach by us of any material
terms. We also depend on Sprint PCS' ability to perform its obligations under
the Sprint PCS agreements. The termination of the Sprint PCS agreements or the
failure of Sprint PCS to perform its obligations under the Sprint PCS agreements
would severely restrict our ability to conduct our wireless digital
communications business.

IF SPRINT PCS DOES NOT COMPLETE THE CONSTRUCTION OF ITS NATIONWIDE PCS NETWORK,
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN CUSTOMERS, WHICH WOULD ADVERSELY AFFECT
OUR REVENUES.

Sprint PCS' network may not provide nationwide coverage to the same extent
as its competitors' networks, which could adversely affect our ability to
attract and retain customers. Sprint PCS is creating a nationwide PCS network
through its own construction efforts and those of its affiliates. Today, neither
Sprint PCS nor any other PCS provider offers service in every area of the United
States. Sprint PCS has entered into affiliation agreements similar to ours with
companies in other territories pursuant to its nationwide PCS build-out
strategy. Our business and results of operations depend on Sprint PCS' national
network and, to a lesser extent, on the networks of its other affiliates. Sprint
PCS and its affiliate program are subject, in varying degrees, to the economic,
administrative, logistical, regulatory and other risks described in this
document. Sprint PCS' and its other affiliates' PCS operations may not be
successful, which in turn could adversely affect our ability to generate
revenues.

WE ARE DEPENDENT UPON SPRINT PCS' BACK OFFICE SERVICES AND ITS THIRD-PARTY
VENDORS' BACK OFFICE SYSTEMS. PROBLEMS WITH THESE SYSTEMS, OR TERMINATION OF
THESE ARRANGEMENTS, COULD DISRUPT OUR BUSINESS AND POSSIBLY INCREASE OUR COSTS.

Because Sprint PCS provides our back office systems such as billing,
customer care and collections, our operations could be disrupted if Sprint PCS
is unable to maintain and expand its back office services, or to efficiently
outsource those services and systems through third-party vendors. The rapid
expansion of Sprint PCS' business will continue to pose a significant challenge
to its internal support systems. Additionally, Sprint PCS has relied on
third-party vendors for a significant number of important functions and
components of its internal support systems and may continue to rely on these
vendors in the future. We depend on Sprint PCS' willingness to continue to offer
these services to us and to provide these services at competitive costs. The
Sprint PCS agreements provide that, upon nine months' prior written notice,
Sprint PCS may elect to terminate any of these services. If Sprint PCS
terminates a service for which we have not developed a cost-effective
alternative, our operating costs may increase beyond our expectations and
restrict our ability to operate successfully.

WE DEPEND ON OTHER TELECOMMUNICATIONS COMPANIES FOR SOME SERVICES THAT, IF
DELAYED, COULD DELAY OUR PLANNED NETWORK BUILD-OUT AND DELAY OUR EXPECTED
INCREASES IN CUSTOMERS AND REVENUES.

We depend on other telecommunications companies to provide facilities and
transport to interconnect portions of our network and to connect our network
with the landline telephone system. American Electric Power, Ameritech, AT&T,


52


Verizon and Sprint (long distance) are our primary suppliers of facilities and
transport. Without these services, we could not offer Sprint PCS services to our
customers in some areas. From time to time, we have experienced delays in
obtaining facilities and transport from some of these companies, and in
obtaining local telephone numbers for use by our customers, which are sometimes
in short supply, and we may continue to experience delays and interruptions in
the future. Delays in obtaining facilities and transport could delay our
build-out and capacity plans and our business may suffer. Delays could also
result in a breach of our Sprint PCS agreements, subjecting these agreements to
potential termination by Sprint PCS.

IF WE DO NOT MEET ALL OF THE CONDITIONS UNDER OUR SECURED CREDIT FACILITY, WE
MAY NOT BE ABLE TO DRAW DOWN ALL OF THE FUNDS UNDER THE FACILITY AND, AS A
RESULT, WE MAY NOT BE ABLE TO COMPLETE THE BUILD-OUT OF OUR NETWORK, WHICH MAY
RESULT IN THE TERMINATION OF THE SPRINT PCS AGREEMENTS.

Our secured credit facility provides for aggregate borrowings of $250.0
million of which $155.0 million was borrowed as of September 30, 2002.
Availability of future borrowings will be subject to customary credit conditions
at each funding date, including the following:

o the absence of any default or event of default;

o the continuing accuracy of all representations and warranties; and

o no material adverse change.

