UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-Q

(Mark One)ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2008.oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                        to


Commission File Number 333-56365



FairPoint Communications, Inc.(Exact Name of Registrant as Specified in Its Charter)

Delaware(State or Other Jurisdiction of Incorporation or Organization)

13-3725229(I.R.S. Employer Identification No.)521 East Morehead Street, Suite 500
Charlotte, North Carolina(Address of Principal Executive Offices)

28202(Zip Code)(704) 344-8150(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 ý    No o

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

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o    No ý

As of October 31, 2008, there were 88,990,318 shares of the Registrant's common stock, par value $0.01 per share, outstanding.

Documents
incorporated by reference:None



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Explanatory Note

As used in this Quarterly Report, unless the context indicates or otherwise requires:



On
March 31, 2008, the merger between Spinco, a subsidiary of Verizon Communications Inc. ("Verizon"), and FairPoint was completed. We refer to this transaction herein as
the merger. In connection with the merger and in accordance with the terms of an Agreement and Plan of Merger (the "merger agreement") entered into among FairPoint, Verizon and Spinco on
January 15, 2007, as amended, the Company issued 53,760,623 shares of common stock to Verizon stockholders. Prior to the merger, Verizon and its subsidiaries (other than Cellco Partnership
doing business as Verizon Wireless ("Cellco")), collectively referred to with Verizon as the "Verizon Group," engaged in a series of restructuring transactions to effect the transfer of specified
assets and liabilities of the local exchange business of Verizon New England Inc. ("Verizon New England") in Maine, New Hampshire and Vermont and the customers of the Verizon Group's related
long distance and Internet service provider businesses in those states (the "Northern New England business"), to Spinco and the entities that
became Spinco's subsidiaries. Spinco was then spun off from Verizon immediately prior to the merger. While FairPoint was the surviving entity in the merger, for accounting purposes Spinco is deemed to
be the acquirer. As a result, for the nine months ended September 30, 2008, the statement of operations and the financial information derived from the statement of operations in this Quarterly
Report reflect the consolidated financial results of the Company by including the financial results of the Northern New England business for the three months ended March 31, 2008, the financial
results of Spinco for the six months ended September 30, 2008 and the financial results of Legacy FairPoint for the six months ended September 30, 2008. The statement of operations and
the financial information derived from the statement of operations for the three months ended September 30, 2008 in this Quarterly Report reflects the actual results of the consolidated Company
(Legacy FairPoint and Spinco) for such period. The balance sheet and financial information derived from the balance sheet in this Quarterly Report reflect the consolidated assets and liabilities of
Legacy FairPoint and Spinco at September 30, 2008. Certain assets and liabilities of the Northern New England business (principally related to pension, other post-employment
benefits and associated deferred taxes) were not distributed to Spinco prior to the merger and for accounting purposes were effectively contributed back to Verizon. The assets and liabilities of the
Northern New England business that were effectively contributed back to Verizon are reflected as contributions to Verizon on the statement of stockholder's equity contained herein. The statement of
operations in this Quarterly Report may not be indicative of the Company's future results. For more information see note 1 to the "Condensed Consolidated Financial Statements" and "Management's
Discussion and Analysis of Financial Condition and Results of OperationsBasis of Presentation."

2

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INDEX

PagePART I. FINANCIAL INFORMATIONItem 1.

Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007

5Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and
2007

6Condensed Consolidated Statements of Stockholders' Equity for the nine months ended September 30, 2008

7Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007

8Notes to Condensed Consolidated Financial Statements

9Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

32Item 3.

Quantitative and Qualitative Disclosures About Market Risk

51Item 4.

Controls and Procedures

52PART II. OTHER INFORMATIONItem 1.

Legal Proceedings

54Item 1A.

Risk Factors

54Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

55Item 3.

Defaults Upon Senior Securities

57Item 4.

Submission of Matters to a Vote of Security Holders

57Item 5.

Other Information

57Item 6.

Exhibits

57Signatures

58


3

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PART I    CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some statements in this Quarterly Report are known as "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, referred to as the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements may
relate to, among other things:



These
forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions and other statements contained in this Quarterly
Report that are not historical facts. When used in this Quarterly Report, the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions are generally
intended to identify forward looking statements. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual
results, events or developments to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors
discussed in this Quarterly Report and in Exhibit 99.1 to this Quarterly Report. You should not place undue reliance on such forward-looking statements, which are based on the information
currently available to us and speak only as of the date on which this Quarterly Report was filed with the SEC. We undertake no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made on related subjects in our subsequent periodic reports filed
with the SEC on Forms 10-K, 10-Q and 8-K and Schedule 14A.

4

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

September 30,
2008

December 31,
2007(unaudited)(Dollars in thousands)AssetsCurrent assets:Cash

$
168,071

$
Restricted cash


10,341


Accounts receivable, net


168,431


160,130Other receivables


15,468


18,579Materials and supplies


42,155


4,229Other


44,196


21,180Deferred income tax, net


19,836


9,730Short term investments





37,090Total current assets


468,498


250,938Property, plant, and equipment, net


1,924,132


1,630,085Intangibles assets, net


222,100


Prepaid pension asset


69,874


36,692Debt issue costs, net


27,016


Restricted cash


70,108


Other assets


16,492


20,457Investments


6,959


Goodwill


625,010


Total assets

$
3,430,189

$
1,938,172Liabilities and Stockholders' EquityCurrent liabilities:Current portion of long-term debt

$
22,500

$
Current portion of capital lease obligations


2,193


2,064Accounts payable


99,647


175,866Dividends payable


22,905


Accrued interest payable


36,686


Interest rate swaps


17,434


Other accrued liabilities


65,873


47,115Total current liabilities


267,238


225,045Long-term liabilities:Capital lease obligations


7,869


9,936Employee benefit obligations


186,775


408,863Deferred income taxes


248,087


140,911Unamortized investment tax credits


5,759


5,877Other long-term liabilities


37,103


28,378Long-term debt, net of current portion


2,447,608


Interest rate swap agreements


19,123


Total long-term liabilities


2,952,324


593,965Minority interest


6


Stockholders' equity:Common stock, $0.01 par value, 200,000,000 shares authorized, issued and outstanding 88,990,318 shares at September 30, 2008 and 53,760,623 shares at
December 31, 2007


890


538Additional paid-in capital


755,574


484,383Retained earnings (deficit)


(467,118
)

634,241Accumulated other comprehensive loss


(78,725
)

Total stockholders' equity


210,621


1,119,162Total liabilities and stockholders' equity

$
3,430,189

$
1,938,172


See accompanying notes to condensed consolidated financial statements (unaudited)

5

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

Three months ended
September 30,

Nine months ended
September 30,2008

2007

2008

2007(Dollars in thousands)Revenues

$
328,255

$
306,258

$
955,359

$
903,614Operating expenses:Cost of services and sales, excluding depreciation and amortization


152,579


141,645


422,316


419,290Selling, general and administrative expense, excluding depreciation and amortization


104,679


67,340


270,085


196,545Depreciation and amortization


60,768


58,360


184,434


174,361Total operating expenses


318,026


267,345


876,835


790,196Income from operations


10,229


38,913


78,524


113,418Other income (expense):Interest expense


(49,665
)

(17,052
)

(109,310
)

(52,871
)Gain (loss) on derivative instruments


(5,014
)




38,109


Other


2,165


852


3,415


2,651Total other expense


(52,514
)

(16,200
)

(67,786
)

(50,220
)Income before income taxes


(42,285
)

22,713


10,738


63,198Income tax (expense) benefit


17,176


(8,903
)

(3,190
)

(24,639
)Net income (loss)

$
(25,109
)
$
13,810

$
7,548

$
38,559Weighted average shares outstanding:Basic


88,999


53,761


71,358


53,761Diluted


88,999


53,761


72,773


53,761Earnings per share:Basic

$
(0.28
)
$
0.26

$
0.11

$
0.72Diluted


(0.28
)

