SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Recently Issued Accounting Standards 53 ■  2003 ANNUAL REPORT In May 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity,” which was effective at the beginning of the first interim period beginning after June 15, 2003. This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The Statement also includes required disclosures for financial instruments within its scope. For the Company, the Statement was effective In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003),“Consolidation of Variable Interest Entities,” which addresses how a business enterprise should evaluate whether it has a contro lling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” (VIE), which was issued in January 2003. The Company will be required to apply FIN 46R to variable interests in VIEs created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation will be applied beginning on January 1, 2005, except it must be applied in the fourth quarter of 2003 for any VIE’s that are considered to be special purpose entities. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and non-controlling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and non-controlling interest of the VIE. The Company is evaluating the impact of applying FIN 46R to existing VIEs in which it has variable interests and does not believe the application will have a material impact on the Company’s  consolidated financial statements. The Company expects to generate adequate cash to meet its short-term and long-term cash needs, including working capital requirements, capital projects and debt payments, and to fund potential dividend payments from cash on hand, operating cash flow, and amounts expected to be available under the Company’s existing financing fac ilities and its anticipated financing facilities discussed above. The Company may, at its election, liquidate some of its investments to generate additional cash for its capital needs as market conditions allow. Management anticipates its operations will generate similar operating cash flows in 2004, compared to those of continuing operations in 2003, although there are events outside the control of the Company that could have an adverse impact on cash flows from operations. The events that could adversely impact operating cash flow results include, but are not limited to; changes in overall economic conditions, regulatory requirements, changes in technologies, availability of labor resources and capital, and other conditions. The PCS subsidiary’s operations are dependent upon Sprint’s ability to execute certain functions such as billing, customer care, and collections; their ability to develop and implement successful marketing programs and new products and services; and their ability to effectively and economically manage other operating activities under the Company’s agreements with Sprint. Additionally, the Company’s ability to attract and maintain a sufficient customer base is critical to maintaining apositive cash flow from operations. These items individually and/or collectively could impact the Company’s results. The Company anticipates using funds from operations, to the extent they are available to fund the capital expenditures and the payment of debt and interest. Due to lower than expected tax expenses in 2003, the Company will apply the tax receivable to the 2004-year tax liability. It is anticipated by no later than second quarter of 2004, additional federal tax payments will be due based on anticipated profits expected to be generated in the operation. Capital expenditures budgeted for 2004 total approximately $30 million, including approximately $20 million for additional PCS base stations, additional towers, and switch upgrades to enhance the PCS network. Improvements and replacements of approximately $5 million are planned for the telephone operation. The remaining $5 million covers building renovations, vehicles, office equipment, and other miscellaneous capital needs. The Company has no other off-balance sheet arrangements and has not entered into any transactions involving unconsolidated, limited purpose entities or commodity contracts. The Company spent $12.5 million on capital projects in 2003, or about $7.0 million below what was budgeted for the year. The variance was primarily due to postponing construction of an additional diverse fiber route and the delay of the second phase of renovations on the Shentel Center in Edinburg, Virginia. The $5.0 million placed in escrow, as part of the sales agreement on the Virginia 10 RSA limited partnership, should be released after February 28, 2005. There are no known claims that have been filed against the amount in escrow.