If we do not meet these conditions at each funding date, our secured
lenders may choose not to lend any or all of the remaining amounts, and if other
sources of funds are not available, we may not be in a position to complete the
build-out of our network. If we do not have sufficient funds to complete our
network build-out, we may be in breach of the Sprint PCS agreements and in
default under our senior secured credit facility.

Horizon PCS' secured credit facility includes financial covenants that must
be met each quarter. We did not meet the covenant for EBITDA for the first
quarter of 2002. As a result of higher than expected gross and net additions to
Horizon PCS subscribers for the quarter, we incurred additional expenses to add
those customers. Although we ultimately benefit from the revenues generated by
new subscribers, we incur one-time expenses associated with new subscribers,
including commissions, handset subsidies, set up costs for the network and
marketing expenses. As a result, these new subscriber costs negatively affect
EBITDA in the short-term during the period of the addition of new subscribers
which led to non-compliance with the EBITDA covenant for the first quarter of
2002.

On June 27, 2002, Horizon PCS obtained a waiver of the non-compliance with
the EBITDA covenant for the first quarter of 2002 and entered into an amendment
of the secured credit facility. The amended facility primarily adjusts certain
financial covenants and increases the margin on the base interest by 25 basis
points, while also providing for the payment of fees to the banking group, an
increase in post-default interest rates, a new financial covenant regarding
minimum available cash, additional prepayment requirements, restrictions on
Horizon PCS' borrowings under the remaining $95.0 million revolving credit
facility and deposit requirements on the $105.0 million borrowed under the
secured credit facility in March 2002.

There can be no assurance that Horizon PCS' financial or operating results
will not be lower than expected in future quarters, causing another
non-compliance to occur, which could have a material adverse effect on Horizon
PCS' financial condition and results of operations.

MATERIAL RESTRICTIONS IN OUR DEBT INSTRUMENTS MAY MAKE IT DIFFICULT TO OBTAIN
ADDITIONAL FINANCING OR TAKE OTHER NECESSARY ACTIONS TO REACT TO CHANGES IN OUR
BUSINESS.

The indenture governing the senior notes contains various covenants that
limit our ability to engage in a variety of transactions. In addition, the
indenture governing our discount notes and the secured credit agreement both
impose additional material operating and financial restrictions on us. These
restrictions, subject to ordinary course of business exceptions, limit our
ability to engage in some transactions, including the following:



53


o designated types of mergers or consolidations;

o paying dividends or other distributions to our stockholders;

o making investments;

o selling assets;

o repurchasing our common stock;

o changing lines of business;

o borrowing additional money; and

o transactions with affiliates.

In addition, our secured credit facility requires us to maintain certain
ratios, including:

o leverage ratios;

o an interest coverage ratio; and

o a fixed charges ratio,

and to satisfy certain tests, including tests relating to:

o minimum covered population;

o minimum number of PCS subscribers in our territory;

o minimum total revenues; and

o minimum EBITDA.

These restrictions could limit our ability to obtain debt financing,
repurchase stock, refinance or pay principal or interest on our outstanding
debt, consummate acquisitions for cash or debt or react to changes in our
operating environment. An event of default under the secured credit facility may
prevent the Company and the guarantors of the senior notes and the discount
notes from paying those notes or the guarantees of those notes.

THE TERMS OF THE CONVERTIBLE PREFERRED STOCK MAY AFFECT OUR FINANCIAL RESULTS.

The terms of the convertible preferred stock give the holders of the
preferred stock the following principal rights:

o to initially designate two members of our board of directors, subject
to reduction based on future percentage ownership;

o to approve or disapprove fundamental corporate actions and
transactions;

o to receive dividends in the form of additional shares of our
convertible preferred stock, which may increase and accelerate upon a
change in control; and

o to require us to redeem the convertible preferred stock in 2005.

If we become subject to the repurchase right or change of control
redemption requirements under the convertible preferred stock while our secured
credit facility, our discount notes or the senior notes are outstanding, we will


54


be required to seek the consent of the lenders under our secured credit
facility, the holders of the discount notes and the holders of the senior notes
to repurchase or redeem the convertible preferred stock, or attempt to refinance
the secured credit facility, the discount notes and the senior notes. If we fail
to obtain these consents, there will be an event of default under the terms
governing our secured credit facility. In addition, if we do not repurchase or
redeem the convertible preferred stock and the holders of the convertible
preferred stock obtain a judgment against us, any judgment in excess of $5.0
million would constitute an event of default under the indentures governing the
discount notes and the senior notes.