0.26


0.10


0.72


See
accompanying notes to condensed consolidated financial statements (unaudited)

6

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders' Equity (Unaudited)

Nine Months Ended September 30, 2008

(in thousands)

Common Stock





Accumulated
other
comprehensive
income (loss)Additional
paid-in
capital

Retained
earnings
(deficit)

Total
stockholders'
equityShares

AmountBalance at December 31, 2007


53,761

$
538

$
484,383

$
634,241

$


$
1,119,162Net income











7,548





7,548Acquisition of FairPoint


35,265


352


315,938








316,290Issuance of restricted shares


50














Restricted stock cancelled for withholding tax


(15
)













Forfeiture of restricted shares


(71
)













Stock based compensation expense








1,164








1,164Dividends declared








(45,911
)







(45,911
)Return of capital to Verizon











(1,160,000
)




(1,160,000
)Issuance of bonds to Verizon











(539,831
)




(539,831
)Contributions by Verizon











381,890





381,890Net liabilities contributed back to Verizon











130,309





130,309Employee benefit adjustment to comprehensive income











78,725


(78,725
)

Balance at September 30, 2008


88,990

$
890

$
755,574

$
(467,118
)
$
(78,725
)
$
210,621


See accompanying notes to condensed consolidated financial statements (unaudited)

7

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Nine months ended
September 30,2008

2007(Dollars in thousands)Cash flows from operating activities:Net income

$
7,548

$
38,559Adjustments to reconcile net income to net cash provided by operating activities of continuing operations excluding impact of acquisitions:Deferred income taxes


15,354


(21,834
)Provision for uncollectible revenue


13,004


14,603Depreciation and amortization


184,434


174,361SFAS 106 post-retirement accruals


33,762


67,514Gain on derivative instruments


(38,109
)

Other non cash items


(26,382
)

(70,344
)Changes in assets and liabilities arising from operations:Accounts receivable


(37,670
)

(8,645
)Prepaid and other assets


2,838


3,784Accounts payable and accrued liabilities


(106,576
)

(16,194
)Other assets and liabilities, net


4,244


(3,283
)Other


(16,221
)

Total adjustments


28,678


139,962Net cash provided by operating activities of continuing operations


36,226


178,521Cash flows from investing activities of continuing operations:Acquired cash balance, net


11,401


Net capital additions


(189,234
)

(107,121
)Net proceeds from sales of investments and other assets


2,154


34,146Net cash used in investing activities of continuing operations


(175,679
)

(72,975
)Cash flows from financing activities of continuing operations:Loan origination costs


(29,238
)

Proceeds from issuance of long-term debt


1,930,000


Repayments of long-term debt


(687,491
)

Contributions from Verizon


373,590


(104,848
)Restricted cash


(80,436
)

Repayment of capital lease obligations


(1,938
)

(698
)Dividends paid to stockholders


(1,196,963
)

Net cash provided by (used in) financing activities of continuing operations


307,524


(105,546
)Net increase in cash


168,071


Cash, beginning of period





Cash, end of period

$
168,071

$
Supplemental disclosure of cash flow information:Non-cash equity consideration

$
316,290

$
Non-cash issuance of senior notes


551,000





See
accompanying notes to condensed consolidated financial statements (unaudited)

8

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited)

(1) Organization and Basis of Financial Reporting

On March 31, 2008, FairPoint completed the acquisition of Spinco, pursuant to which Spinco merged
with and into FairPoint, with FairPoint continuing as the surviving corporation for legal purposes. Spinco was a wholly-owned subsidiary of Verizon and prior to the merger the Verizon Group
transferred certain specified assets and liabilities of the local exchange businesses of Verizon New England in Maine, New Hampshire and Vermont and the customers of the related long distance and
Internet service provider businesses in those states to subsidiaries of Spinco. The merger was accounted for as a "reverse acquisition" of Legacy FairPoint by Spinco under the purchase method of
accounting because Verizon stockholders owned a majority of the shares of the consolidated Company following the merger and, therefore, Spinco is treated as the acquirer for accounting purposes. The
financial statements reflect the transaction as if Spinco had issued consideration to FairPoint shareholders. As a result, for the nine months ended September 30, 2008, the statement of
operations and the financial information derived from the statement of operations in this Quarterly Report reflect the consolidated financial results of the Company by including the financial results
of the Northern New England business for the three months ended March 31, 2008, the financial results of Spinco for the six months ended September 30, 2008 and the financial results of
FairPoint for the six months ended September 30, 2008. The statement of operations and the financial information derived from the statement of operations for the three months ended
September 30, 2008 in this Quarterly Report reflects the actual results of the consolidated Company (Legacy FairPoint and Spinco) for such period. The balance sheet and financial information
derived from the balance sheet in this Quarterly Report reflect the consolidated assets and liabilities of Legacy FairPoint and Spinco at September 30, 2008. Certain assets and liabilities of
the Northern New England business (principally related to pension, other post-employment benefits, and associated deferred taxes) were not distributed to Spinco prior to the merger and for
accounting purposes were effectively contributed back to Verizon. The assets and liabilities of the Northern New England business that were effectively contributed back to Verizon are reflected as net
liabilities contributed back to Verizon on the statement of stockholders' equity contained herein. The statement of operations in this Quarterly Report may not be indicative of the Company's future
results.

In
order to effect the merger described above, the Company issued 53,760,623 shares to Verizon stockholders for their interest in Spinco. Accordingly the number of common shares
outstanding, par value, paid in capital and per share information included herein has been retroactively restated to give effect to the merger.

Basis of PresentationNorthern New England Business (Historical)

Prior to March 31, 2008, the Northern New England business and operations were comprised of the local exchange business and
related landline activities of the Verizon Group in the states of Maine, New Hampshire and Vermont. The Northern New England business was primarily comprised of carved-out components from
each of Verizon New England, NYNEX Long Distance Company (doing business as Verizon Enterprise Solutions), Bell Atlantic Communications, Inc. (doing business as Verizon Long Distance), Verizon
Internet Services Inc., GTE.Net LLC, and Verizon Select Services Inc.

The
Northern New England business had one reportable segment, servicing a territory consisting of Local Access and Transport Areas ("LATAs"), in Maine, New Hampshire and Vermont. These
LATAs are generally centered on a city or based on some other identifiable common geography. The

9

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(1) Organization and Basis of Financial Reporting (Continued)

Northern
New England business included regulated and unregulated carrier business in all three states, consisting principally of:



Management
views its business of providing video, data and voice communication services to residential and business customers as one business segment and currently aggregates these
revenue streams under the quantitative and qualitative thresholds defined in Statement of Financial Accounting Standards (SFAS) No. 131,Disclosures about Segments of an
Enterprise and Related Information.

Many
of the communications services that the Northern New England business provided are subject to regulation by the state regulatory commissions of Maine, New Hampshire and Vermont with
respect to intrastate rates and services and other matters. The Federal Communications Commission (the "FCC") regulates rates that the Northern New England business charges long-distance
carriers and end-user subscribers for interstate access services and interstate traffic.

All
results presented herein prior to March 31, 2008 represent the historical financial results of the Northern New England business and represent special-purpose combined
financial statements prepared to present the balance sheets, statement of operations and cash flows of the Northern New England business in contemplation of the merger with FairPoint and related
transactions. These special-purpose combined financial statements were prepared in accordance with U.S. generally accepted accounting principles ("GAAP").

The
special-purpose combined financial statements include the wireline-related businesses, Internet access, long distance and customer premises equipment services provided by the
Northern New England business to customers in the states of Maine, New Hampshire and Vermont. All significant intercompany transactions have been eliminated. These special-purpose combined financial
statements also included the assets, liabilities and expenses related to employees who support the Northern New England business, some of whom remained employees of Verizon following the merger. The
financial statements also include transactions with Verizon which was an affiliate of the Northern New England business prior to consummation of the merger. Through these transactions, Verizon
provided various services to the Northern New England business including various operational and administrative services. Subsequent to March 31, 2008, any transactions with Verizon are no
longer considered affiliate receivables or payables.

Prior
to March 31, 2008, the financial statements of the Northern New England business were prepared using specific information where available and allocations where data was not
maintained on

10

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(1) Organization and Basis of Financial Reporting (Continued)

a
state-specific basis within the Northern New England business' books and records. Effective March 31, 2008, the balance sheet reflects actual balances of Spinco and Legacy FairPoint
consolidated. All adjustments required to change from allocated balances at December 31, 2007 to actual balances are
reflected in stockholders' equity. Any additional adjustments identified to reflect the March 31, 2008 opening balances have been and will be recorded to stockholders' equity.

The
accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC for Quarterly Reports on
Form 10-Q. Accordingly, certain information and disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted and condensed
pursuant to such rules and regulations. In the opinion of the Company's management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the Company's results of operations, financial position, and cash flows. The results of operations for the Northern New England business interim
periods presented are not necessarily indicative of the results of operations of the Company and may not be indicative of results for the entire year. The unaudited condensed consolidated financial
statements should be read in conjunction with FairPoint's Annual Report on Form 10-K for the year ended December 31, 2007.

Use of Estimates

The accompanying condensed consolidated financial statements have been prepared in accordance with GAAP, which require management to
make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates.

Examples
of significant estimates include the allowance for doubtful accounts, the recoverability of plant, property and equipment, pension and post-retirement benefit
assumptions, purchase price allocation for the acquisition of Legacy FairPoint and income taxes. In addition, estimates were made to determine the allocations used in preparing the historical combined
financial statements as described above.

(2) Accounting Policies

Revenue Recognition

The Company recognizes service revenues based upon contract terms and usage of the Company's local exchange network and facilities.
Fixed fees for local telephone, long distance, Internet access and certain other services are recognized in the month the service is provided. Revenue from other services that are not fixed fee or
that exceed contracted amounts is recognized when such services are provided.

The
Company recognizes revenue for equipment and installation services when the equipment is installed in accordance with contractual specifications and ready for the customer's use.
Maintenance and monitoring services are recognized over the term of the contract as services are provided. Long-term contracts are accounted for using the percentage of completion method.
The completed contract method is used if the costs cannot be estimated with a reasonable degree of reliability.

Non-recurring
customer activation fees, along with the related costs up to, but not exceeding, the activation fees, are deferred and amortized over the customer relationship
period.

11

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(2) Accounting Policies (Continued)

Maintenance and Repairs

The cost of maintenance and repairs, including the cost of replacing minor items not constituting substantial betterments, is charged
primarily to cost of services and sales as these costs are incurred.

Restricted Cash

As of March 31, 2008 or the closing of the merger, the Company had $80.9 million of restricted cash. The Company is
required to use these funds to (i) pay for the removal of double poles in Vermont, which is estimated to cost $6.7 million, (ii) pay for certain service quality improvements under
a performance enhancement plan in Vermont totaling $25.0 million, and (iii) pay for network improvements in New Hampshire totaling $49.2 million. As of September 30, 2008,
the Company has spent $2.0 million on these required projects. These expenditures have been partially offset by an increase of $0.7 million in restricted cash through
September 30, 2008, due to interest earned on deposits. In addition, the Company established another escrow account related to pending litigation totaling $0.8 million at
September 30, 2008. As of September 30, 2008, the Company had $80.4 million of restricted cash of which $10.3 million is shown in current assets and $70.1 million is
shown as a non-current asset on the Condensed Consolidated Balance Sheet.

Short-term Investments

Short-term investments consist primarily of cash equivalents held in trust to pay for certain employee benefits.
Short-term investments are stated at cost, which approximates market value. These short-term investments were not transferred to FairPoint in connection with the merger.

Trade and Other Accounts Receivable

Trade and other accounts receivable are stated at the amount the Company expects to collect. Allowances for uncollectible accounts are
maintained for estimated losses
resulting from the inability of the customers to make required payments. In determining these estimates, the Company considers historical write-offs, the aging of the receivables and other
factors, such as overall economic conditions.

Materials and Supplies

Materials and supplies include new and reusable supplies and network equipment, which are stated principally at average original cost,
except that specific costs are used in the case of large individual items. As of September 30, 2008, the Company has acquired a significant amount of materials and supplies that will be
utilized to execute the Company's capital projects in the near future.

Property, Plant and Equipment

Property, plant and equipment is recorded at cost. Depreciation expense is principally based on the composite group remaining life
method and straight-line composite rates. This method provides for the recognition of the cost of the remaining net investment in telephone plant, property and equipment less anticipated
positive net salvage value, over the remaining asset lives. This method requires the periodic revision of depreciation rates.

At
September 30, 2008 and December 31, 2007, accumulated depreciation for property, plant and equipment is $4.6 billion and $3.8 billion, respectively.
Depreciation expense for the three months

12

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(2) Accounting Policies (Continued)

ended
September 30, 2008 was reduced by $4.6 million of non-recurring prior period adjustments related to the second quarter of 2008.

The
estimated asset lives used are presented in the following table:

Average Lives

YearsBuildings


45Central office equipment


511Outside communications plantCopper cable


1518Fiber cable


25Poles and conduit


3050Furniture, vehicles and other


315


When
depreciable telephone plant used in the Company's wireline network is replaced or retired, the carrying amount of such plant is deducted from the respective accounts and charged to
accumulated depreciation.

Network
software purchased or developed in connection with related plant assets is capitalized. The Company also capitalizes interest associated with the acquisition or construction of
network related assets. Capitalized interest is reported as part of the cost of the network related assets and as a reduction in interest expense.

The
Company believes that current estimated useful asset lives are reasonable, although they are subject to regular review and analysis. In the evaluation of asset lives, multiple
factors are considered, including, but not limited to, the ongoing network deployment, technology upgrades and enhancements, planned retirements and the adequacy of reserves.

Long-Lived Assets

Property, plant and equipment and intangible assets subject to amortization are reviewed for impairment in accordance with SFAS
No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets("SFAS No. 144"). Under SFAS No. 144, these
assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. An impairment charge is recognized for the amount, if any,
by which the carrying value of the asset exceeds its fair value.

Computer Software Costs

The Company capitalizes certain costs incurred in connection with developing or obtaining internal use software which has a useful life
in excess of one year in accordance with American Institute of Certified Public Accountants Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use", or SOP 98-1. Capitalized costs include direct development costs associated with internal use software, including direct labor costs and external costs of
materials and services.

On
January 15, 2007, FairPoint entered into the Master Services Agreement, or MSA, with Capgemini U.S. LLC. Through the MSA, the Company intends to replicate and/or replace
certain

13

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(2) Accounting Policies (Continued)

existing
Verizon systems during a phased period through January 2009. The Company is currently in the application development stage of the project and is recognizing costs in accordance with
SOP 98-1. The Company has recognized both external and internal service costs associated with the MSA based on total labor incurred as of September 30, 2008 compared to the
total estimated labor to substantially complete the implementation project. As of September 30, 2008, the Company had capitalized $72.6 million of costs under
SOP 98-1.

Intangible Assets, net

The Company's intangible assets consist of customer lists, non-compete agreements and trade names as follows (in
thousands):

At
September 30,
2008Customer lists (weighted average 9.7 years):Gross carrying amount

$
197,174Less accumulated amortization


(10,697
)Net customer lists


186,477Non-Compete agreement (weighted average 1 year):Gross carrying amount


352Less accumulated amortization


(176
)Net non-compete agreement


176Trade names (indefinite life):Gross carrying amount


35,447Total intangible assets, net

$
222,100


The
estimated weighted average useful lives of the intangible assets are 9.7 years for the customer relationships, one year for the non-compete agreement and an
indefinite useful life for trade names. Amortization expense was $5.4 million for the third quarter of 2008 and is expected to be approximately $22 million per year.