IF WE BREACH OUR AGREEMENT WITH SBA COMMUNICATIONS CORP. ("SBA"), OR IT
OTHERWISE TERMINATES ITS AGREEMENT WITH US, OUR RIGHT TO PROVIDE WIRELESS
SERVICE FROM MOST OF OUR CELL SITES WILL BE LOST.

We lease cell sites from SBA. We rely on our contract with SBA to provide
us with access to most of our cell sites and to the towers located on these
sites. If SBA were to lose its underlying rights to these sites, our ability to
provide wireless service from these sites would end, subject to our right to
cure defaults by SBA. If SBA terminates our agreement as a result of our breach,
we will lose our right to provide wireless services from most of our cell sites.

WE MAY HAVE DIFFICULTY OBTAINING INFRASTRUCTURE EQUIPMENT AND HANDSETS, WHICH
COULD RESULT IN DELAYS IN OUR NETWORK BUILD-OUT, DISRUPTION OF SERVICE OR LOSS
OF CUSTOMERS.

If we cannot acquire the equipment required to build or upgrade our network
in a timely manner, we may be unable to provide wireless communications services
comparable to those of our competitors or to meet the requirements of the Sprint
PCS agreements. Manufacturers of this equipment could have substantial order
backlogs. Accordingly, the lead-time for the delivery of this equipment may be
longer than anticipated. In addition, the manufacturers of specific types
handsets may have to distribute their limited supply of products among their
numerous customers. Some of our competitors purchase large quantities of
communications equipment and may have established relationships with the
manufacturers of this equipment. Consequently, they may receive priority in the
delivery of this equipment. If we do not obtain equipment or handsets in a
timely manner, we could suffer delays in the build-out of our network,
disruptions in service and a reduction in customers.

IF THE WEST VIRGINIA PCS ALLIANCE AND VIRGINIA PCS ALLIANCE FAIL TO PROVIDE
THEIR NETWORK TO US IN THEIR MARKETS, OR IF OUR NETWORK SERVICES AGREEMENT WITH
THE ALLIANCES IS OTHERWISE TERMINATED, WE WILL LOSE THE ABILITY TO USE THE
ALLIANCES' NETWORKS.

West Virginia PCS Alliance and Virginia PCS Alliance, which we refer to as
the Alliances, are two related, independent PCS providers whose network is
managed by NTELOS. Under our network services agreement, the Alliances provide
us with the use of and access to key components of their network in most of our
markets in Virginia and West Virginia. We directly compete with the Alliances in
the markets where we use their network. If the Alliances fail to maintain the
standards for their network as set forth in our network services agreement with
them or otherwise fail to provide their network for our use, our ability to
provide wireless services in these markets may be adversely affected, and we may
not be able to provide seamless service for our customers. If we breach our
obligations to the Alliances, or if the Alliances otherwise terminate the
network services agreement, we will lose our right to use the Alliances' network
to provide service in these markets. In that event, it is likely that we will be
required to build our own network in those markets and incur the substantial
costs associated with doing so.

SPRINT PCS' VENDOR DISCOUNTS MAY BE DISCONTINUED, WHICH COULD INCREASE OUR
EQUIPMENT COSTS AND REQUIRE MORE CAPITAL THAN WE HAD PROJECTED TO BUILD-OUT OR
UPGRADE OUR NETWORK.

We intend to continue to purchase our infrastructure equipment under Sprint
PCS' vendor agreements that include significant volume discounts. If Sprint PCS
were unable to continue to obtain vendor discounts for its affiliates, the loss
of vendor discounts could increase our equipment costs for our network
build-out.

CONFLICTS WITH SPRINT PCS MAY NOT BE RESOLVED IN OUR FAVOR, WHICH COULD RESTRICT
OUR ABILITY TO MANAGE OUR BUSINESS AND PROVIDE SPRINT PCS PRODUCTS AND SERVICES,
ADVERSELY AFFECTING OUR RELATIONSHIPS WITH OUR CUSTOMERS, INCREASE OUR EXPENSES
OR DECREASE OUR REVENUES.