Debt Issue Costs

On March 31, 2008, immediately prior to the merger, Legacy FairPoint and Spinco entered into a $2,030.0 million senior
secured credit facility (the "credit facility"), consisting of a non-amortizing revolving facility in an aggregate principal amount of $200.0 million (the "revolver"), a senior
secured term loan A facility in an aggregate principal amount of $500.0 million (the "term loan A facility"), a senior secured term loan B facility in the aggregate principal amount of
$1,130.0 million (the "term loan B facility, and together with the term loan A facility, the "term loan"), and a delayed draw term loan facility in an aggregate principal amount of
$200.0 million (the "delayed draw term loan"). The Company incurred $29.2 million of debt issue costs associated with these credit facilities and began to amortize these costs over the
life of the related debt, ranging from 6 to 7 years using the straight line

14

---



FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(2) Accounting Policies (Continued)

method
of amortization, which approximates the effective interest method. As of September 30, 2008, the Company had capitalized debt issue and offering costs of $27.0 million, net of
amortization.

Accounting for Income Taxes

As part of the process of preparing its consolidated financial statements, the Company is required to estimate its income taxes. This
process involves estimating the actual current tax exposure and assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included within the Company's consolidated balance sheets. The Company must then assess the likelihood that its deferred tax assets will be recovered
from future taxable income and, to the extent the Company believes the recovery is not likely, it must establish a valuation allowance. Further, to the extent that the Company establishes a valuation
allowance or increases this allowance in a financial accounting period, the Company must include a tax provision, or reduce its tax benefit in the consolidated statement of operations. In performing
the assessment, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. The Company uses its judgment to determine its
provision or benefit for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against its net deferred tax assets.

Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and trade
receivables. The Company places its cash with high-quality financial institutions. Concentrations of credit risk with respect to trade receivables are principally related to receivables
from other telecommunications carriers and are otherwise limited to the Company's large number of customers in several states.

The
Company sponsors pension and post-retirement healthcare plans for certain employees. Plan assets are held by a third party trustee. The Company's plans hold debt and
equity securities for investment purposes. The value of these plan assets is dependent on the financial condition of those entities issuing the debt and equity securities. A significant decline in the
fair value of plan assets could result in additional contributions to the plans by the Company in order to meet funding requirements under the Employee Retirement Income Security Act of 1974, as
amended ("ERISA").

As
of September 30, 2008, as a result of interest rate swap agreements, approximately 79% of the Company's indebtedness bore interest at fixed rates rather than variable rates.
The Company's ability to hedge its interest rate risk is dependent on the solvency of those banks with whom the Company enters into swap agreements.

Advertising Costs

Advertising costs are expensed as they are incurred.

Long Term Incentive Plan

The Company's 2008 Long Term Incentive Plan (the "Plan") was adopted by the Company's board of directors on March 27, 2008 and
subsequently approved by its shareholders on June 18, 2008. A

15

---



FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(2) Accounting Policies (Continued)

total
of 9,500,000 shares of the Company's common stock are available for issuance under the Plan which is administered by the compensation committee of our board of directors.

On
March 27, 2008 the Company's compensation committee approved the award of Performance Units under the Plan for the performance period beginning April 1, 2008 and ending
December 31, 2008 and for the performance period beginning April 1, 2008 and ending December 31, 2009, in each case to certain key employees.

On
June 18, 2008 the Company's compensation committee approved the award of Performance Units under the Plan for the performance period beginning April 1, 2008 and ending
December 31, 2010 to certain key employees.

Effective
January 1, 2006, the Company adopted the provisions of SFAS No. 123(R),Share-Based Payment(SFAS
No. 123(R)). SFAS No. 123(R) establishes accounting for stock-based awards granted in exchange for employee services. Accordingly, for employee awards which are expected to vest, stock-
based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense on a straight-line basis over the requisite service period, which
generally begins on the date the award is granted through the date the award vests.

Employee Benefit Plans

For the three months ended March 31, 2008 and the year ended December 31, 2007, the employees of the Northern New England
business participated in Verizon's benefit plans including noncontributory pension plans, post-retirement healthcare and life insurance plans for Northern New England business' retirees
and their dependents. Upon the effective date of the merger, the Company assumed certain liabilities with respect to certain employees of the Northern New England business, and the Company adopted
pension plans (which are non-contributory), post-retirement healthcare and life insurance plans covering the Northern New England business' future retirees and their
dependents. Pension, post-retirement healthcare and life insurance benefits earned during the year as well as interest on projected benefit obligations are accrued annually. Prior service
costs and credits resulting from changes in plan benefits are amortized over the average remaining service period of the employees expected to receive benefits. Expected return on plan assets is
determined by applying the expected return on assets assumption to the market related value of assets. Accumulated actuarial gains and losses are amortized over the average remaining service period of
the employees expected to receive benefits only to the extent the unrecognized amounts exceed a 10% corridor determined as the greater of the plan's assets or liabilities.

Since
June 30, 2006, the Company's Northern New England business management employees have not earned pension benefits. In addition, Northern New England business management
employees hired after December 31, 2005 are not eligible for pension benefits and managers with less than 13.5 years of service as of June 30, 2006 are not eligible for
Company-subsidized retiree healthcare or retiree life insurance benefits.

16

---



FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(2) Accounting Policies (Continued)

Prior to the effective date of the merger, the benefit plans were part of the Verizon consolidated plans. The structure of the plans during this period did not provide for the separate
attribution of the related pension and post-retirement assets and obligations at the Northern New England business level. Because there was not a separate plan for the Northern New England
business, the annual income and expense related to such assets and obligations were allocated to the Northern New England business and were reflected as prepaid pension assets and employee benefit
obligations in the balance sheet as of December 31, 2007 and were reflected in the financial results for all periods prior to March 31, 2008.

As
part of the merger, liabilities and assets attributable to the employees of the Northern New England business were spun off from the relevant Verizon benefit plans to new benefit
plans maintained by the Company and accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 87,Employers' Accounting for
Pensions. The separate Northern New England plans now maintained by the Company for collectively bargained employees generally cover all eligible active collectively bargained
employees of the Northern New England business and approximately 315 management employees (benefits for management employees are no longer accrued). Retired employees of the Northern New England
business at March 31, 2008 will continue to be covered by the Verizon benefit plans. In accordance with the Employee Matters Agreement dated January 17, 2007 between Verizon and the
Company, an amount equal to $202.4 million of cash was transferred from the trusts of the two Verizon defined benefit pension plans to the corresponding Company pension plans' trusts on
April 30, 2008, which amount was calculated by Verizon's actuaries to be 80% of the estimated pension liability for the Company's active employees. An additional transfer of assets, estimated
at $49.3 million as of September 30, 2008, will be made from Verizon's defined benefit plans' trusts upon final validation by actuaries and the Company of the census information and
related actuarial calculations in accordance with relevant statutory and regulatory guidelines. The assets transferred from the Verizon benefit plans' trusts to the Company's benefit plans' trusts
have been invested by the plans' trustee in various equity and fixed income securities. The final asset transfer will include investment return on the entire asset spin-off amount from
March 31, 2008 until the date of the final asset transfer equivalent to the rate of return in the Verizon pension trusts.

In
September 2006, the FASB issued Statement SFAS No. 158,Employers' Accounting for Defined Benefit Pension and Other Post-retirement
Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R)(SFAS No. 158). SFAS No. 158 requires the recognition of a defined benefit
post-retirement plan's funded status as either an asset or liability on the balance sheet. SFAS No. 158 also requires the immediate recognition of the unrecognized actuarial gains
and losses and prior service costs and credits that arise during the period as a component of other accumulated comprehensive income, net of applicable income taxes. Additionally, a company must
determine the fair value of plan assets as of the company's year end. The provisions of SFAS No. 158 are not to be applied retrospectively. The Northern New England business adopted SFAS
No. 158 effective December 31, 2006.

In
addition, the Company sponsors a voluntary 401(k) savings plan that covers substantially all eligible Legacy FairPoint employees, and two voluntary 401(k) savings plans that cover in
the aggregate substantially all eligible Northern New England business employees. Each 401(k) plan year, the Company contributes to the 401(k) plan an amount of matching contributions determined by
the Company at its discretion or as otherwise negotiated with respect to collectively bargained employees.

17

---



FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(3) Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements("SFAS 157"). SFAS 157 addresses how
companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles. As a result of
SFAS 157 there is now a common definition of fair value to be used throughout GAAP. The FASB believes that the new standard will make the measurement of fair value more consistent and
comparable and improve disclosures about those measures. The provisions of SFAS 157 were to be effective for fiscal years beginning after November 15, 2007. On February 6, 2008,
the FASB agreed to defer the effective date of SFAS 157 for one year for certain non-financial assets and non-financial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at least annually). Effective for fiscal year 2008, the Company has adopted SFAS 157 except as it applies to those
non-financial assets and non-financial liabilities. The adoption did not have any financial impact on the Company's results of operations and financial position.

In
February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilitiesincluding an amendment of
FASB Statement No. 115("SFAS 159"). SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement of
certain financial assets and liabilities under an instrument-by-instrument election. Subsequent measurements for the financial assets and liabilities an entity elects to
measure at fair value will be recognized in the results of operations. SFAS 159 also establishes additional disclosure requirements. This standard is effective for fiscal years beginning after
November 15, 2007. Effective for fiscal year 2008, the Company has adopted the provisions of SFAS 159. The adoption did not have any financial impact on the Company's results of
operations and financial position.

In
December 2007, the FASB issued SFAS No. 141R,Business Combinations("SFAS 141R"). SFAS 141R replaces
SFAS 141 and establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements which will enable users to evaluate the nature and financial
effects of the business combination. This standard is effective for fiscal years beginning after December 15, 2008 and early adoption is prohibited.

In
December 2007, the FASB issued SFAS No. 160,Non-controlling Interests in Consolidated Financial Statements("SFAS 160"). SFAS 160 establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the non-controlling interest, changes in a parent's ownership interest and the valuation of retained non-controlling
equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. This standard is effective for fiscal years beginning after December 15, 2008 and early adoption is
prohibited.

In
March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities("SFAS 161").
SFAS 161 requires companies with derivative instruments to disclose information that should enable financial statement users to understand how and why a company uses derivative instruments, how
derivative instruments and related hedged items are accounted for under FASB Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" and how

18

---



FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(3) Recent Accounting Pronouncements (Continued)

derivative
instruments and related hedged items affect a company's financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal
years beginning after November 15, 2008.

(4) Dividends

The Company's board of directors has adopted a dividend policy which reflects the Company's judgment that its stockholders would be better served if the Company distributed a substantial
portion of the cash generated by the Company's business in excess of operating needs, interest and principal payments on indebtedness, dividends on future senior classes of capital stock, if any,
capital expenditures, taxes and future reserves, if any, as regular quarterly dividend payments to the holders of the Company's common stock, rather than retained and used for other purposes. However,
the Company's board of directors may, in its discretion, amend or repeal the dividend policy to decrease the level of dividends provided for or discontinue entirely the payment of dividends.

As
a condition to the approval of the merger by state regulatory authorities, the Company has agreed to be subject to reductions in its dividend rate and certain other restrictions on
the payment of dividends. The Company's annual dividend rate may not exceed $1.03 per share until certain conditions contained in the state regulatory orders approving the merger no longer apply. In
addition to the conditions and restrictions imposed by the state regulatory orders, financial covenants in the Company's credit facility and the indenture governing the 131/8% Senior
Notes due 2018 issued by Spinco to the Verizon Group and subsequently exchanged for debt obligations of Verizon and sold through a private offering (the "notes") also restrict its ability to pay
dividends, and certain of these restrictions may be more restrictive than the conditions and restrictions imposed by the state regulatory orders.

On
September 4, 2008, the Company declared a dividend totaling $22.9 million, or $0.2575 per share of common stock, which was paid on October 17, 2008 to holders of
record as of September 30, 2008.

(5) Acquisitions and Dispositions

Prior to the merger, the Verizon Group engaged in a series of restructuring transactions to effect the transfer of specified assets and liabilities of the local exchange business of
Verizon New England in Maine, New Hampshire and Vermont and the customers of the Verizon Group's related long distance and Internet service provider businesses in those states to Spinco and the
entities (including an entity formed for holding Vermont property) that became Spinco's subsidiaries. In connection with these restructuring transactions, and immediately prior to closing of the
merger on March 31, 2008, the Verizon Group contributed certain of those assets and all of the direct and indirect equity interests of those entities to Spinco in exchange
for:



As
a result of these transactions, the Verizon Group received $1.7 billion of combined cash and principal amount of notes.

19

---



FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(5) Acquisitions and Dispositions (Continued)

The
Verizon Group also contributed approximately $316.0 million in cash to Spinco at the time of the spin-off, in addition to the amount of working capital, subject to
adjustment, that it was required to contribute pursuant to the distribution agreement that was in effect prior to the merger. During the third quarter of 2008, the Company settled the working capital
adjustment with Verizon, resulting in an additional contribution to the Company of approximately $29.0 million from Verizon. In connection with this working capital settlement, the Company paid
Verizon $66.3 million for certain payables (offset by any receivables) owed to Verizon affiliates.

After
the contribution and immediately prior to the merger, Verizon spun off Spinco by distributing all of the shares of Spinco common stock to a third-party distribution agent to be
held collectively for the benefit of Verizon stockholders. We refer collectively to the transactions described above as the spin-off.

On
March 31, 2008, FairPoint completed the merger with Spinco. The merger of FairPoint and Spinco was accounted for as a reverse acquisition of FairPoint by Spinco under the
purchase method of accounting because Spinco's stockholders owned a majority of the shares of the combined Company following the merger. The merger consideration was $316.3 million. Goodwill
resulting from this transaction will not be deductible for income tax purposes.

The
merger was accounted for using the purchase method of accounting for business combinations and, accordingly, the acquired assets and liabilities of Legacy FairPoint were recorded at
their estimated fair values as of the date of acquisition, and Legacy FairPoint's results of operations have been included in the Company's consolidated financial statements from the date of
acquisition. Based upon the Company's preliminary purchase price allocation, the excess of the purchase price over the fair value of the net tangible assets acquired was approximately
$858.0 million. The Company recorded an intangible asset related to the acquired customer relationships of $197.2 million, an intangible asset related to trade names of
$35.4 million and an intangible asset related to a non-compete agreement of $0.4 million. The remaining $625.0 million was recognized as goodwill. The estimated
weighted average useful lives of the intangible assets are 9.7 years for the customer relationships, one year for the non-compete agreement and trade names have an indefinite useful
life.

The
preliminary allocation of the total net purchase price of the merger is shown in the table below (in thousands):

Cash

$
11,401Current assets


42,443Property, plant, and equipment


294,081Investments


6,856Excess cost over fair value of net assets acquired


625,010Intangible assets


232,973Other assets


127,034Current liabilities


(144,943
)Long-term debt


(687,491
)Other liabilities


(191,074
)Total net purchase price

$
316,290


20

---



FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(5) Acquisitions and Dispositions (Continued)

The purchase price allocation is preliminary as the Company is still assessing the fair value of Legacy FairPoint's investments and property,
plant and equipment. Since the closing of the acquisition on March 31, 2008, the Company has identified a $13.4 million decrease in the fair value of net tangible assets acquired which
resulted in a corresponding increase to goodwill. When finalized, material adjustments to goodwill may result.