Under the Sprint PCS agreements, Sprint PCS has a substantial amount of
control over the conduct of our business. Conflicts between us may arise, and as
Sprint PCS owes us no duties except as set forth in the Sprint PCS agreements,


55


these conflicts may not be resolved in our favor. The conflicts and their
resolution may harm our business. For example:

o Sprint PCS may price its national plans based on its own objectives
and may set price levels and customer credit policies that may not be
economically sufficient for our business;

o Sprint PCS may increase the prices we pay for our back office
services; and

o Sprint or Sprint PCS may make decisions that adversely affect our use
of the Sprint and Sprint PCS brand names, products or services.

WE MAY NOT BE ABLE TO COMPETE WITH LARGER, MORE ESTABLISHED WIRELESS PROVIDERS
WHO HAVE RESOURCES TO COMPETITIVELY PRICE THEIR PRODUCTS AND SERVICES, WHICH
COULD IMPAIR OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS.

Our ability to compete will depend in part on our ability to anticipate and
respond to various competitive factors affecting the telecommunications
industry, including new services that may be introduced, changes in consumer
preferences, demographic trends, economic conditions and discount pricing
strategies by competitors. In each market, we compete with at least two cellular
providers that have had their infrastructure in place and have been operational
for a number of years. They may have significantly greater financial and
technical resources than we do, they could offer attractive pricing options and
they may have a wider variety of handset options. We expect existing cellular
providers will continue to upgrade their systems and provide expanded digital
services to compete with the Sprint PCS products and services we offer. Many of
these wireless providers generally require their customers to enter into
long-term contracts, which may make it more difficult for us to attract
customers away from them.

We will also compete with several PCS providers and other existing
communications companies in our markets and expect to compete with new entrants
as the FCC licenses additional spectrum to mobile services providers. A number
of our cellular, PCS and other wireless competitors have access to more licensed
spectrum than the amount licensed to Sprint PCS in most of our territory and
therefore will be able to provide greater network call volume capacity than our
network to the extent that network usage begins to reach or exceed the capacity
of our licensed spectrum. Our inability to accommodate increases in call volume
could result in more dropped or disconnected calls. In addition, any competitive
difficulties that Sprint may experience could also harm our competitive position
and success.

We anticipate that market prices for two-way wireless voice services and
products generally will continue to decline as a result of increased
competition. Consequently we may be forced to increase spending for advertising
and promotions. Increased competition also may lead to continued increases in
customer churn. Those trends could cause further delays in our expected dates to
achieve positive EBITDA.

WE MAY NOT BE ABLE TO OFFER COMPETITIVE ROAMING CAPABILITY, WHICH COULD IMPAIR
OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS.

We rely on agreements with competitors to provide automatic roaming
capability to our PCS customers in many of the areas of the United States not
covered by the Sprint PCS network, which primarily serves metropolitan areas.
Some competitors may be able to offer coverage in areas not served by the Sprint
PCS network or may be able to offer roaming rates that are lower than those
offered by Sprint PCS and its affiliates. Some of our competitors are seeking to
reduce access to their networks through actions pending with the FCC. Moreover,
the engineering standard for the dominant air interface upon which PCS customers
roam is currently being considered for elimination by the FCC as part of a
streamlining proceeding. If the FCC eliminates this standard, our Sprint PCS
customers may have difficulty roaming in some markets.

THERE IS NO UNIFORM SIGNAL TRANSMISSION TECHNOLOGY AND IF WE DECIDE TO USE OTHER
TECHNOLOGIES IN THE FUTURE, THIS DECISION COULD SUBSTANTIALLY INCREASE OUR
EQUIPMENT EXPENDITURES TO REPLACE THE TECHNOLOGY USED ON OUR NETWORK.

The wireless telecommunications industry is experiencing evolving industry
standards. We have employed code division multiple access (CDMA) technology,
which is the digital wireless communications technology selected by Sprint PCS
for its network. CDMA may not provide the advantages expected by us and by
Sprint PCS. In addition to CDMA, there are two other principal signal
transmission technologies, time division multiple access, or TDMA, and global


56


systems for mobile communications, or GSM. These three signal transmission
technologies are not compatible with each other. If one of these technologies or
another technology becomes the preferred industry standard, we may be at a
competitive disadvantage and competitive pressures may require Sprint PCS to
change its digital technology which, in turn, may require us to make changes at
substantially increased costs.