The
following unaudited pro forma information presents the combined results of operations of the Company as though the merger and related transactions had been consummated on
January 1, 2007. These results include certain adjustments, mainly associated with increased interest expense on debt and amortization of intangible assets related to the acquisitions and the
related income tax effects. The pro forma financial information does not necessarily reflect the actual results of operations had the merger been consummated at the beginning of the period or which
may be attained in the future (in thousands, except per share data).

Pro forma nine
months ended
September 30,Pro forma three
months ended
September 30,
20072008

2007(unaudited)

(unaudited)Revenues

$
380,965

$
1,022,363

$
1,115,890Income (loss) from continuing operations


16,982


(11,509
)

30,582Net income (loss)


16,982


(11,509
)

30,582Earnings per common share from continuing operations:Basic

$
0.19

$
(0.16
)
$
0.35Diluted


0.19


(0.16
)

0.34Earnings per common share:Basic

$
0.19

$
(0.16
)
$
0.35Diluted


0.19


(0.16
)

0.34


(6) Income Taxes

The Company accounts for income taxes for interim periods in accordance with SFAS No. 109"Accounting for Income Taxes"("SFAS 109") and FASB Interpretation No. 18"Accounting for Income Taxes in Interim Periods"("FIN 18"). FIN 18 requires the
tax (or benefit) related to ordinary income (or loss) to be computed at an estimated annual effective tax rate and the tax (or benefit) related to all other items to be individually computed and
recognized when the items occur unless a reliable estimated annual effective tax rate cannot be calculated. For the quarter ending September 30, 2008, the Company cannot make a reliable
estimate of its estimated effective annual tax rate. Consequently, the Company's effective income tax rate for the period ending September 30, 2008 has been presented based on the Company's
actual year to date effective tax rate.

For
the nine months ended September 30, 2008, the Company recorded income tax expense of $3.2 million resulting in an effective tax rate of 29.7% compared to 39.0% for the
nine months ended September 30, 2007. The reduction in rate resulted primarily in reporting tax-free Medicare subsidy reimbursements combined with lower book income during the nine
month period ended September 30, 2008.

21

---



FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(6) Income Taxes (Continued)

For the periods through March 31, 2008, the Northern New England business was included in the Verizon consolidated federal tax return and combined state tax returns in the states
of Maine, New Hampshire and Vermont. The operations of the Northern New England business were included in a tax sharing agreement with Verizon and were allocated tax payments based on the respective
tax liability as if they were filing on a separate company basis. Current and deferred tax expense has been determined by applying the provisions of FAS 109 to each company as if it were a
separate taxpayer.

Effective
January 1, 2007, the Company adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes(FIN 48), which requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding
uncertainties in income tax positions. The unrecognized tax benefits under FIN 48 were similar to the income tax reserves reflected prior to adoption under SFAS No. 5 "Accounting for Contingencies"whereby reserves were established for probable loss contingencies that could be reasonably estimated. The adoption of
FIN 48 was not material.

FIN 48
requires applying a "more likely than not" threshold to the recognition and de-recognition of uncertain tax positions. The Company's unrecognized tax benefits
totaled $11.4 million as of March 31, 2008, $8.6 million as of June 30, 2008 and $8.6 million as of September 30, 2008. The reduction in the unrecognized tax
benefits in the second quarter of 2008 solely related to the effective settlement of an IRS audit covering the fiscal years 2000 through 2003, which is described below. Of the $8.6 million of
unrecognized tax benefits at September 30, 2008, $1.0 million would impact the Company's effective rate, if recognized. The remaining unrecognized tax benefits relate to temporary items
and tax reserves recorded in a business combination, which would not affect the annual effective tax rate. Furthermore, the Company does not anticipate any significant increase or decrease to the
unrecognized tax benefits within the next twelve months.

The
Company recognizes any accrued interest and penalties related to unrecognized tax benefits in income tax expense. For the nine months ended September 30, 2008, there was a
$0.6 million decrease in interest and penalties, all of which relates to the effective settlement of an IRS audit covering fiscal years 2000 through 2003. Of the $0.6 million reduction,
$0.5 million relates to an interest reserve recorded as part of the business combination which, accordingly, has no effect on earnings. As of September 30, 2008, cumulative interest and
penalties totaled $1.0 million, net of tax.

The
Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is generally no longer subject to U.S. federal and state income tax
examinations by tax authorities for years before 2004. During the quarter ending June 30, 2008, Verizon effectively settled the IRS examination for fiscal years 2000 through 2003. Due to the
executed tax sharing agreement dated January 15, 2007 between FairPoint and Verizon covering prior period tax liabilities, current period tax liabilities, tax payments, and tax returns, the
settlement of the IRS audit resulted in an amount due to Verizon from FairPoint in the amount of $1.5 million relating to adjustments of temporary differences and $0.1 million of
interest. As of September 30, 2008, the Company does not have any significant additional jurisdictional tax audits.

The
merger between FairPoint and Spinco will be treated as a tax-free "reorganization" within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code. As
such, Spinco and Legacy FairPoint will be a party to that reorganization within the meaning of Section 368(b) of the Code. Spinco will not recognize gain or loss on the transfer of its assets
to FairPoint and the assumption by FairPoint of the

22

---



FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(6) Income Taxes (Continued)

liabilities
of Spinco, and no gain or loss will be recognized by stockholders of Spinco on the receipt of Company Common Stock in exchange for Spinco common stock. Following the merger on
March 31, 2008, FairPoint and Spinco will join in the filing of a consolidated federal tax return for the nine month period ending December 31, 2008. Due to the tax free nature of the
merger, the Company expects any federal and state tax attributes of FairPoint and Spinco to carry forward to the Company.

At
September 30, 2008, the Company had federal net operating loss carryforwards of $254.8 million. The Legacy FairPoint losses are subject to a Section 382
limitation from a prior period ownership change; however, the Section 382 limitation is not expected to prevent the Company from utilizing these net operating losses over the loss carry forward
period.

At
March 31, 2008 in connection with the merger, Legacy FairPoint underwent an ownership change subject to Section 382, which places certain limitations on the use of net
operating loss carryovers and other tax attributes. The Company is continuing to evaluate the impact of the Section 382 limitation.

(7) Interest Rate Swap Agreements

The Company assesses interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by
evaluating hedging opportunities. The Company maintains risk management control systems to monitor interest rate cash flow risk attributable to both the Company's outstanding and forecasted debt
obligations. The risk management control systems involve the use of analytical techniques, including cash flow sensitivity
analysis, to estimate the expected impact of changes in interest rates on the Company's future cash flows.

The
Company uses variable and fixed-rate debt to finance its operations, capital expenditures and acquisitions. The variable-rate debt obligations expose the
Company to variability in interest payments due to changes in interest rates. The Company believes it is prudent to limit the variability of a portion of its interest payments. To meet this objective,
from time to time, the Company enters into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. These swaps change the variable-rate cash
flow exposure on the debt obligations to fixed cash flows. Under the terms of the interest rate swaps, the Company pays a variable interest rate plus an additional payment if the variable rate payment
is below a contractual rate, or it receives a payment if the variable rate payment is above the contractual rate.

23

---



FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(7) Interest Rate Swap Agreements (Continued)

The
chart below provides details of each of the Company's interest rate swap agreements.