WE MAY NOT RECEIVE AS MUCH SPRINT PCS ROAMING REVENUE AS WE ANTICIPATE AND OUR
NON-SPRINT PCS ROAMING REVENUE IS LIKELY TO BE LOW.

We are paid a fee from Sprint PCS or a Sprint PCS affiliate for every
minute that a Sprint PCS subscriber based outside of our territory uses our
network. Similarly, we pay a fee to Sprint PCS or a Sprint PCS affiliate for
every minute that our customers use the Sprint PCS network outside our
territory. Our customers may use the Sprint PCS network outside our territory
more frequently than we anticipate, and Sprint PCS subscribers based outside our
territory may use our network less frequently than we anticipate. The fee for
each Sprint PCS roaming minute used was decreased from $0.20 per minute before
June 1, 2001, to $0.15 per minute effective June 1, 2001, and further decreased
to $0.12 per minute effective October 1, 2001. The Sprint PCS roaming rate was
changed to $0.10 per minute in 2002. After 2002, the rate will be changed to "a
fair and reasonable return," which has not yet been determined. However, based
on preliminary discussions with Sprint, we anticipated a significant additional
reduction in the rate. As a result, we may receive less Sprint PCS roaming
revenue in the aggregate, than we previously anticipated or we may have to pay
more Sprint PCS roaming fees in the aggregate than we anticipate.

IF SPRINT PCS CUSTOMERS ARE NOT ABLE TO ROAM INSTANTANEOUSLY OR EFFICIENTLY ONTO
OTHER WIRELESS NETWORKS, WE MAY SUFFER A REDUCTION IN OUR REVENUES AND NUMBER OF
CUSTOMERS.

The Sprint PCS network operates at a different frequency and uses or may
use a different signal transmission technology than many analog cellular and
other digital systems. To access another provider's analog cellular, TDMA or GSM
digital system when outside the territory served by the Sprint PCS network, a
Sprint PCS customer is required to utilize a dual-band/dual-mode handset
compatible with that provider's system. Generally, because dual-band/dual-mode
handsets incorporate two radios rather than one, they are more expensive, larger
and heavier than single-band/single-mode handsets. The Sprint PCS network does
not allow for call hand-off between the Sprint PCS network and another wireless
network, so a customer must end a call in progress on the Sprint PCS network and
initiate a new call when outside the territory served by the Sprint PCS network.
In addition, the quality of the service provided by a network provider during a
roaming call may not approximate the quality of the service provided by Sprint
PCS. The price of a roaming call may not be competitive with prices of other
wireless companies for roaming calls, and Sprint PCS customers may not be able
to use Sprint PCS advanced features, such as voicemail notification, while
roaming. These roaming issues may cause us to suffer a reduction in our revenues
and number of customers.

PARTS OF OUR TERRITORIES HAVE LIMITED LICENSED SPECTRUM, WHICH MAY ADVERSELY
AFFECT THE QUALITY OF OUR SERVICE.

In the majority of our markets, Sprint PCS has licenses covering 20 MHz or
30 MHz of spectrum. However, Sprint PCS has licenses covering only 10 MHz in
parts of our territory covering approximately 3.8 million residents out of a
total population of over 10.2 million residents. In the future, as our customers
in those areas increase in number, this limited licensed spectrum may not be
able to accommodate increases in call volume and may lead to increased dropped
calls and may limit our ability to offer enhanced services.

NON-RENEWAL OR REVOCATION BY THE FCC OF THE SPRINT PCS LICENSES WOULD
SIGNIFICANTLY HARM OUR BUSINESS BECAUSE WE WOULD NO LONGER HAVE THE RIGHT TO
OFFER WIRELESS SERVICE THROUGH OUR NETWORK.

We are dependent on Sprint PCS' licenses, which are subject to renewal and
revocation by the FCC. Sprint PCS' licenses in many of our territories will
expire as early as 2005 but may be renewed for additional ten-year terms. There
may be opposition to renewal of Sprint PCS' licenses upon their expiration and
the Sprint PCS licenses may not be renewed. The FCC has adopted specific
standards to apply to PCS license renewals. For example, if Sprint PCS does not
demonstrate to the FCC that Sprint PCS has met the five-year construction
requirements for each of its PCS licenses, it can lose those licenses. Failure
to comply with these standards in our territory could cause the imposition of
fines on Sprint PCS by the FCC or the revocation or forfeiture of the Sprint PCS
licenses for our territory, which would prohibit us from providing service in
our markets.