Effective Date:

Notional Amount

Rate

Rate, including
applicable margin

Expiration DateFebruary 8, 2005

$130.0 Million


3.98%


6.73%

December 31, 2008February 8, 2005

$130.0 Million


4.11%


6.86%

December 31, 2009April 29, 2005

$50.0 Million


4.72%


7.47%

March 31, 2012June 30, 2005

$50.0 Million


4.69%


7.44%

March 31, 2011June 30, 2006

$50.0 Million


5.36%


8.11%

December 31, 2009December 31, 2007

$65.0 Million


4.91%


7.66%

December 30, 2011December 31, 2007

$75.0 Million


5.46%


8.21%

December 31, 2010December 31, 2008

$100.0 Million


5.02%


7.77%

December 31, 2010December 31, 2009

$150.0 Million


5.65%


8.40%

December 31, 2011June 30, 2008

$100.0 Million


4.99%


7.74%

December 30, 2010June 30, 2008

$100.0 Million


4.95%


7.70%

June 30, 2010June 30, 2008

$100.0 Million


5.45%


8.20%

December 31, 2010June 30, 2008

$100.0 Million


5.30%


8.05%

December 30, 2010June 30, 2008

$100.0 Million


4.50%


7.25%

December 31, 2010June 30, 2008

$100.0 Million


4.50%


7.25%

December 31, 2010December 31, 2010

$300.0 Million


4.49%


7.24%

December 31, 2012June 30, 2008

$250.0 Million


3.25%


6.00%

December 31, 2010


As
a result of the merger, beginning on April 1, 2008, these swaps do not meet the criteria for hedge accounting. Therefore, the changes in fair value of the swap contracts
subsequent to the merger have been recorded as other income (expense) on the condensed consolidated statement of operations. As a result of these swap agreements, approximately 79% of the Company's
indebtedness bore interest at fixed rates rather than variable rates as of September 30, 2008. At September 30, 2008, the fair market value of these swaps was a net liability of
approximately $36.5 million, of which $17.4 million has been
included in current liabilities and $19.1 million has been included in long-term liabilities. The Company has recognized a $5.0 million loss and a $38.1 million gain,
respectively, on derivative instruments on the consolidated statement of operations as a result of changes in the fair value of the swap agreements during the three months and nine months ended
September 30, 2008.

(8) Investments

The Company holds certain investments, totaling $7.0 million at September 30, 2008, in non-marketable securities which are accounted for using the cost and
equity methods of accounting. The Company continually monitors all of these investments for possible impairment by evaluating the financial performance of the businesses in which it invests and
comparing the carrying value of the investment to quoted market prices (if available), or the fair values of similar investments, which in certain instances, is based on traditional valuation models
utilizing multiples of cash flows. When circumstances indicate that a decline in the fair value of the investment has occurred and the decline is other than temporary, the Company records the decline
in value as a realized impairment loss and a reduction in the cost of the investment.

24

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(9) Long Term Debt

Prior to March 31, 2008, debt held by the Northern New England business was recorded at the Verizon consolidated level and interest expense was allocated to the Northern New
England business.

Long
term debt for the Company at September 30, 2008 is shown below (in thousands):

September 30,
2008Senior secured credit facility, variable rates ranging from 5.50% to 6.75% (weighted average rate of 5.74%) at September 30, 2008, due 2014 to
2015

$
1,930,000Senior notes, 13.125%, due 2018


551,000Discount on senior notes, 13.125%, due 2018


(10,892
)Total outstanding long-term debt


2,470,108Less current portion


(22,500
)Total long-term debt, net of current portion

$
2,447,608


The
approximate aggregate maturities of long-term debt for each of the five years subsequent to September 30, 2008 are as follows (in thousands):

Quarter ending September 30,2009

$
22,5002010


45,0002011


54,1502012


63,3002013


213,300Thereafter


2,082,750$
2,481,000


On
March 31, 2008, immediately prior to the merger, FairPoint and Spinco entered into a $2,030 million credit facility consisting of a revolver in an
aggregate principal amount of $200 million, a term loan A facility in an aggregate principal amount of $500 million, a term loan B facility in the aggregate principal amount of
$1,130 million and together with the term loan A facility, referred to as the term loan, and a delayed draw term loan in an aggregate principal amount of $200 million. Spinco drew
$1,160 million under the term loan immediately prior to the spin-off, and then the Company drew $470 million under the term loan and $5.5 million under the delayed
draw term loan concurrently with the closing of the merger. Subsequent to the merger, the Company has drawn an additional $194.5 million under the delayed draw term loan including
$100.0 million drawn on September 12, 2008. Following the merger, the Company assumed all of the obligations under the credit facility.

On
September 12, 2008, as a result of uncertain financial market conditions, the Company borrowed the remaining $100.0 million available under the $200.0 million
delayed draw term loan facility, as well as $100.0 million under the $200.0 million revolving credit facility. On October 5, 2008 the administrative agent under the credit
facility filed for bankruptcy. The administrative agent accounted for thirty percent of the loan commitments under the revolving credit facility. Accordingly, the Company expects that the remaining
amount available under the revolving credit facility at is $59.7 million, net of outstanding letters of credit. We are currently pursuing a change in the administrative agent.

25

---



FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(9) Long Term Debt (Continued)

The
revolving credit facility has a swingline subfacility in the amount of $10 million and a letter of credit subfacility in the amount of $30 million, which will allow
issuances of standby letters of credit by the Company. Due to the bankruptcy of the administrative agent under the credit facility, the Company expects that the availability under the swingline
subfacility and letter of credit subfacility will be $7 million and $21 million, respectively. The credit facility also permits interest rate and currency exchange swaps and similar
arrangements that the Company may enter into with the lenders under the credit facility and/or their affiliates. As of September 30, 2008, letters of credit had been issued for
$14.7 million.

The
term loan B facility and the delayed draw term loan will mature in March 2015 and the revolving credit facility and the term loan A facility will mature in March 2014. Each of the
term loan A facility, the term loan B facility and the delayed draw term loan, collectively referred to as the term loans, will be repayable in quarterly installments in the manner set forth in the
credit facility.

Interest
rates for borrowings under the credit facility will be, at the Company's option, for the revolver and for the term loans at either (a) the Eurodollar rate, as defined in
the credit agreement, plus an applicable margin or (b) the base rate, as defined in the credit agreement, plus an applicable margin.

The
credit facility provides for payment to the lenders of a commitment fee on the average daily unused portion of the revolver commitments, payable quarterly in arrears on the last
business day of each calendar quarter and on the date upon which the commitment is terminated. The credit facility also provides for payment to the lenders of a commitment fee from the closing date of
the credit facility up through and including the twelve month anniversary thereof on the unused portion of the delayed draw term loan, payable quarterly in arrears, and on the date upon which the
delayed draw term loan is terminated, as well as other fees.

The
credit facility requires the Company first to prepay outstanding term loan A loans in full, including any applicable fees, interest and expenses and, to the extent that no term loan
A loans remain outstanding, term loan B loans, including any applicable fees, interest and expenses, with, subject to certain conditions and exceptions, 100% of the net cash proceeds the Company
receives from any sale, transfer or other disposition of any assets subject to certain reinvestment rights, 100% of net casualty insurance proceeds subject to certain reinvestment rights and 100% of
the net cash proceeds the Company receives from the issuance of debt obligations and preferred stock. In addition, the Company's credit facility requires it to prepay outstanding term loans on the
date the Company delivers a compliance certificate pursuant to the credit agreement beginning with the fiscal quarter ended June 30, 2009 demonstrating that the Company's leverage ratio for the
preceding quarter is greater than 3.50 to 1.00, with an amount equal to the greater of (i) $11,250,000 or (ii) 90% of the Company's excess cash flow calculated after its permitted
dividend payment and less its amortization payments made on
the term loans pursuant to the Company's credit agreement. Notwithstanding the foregoing, the Company may designate the type of loans which are to be prepaid and the specific borrowings under the
affected facility pursuant to which any amounts mandatorily prepaid will be applied in forward order of maturity of the remaining amortization payments.

Voluntary
prepayments of borrowings under the term loan facilities and optional reductions of the unutilized portion of the revolving facility commitments will be permitted upon payment
of an

26

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(9) Long Term Debt (Continued)

applicable
payment fee, which shall only be applicable to certain prepayments of borrowings as described in the credit facility.