57


IF THE SPRINT PCS AGREEMENTS DO NOT COMPLY WITH FCC REQUIREMENTS, SPRINT PCS MAY
TERMINATE THE SPRINT PCS AGREEMENTS, WHICH COULD RESULT IN OUR INABILITY TO
PROVIDE SERVICE.

The FCC requires that licensees like Sprint PCS maintain control of their
licensed spectrum and not delegate control to third-party operators or managers
like us. Although the Sprint PCS agreements reflect an arrangement that the
parties believe meets the FCC requirements for licensee control of licensed
spectrum, we cannot be certain the FCC will agree with us. If the FCC determines
that the Sprint PCS agreements need to be modified to increase the level of
licensee control, we have agreed with Sprint PCS to use our best efforts to
modify the Sprint PCS agreements to comply with applicable law. If we cannot
agree with Sprint PCS to modify the Sprint PCS agreements, they may be
terminated. If the Sprint PCS agreements are terminated, we would no longer be a
part of the Sprint PCS network and we would have extreme difficulty in
conducting our business.

WE MAY NEED MORE CAPITAL THAN WE CURRENTLY ANTICIPATE TO COMPLETE THE BUILD-OUT
AND UPGRADE OF OUR NETWORK, AND A DELAY OR FAILURE TO OBTAIN ADDITIONAL CAPITAL
COULD DECREASE OUR REVENUES.

The completion of our network build-out will require substantial capital.
Additional funds would be required in the event of:

o significant departures from our current business plan;

o unforeseen delays, cost overruns, unanticipated expenses; or

o regulatory, engineering design and other technological changes.

For example, it is possible that we will need substantial funds if we find
it necessary or desirable to overbuild the territory currently served through
our arrangements with the Alliances. Due to our highly leveraged capital
structure, additional financing may not be available or, if available, may not
be obtained on a timely basis or on terms acceptable to us or within limitations
permitted under our existing debt covenants. Failure to obtain additional
financing, should the need for it develop, could result in the delay or
abandonment of our development and expansion plans, and we may be unable to fund
our ongoing operations.

BECAUSE SPRINT PCS HAS RECENTLY REQUIRED US TO UPGRADE OUR NETWORK TO PROVIDE
"THIRD GENERATION" TECHNOLOGY, WE WILL FACE ADDITIONAL CAPITAL EXPENSES.

The wireless industry is seeking to implement new "third generations," or
"3G", technology. Sprint PCS has selected a version of 3G technology (1XRTT) for
its own networks and required us to upgrade our network to provide those
services. We currently estimate the network upgrade to 1XRTT will cost
approximately $35 million, but actual costs could exceed this estimate. Sprint
PCS launched the new 3G technology in August 2002 under the brand, PCS Vision.
We participated in that launch along with other Sprint PCS affiliates. We still
have additional expenditures pending to complete the full implementation of 3G
in all of our markets. If other wireless carriers implement their 3G upgrades on
a more rapid timetable, or on a more cost efficient basis, or on a more advanced
technology basis, we will likely suffer competitive disadvantages in our
markets. While there are potential advantages with 3G technology, such as
increased network capacity and additional capabilities for wireless data
applications, the technology has not been proven in the marketplace and has the
risks inherent in other technological innovations.

Recently, Sprint has sought to increase service fees during the remainder
of 2002 and beyond in connection with its development of 3G-related back-office
systems and platforms. Horizon PCS, along with the other PCS affiliates of
Sprint, are currently disputing the validity of Sprint's right to pass through
this fee to Horizon PCS. If this dispute is resolved unfavorably to Horizon PCS,
then Horizon PCS will incur additional expenses.

UNAUTHORIZED USE OF OUR NETWORK AND OTHER TYPES OF FRAUD COULD DISRUPT OUR
BUSINESS AND INCREASE OUR COSTS.

We will likely incur costs associated with the unauthorized use of our
network, including administrative and capital costs associated with detecting,
monitoring and reducing the incidence of fraud. Fraud impacts interconnection
costs, capacity costs, administrative costs, fraud prevention costs and payments
to other carriers for unbillable fraudulent roaming. Although we believe that


58


Sprint has implemented appropriate controls to minimize the effect to us of
fraudulent usage, our efforts may not be successful.

EXPANDING OUR TERRITORY MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.

As part of our business strategy, we may expand our territory through the
grant of additional markets from Sprint PCS or through acquisitions of other
Sprint PCS affiliates. We will evaluate strategic acquisitions and alliances
principally relating to our current operations. These transactions may require
the approval of Sprint PCS and commonly involve a number of risks, including:

o difficulty assimilating acquired operations and personnel;

o diversion of management attention;

o disruption of ongoing business;

o inability to retain key personnel;

o inability to successfully incorporate acquired assets and rights into
our service offerings;

o inability to maintain uniform standards, controls, procedures and
policies; and

o impairment of relationships with employees, customers or vendors.

Failure to overcome these risks or any other problems encountered in these
transactions could have a material adverse effect on our business. In connection
with these transactions, we may also issue additional equity securities and
incur additional debt.

THE SPRINT PCS AGREEMENTS AND OUR RESTATED CERTIFICATE OF INCORPORATION INCLUDE
PROVISIONS THAT MAY DISCOURAGE, DELAY OR RESTRICT ANY SALE OF OUR OPERATING
ASSETS OR COMMON STOCK TO THE POSSIBLE DETRIMENT OF OUR NOTEHOLDERS.

The Sprint PCS agreements restrict our ability to sell our operating assets
and common stock. Generally, Sprint PCS must approve a change of control of our
ownership and consent to any assignment of the Sprint PCS agreements. The Sprint
PCS agreements also give Sprint PCS a right of first refusal if we decide to
sell the operating assets of our Bright PCS markets to a third party. In
addition, provisions of our restated certificate of incorporation could also
operate to discourage, delay or make more difficult a change in control of our
company. For example, our restated certificate of incorporation provides for:

o two classes of common stock, with our class B common stock having ten
votes per share;

o the issuance of preferred stock without stockholder approval; and

o a classified board, with each board member serving a three-year term.

The restrictions in the Sprint PCS agreements and the provisions of our
restated certificate of incorporation could discourage any sale of our operating
assets or common stock.

WE MAY EXPERIENCE A HIGH RATE OF CUSTOMER TURNOVER, WHICH WOULD INCREASE
OUR COSTS OF OPERATIONS AND REDUCE OUR REVENUE AND POTENTIALLY CAUSE A VIOLATION
OF THE COVENANTS UNDER HPCS' SECURED CREDIT FACILITY.

Our strategy to minimize customer turnover, commonly known as churn, may
not be successful. As a result of customer turnover, we lose the revenue
attributable to these customers and increase the costs of establishing and
growing our customer base. The PCS industry has experienced a higher rate of
customer turnover as compared to cellular industry averages. We have experienced
an increase in churn during 2002, primarily caused by NDASL customers' inability
to pay for services billed. Current and future strategies to reduce customer
churn may not be successful.




59


The rate of customer turnover is affected by the following factors, several
of which are not within our ability to address:

o credit worthiness of customers;

o extent of network coverage;

o reliability issues such as blocked calls, dropped calls and handset
problems;

o non-use of phones;

o change of employment;

o a lack of affordability;

o price competition;

o Sprint PCS' customer credit policies;

o customer care concerns; and

o other competitive factors.

A high rate of customer turnover could adversely affect our competitive
position, results of operations and our costs of, or losses incurred in,
obtaining new customers, especially because we subsidize some of the cost of the
handsets purchased by our customers.

OUR ALLOWANCE FOR DOUBTFUL ACCOUNTS MAY NOT BE SUFFICIENT TO COVER UNCOLLECTIBLE
ACCOUNTS.

On an ongoing basis, we estimate the amount of customer receivables that we
may not collect to reflect the expected loss on such accounts in the current
period. However, our allowance for doubtful accounts may underestimate actual
unpaid receivables for various reasons, including:

o adverse changes in our churn rate exceeding our estimates;

o adverse changes in the economy generally exceeding our expectations;
or

o unanticipated changes in Sprint PCS' products and services.

If our allowance for doubtful accounts is insufficient to cover losses on
our receivables, our business, financial position or results of operations could
be materially adversely affected.

BECAUSE THE WIRELESS INDUSTRY HAS EXPERIENCED HIGHER CUSTOMER ADDITIONS AND
HANDSET SALES IN THE FOURTH CALENDAR QUARTER AS COMPARED TO THE OTHER THREE
CALENDAR QUARTERS, A FAILURE BY US TO ACQUIRE SIGNIFICANTLY MORE CUSTOMERS IN
THE FOURTH QUARTER COULD HAVE A DISPROPORTIONATE NEGATIVE EFFECT ON OUR RESULTS
OF OPERATIONS.

The wireless industry is historically dependent on fourth calendar quarter
results. Our overall results of operations could be significantly reduced if we
have a worse than expected fourth calendar quarter for any reason, including the
following:

o our inability to match or beat pricing plans offered by competitors;

o our failure to adequately promote Sprint PCS' products, services and
pricing plans;



60


o our inability to obtain an adequate supply or selection of handsets;

o a downturn in the economy of some or all of the markets in our
territory; or

o a generally poor holiday shopping season.

REGULATION BY GOVERNMENT AGENCIES MAY INCREASE OUR COSTS OF PROVIDING SERVICE OR
REQUIRE US TO CHANGE OUR SERVICES, WHICH COULD IMPAIR OUR FINANCIAL PERFORMANCE.

The licensing, construction, use, operation, sale and interconnection
arrangements of wireless telecommunications systems are regulated to varying
degrees by the FCC, the Federal Aviation Administration and, depending on the
jurisdiction, state and local regulatory agencies and legislative bodies.
Adverse decisions regarding these regulatory requirements could negatively
impact our operations and our cost of doing business.

USE OF HAND-HELD PHONES MAY POSE HEALTH RISKS, REAL OR PERCEIVED, WHICH COULD
RESULT IN THE REDUCED USE OF OUR SERVICES OR LIABILITY FOR PERSONAL INJURY
CLAIMS.

Media reports have suggested that radio frequency emissions from wireless
handsets may be linked to various health problems, including cancer, and may
interfere with various electronic medical devices, including hearing aids and
pacemakers. Concerns over radio frequency emissions may discourage use of
wireless handsets or expose us to potential litigation. Any resulting decrease
in demand for our services, or costs of litigation and damage awards, could
impair our ability to profitably operate our business

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) Exhibits

3.1* Articles of Incorporation of Horizon Telcom, Inc.

3.2* Bylaws of Incorporation of Horizon Telcom, Inc.

4.1* Form of Stock Certificate

10.48** Waiver Agreement between The Chillicothe Telephone
Company, American United Life Insurance Company
and The State Life Insurance Company dated as of
August 8, 2002.

10.49** Senior Note Purchase agreement for $30,000,000 at
6.64%, between The Chillicothe Telephone Company,
The Variable Annuity Life Insurance Company, AIG
Annuity Insurance Company, and Modern Woodmen of
America, dated as of August 1, 2002.

10.50** Amended and Restated Note Purchase Agreement for
$12,000,000 at 6.72%, between The Chillicothe
Telephone Company, American United Life Insurance
Company and The State Life Insurance Company,
dated as of November 1, 2002.

10.51** Waiver Agreement between The Chillicothe Telephone
Company, American United Life Insurance Company
and The State Life Insurance Company dated as of
August 14, 2002.

10.52** Amendment Agreement between The Chillicothe
Telephone Company, Northern Life Insurance Company
and Reliastar Life Insurance Company dated as of
August 14, 2002.

10.53** Waiver Extension Agreement between The Chillicothe
Telephone Company, The American United Life
Insurance Company and The State Life Insurance
Company dated as of September 12, 2002.

* Incorporated by reference to the exhibit with the same
number previously filed by the Registrant on Form 10 (Reg.
No. 0-32617)
** Filed herewith.

(B) Reports on Form 8-K

None.


61



Horizon Telcom, Inc., Certification for Quarterly Report on Form 10-Q


I, Thomas McKell, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Horizon Telcom, Inc.;

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;

4. The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures 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 quarterly report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: November 13, 2002 /s/ Thomas McKell
-------------------------------------
Thomas McKell
President and Chief Executive Officer



62




Horizon Telcom, Inc., Certification for Quarterly Report on Form 10-Q


I, Peter M. Holland, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Horizon Telcom, Inc.;

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;

4. The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures 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 quarterly report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.



Date: November 13, 2002 /s/ Peter M. Holland
--------------------------
Peter M. Holland
Chief Financial Officer



63




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.

HORIZON TELCOM, INC.
(Registrant)

Date: November 13, 2002 By: /s/ Thomas McKell
----------------------------------
Thomas McKell
Chief Executive Officer


Date: November 13, 2002 By: /s/ Peter M. Holland
----------------------------------
Peter M. Holland
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)







64
1553879