Under
the credit facility, the Company is required to meet certain financial tests, including a minimum cash interest coverage ratio and a maximum total leverage ratio. The credit
facility contains customary affirmative covenants. The credit facility also contains negative covenants and restrictions, including, among others, with respect to redeeming and repurchasing the
Company's other indebtedness, loans and investments, additional indebtedness, liens, capital expenditures, changes in the nature of our business, mergers, acquisitions, asset sales and transactions
with affiliates. As of September 30, 2008, the Company is not in violation of any covenants in its credit facility.

The
credit agreement also contains restrictions on the Company's ability to pay dividends on its common stock.

The
credit facility is guaranteed, jointly and severally, by all existing and subsequently acquired or organized wholly owned first-tier domestic subsidiaries of the Company
that are holding companies. No guarantee is required of a subsidiary that is an operating company. Northern New England Telephone Operations LLC, Vermont LLC and Enhanced Communications
of Northern New England Inc. are regulated operating subsidiaries and, accordingly, are not guarantors under the credit facility.

The
credit facility contains customary events of default, including, but not limited to, failure to pay principal, interest or other amounts when due (subject to customary grace
periods), breach of covenants or representations, cross-defaults to certain other indebtedness in excess of specified amounts, judgment defaults in excess of specified amounts, certain ERISA defaults,
the failure of any guaranty or security document supporting the credit facility and certain events of bankruptcy and insolvency.

On
March 31, 2008, Spinco issued $551 million aggregate principal amount of the notes. The notes mature on April 1, 2018 and are not redeemable at the Company's
option prior to April 1, 2013. Interest
is payable on the notes semi-annually in cash on April 1 and October 1 of each year. The notes bear interest at a fixed rate of 131/8% and principal is due at
maturity. The notes were issued at a discount and, accordingly, at the date of their distribution, the notes had a carrying value of $539.8 million (principal amount at maturity of
$551.0 million less discount of $11.2 million).

The
indenture governing the notes limits, among other things, the Company's ability to incur additional indebtedness, issue certain preferred stock, repurchase its capital stock or
subordinated debt, make certain investments, create certain liens, sell certain assets or merge or consolidate with or into other companies, incur restriction on the ability of the Company's
subsidiaries to make distributions or transfer assets to the Company and enter into transactions with affiliates.

The
indenture governing the notes also restricts the Company's ability to pay dividends on its common stock.

(10) Employee Benefits

As a result of the merger and the associated transfer of the pension and other post-employment benefits ("OPEB") assets and liabilities to FairPoint, the Company is
remeasuring its pension and OPEB assets and liabilities as of April 1, 2008. This measurement is based on a 6.80% discount rate (increase of 30 basis points), as well as certain other valuation
assumption modifications, and is expected to result in immaterial changes to the pension and OPEB balances.

27

---



FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(10) Employee Benefits (Continued)

The
net periodic benefit (income) cost related to the Company's pension plans is $0.1 million for the quarter ended September 30, 2008. The net periodic benefit (income)
cost related to the Company's post-retirement healthcare plans is $6.6 million for the quarter ended September 30, 2008. Because prior to March 31, 2008 the Northern
New England business' operating expenses were determined predominantly through allocations, separate identification of the benefit costs for these businesses are not readily available.

Components
of the net periodic benefit (income) cost related to the Company's pension and post-retirement healthcare plans for the quarter ended September 30, 2008 are
presented below.

In Millions

Qualified
Pension

Post-retirement
HealthService cost

$
2.2

$
2.6Interest cost


2.9


2.7Expected return on plan assets


(5.0
)

0.0Amortization of prior service cost


0.0


1.1Amortization of actuarial (gain) loss


0.0


0.2Net periodic benefit cost

$
0.1

$
6.6


In
2008, the Company does not plan to make a contribution to the qualified pension plans, but it does expect to incur $0.1 million in post-retirement
healthcare plan expenditures.

For
the nine months ended September 30, 2008, the actual loss on the pension plan assets has been approximately 14.2%. Net periodic benefit cost for 2008 assumes a weighted
average annualized expected return on plan assets of approximately 8.3%. Should our actual return on plan assets continue to be significantly lower than our expected return assumption, our net
periodic benefit cost will increase in future periods and we may be required to contribute additional funds to our pension plans after 2009.

(11) Comprehensive Income

Comprehensive income consists of net income and other gains and losses affecting shareholders' investment that, under GAAP, are excluded from net income.

Changes
in the components of Other Comprehensive Income were as follows (in thousands):

Three months ended
September 30,

Nine months ended
September 30,2008

2007

2008

2007Net income

$
(25,109
)
$
13,810

$
7,548

$
38,559Other comprehensive income (loss), net of taxes:Defined benefit pension and post-retirement plans








(78,725
)

Total comprehesive (loss) income

$
(25,109
)
$
13,810

$
(71,177
)
$
38,559


Defined
benefit pension and post-retirement plan activity during the first quarter of 2008 included $78.7 million in connection with the merger, which
is reflected as a reduction to Accumulated Other Comprehensive Loss. This amount represents the allocation of previously existing plan assets, obligations and prior service costs to the surviving
benefit plans upon merger.

28

---



FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(12) Earnings Per Share

Earnings per share has been computed in accordance with SFAS No. 128,Earnings Per Share. Basic earnings per share is computed by
dividing net income by the weighted average number of shares of common stock outstanding for the period. Except when the effect would be anti-dilutive, the diluted earnings per share
calculation calculated using the treasury stock method includes the impact of stock units, shares of non-vested common stock and shares that could be issued under outstanding stock
options. The weighted average number of common shares outstanding for all periods presented have been restated to reflect the issuance of 53,760,623 shares to the stockholders of Spinco in connection
with the merger.

The
following table provides a reconciliation of the common shares used for basic earnings per share and diluted earnings per share (in thousands):

Three months ended
September 30,

Nine months ended
September 30,2008

2007

2008

2007Weighted average number of common shares used for basic earnings per share


88,999


53,761


71,358


53,761Effect of potential dilutive shares








1,415


Weighted average number of common shares and potential dilutive shares used for diluted earnings per share


88,999


53,761


72,773


53,761Anti-dilutive shares excluded from the above reconciliation


2,894





282





(13) Fair Value Measurements

SFAS No. 157,Fair Value Measurements(SFAS No. 157) defines fair value, establishes a framework for measuring fair value
and establishes a hierarchy that categorizes and prioritizes the sources to be used to estimate fair value. SFAS No. 157 also expands financial statement disclosures about fair value
measurements. On February 12, 2008, the FASB issued FASB Staff Position (FSP) 157-2, which delays the effective date of SFAS No. 157 for one year for all nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company elected a partial deferral of SFAS
No. 157 under the provisions of FSP 157-2 related to the measurement of fair value used when evaluating goodwill, investments, other intangible assets and other
long-lived assets for impairment and valuing asset retirement obligations and liabilities for exit or disposal activities. The Company is
currently evaluating the impact of FSP 157-2 on its financial statements. The impact of partially adopting SFAS No. 157 effective January 1, 2008 was not material to the
Company's financial statements.

29

---



FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(13) Fair Value Measurements (Continued)

The
following table summarizes the Company's financial assets and liabilities measured at fair value on a recurring basis (at least annually) as of September 30, 2008 (in
thousands):

September 30,
2008

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)Prepaid pension assets (1)

$
69,874

$
69,874

$


$
Interest rate swap agreements (2)


(36,557
)




(36,557
)

Employee benefit obligations (1)


(186,775
)




(186,775
)




---

(14) Litigation and Regulatory Commitments

From time to time, the Company is involved in litigation and regulatory proceedings arising out of its operations. Management believes that the Company is not currently a party to any
litigation or regulatory proceedings, the adverse outcome of which, individually or in the aggregate, would have a material adverse effect on the Company's financial position or results of operations.

The
Company is subject to the orders issued by the state regulatory authorities in Maine, New Hampshire and Vermont in connection with their approval of the merger which provide for,
among other things:



30

---



FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(14) Litigation and Regulatory Commitments (Continued)



31

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

The
following discussion should be read in conjunction with the financial statements of the Company and the notes thereto. The following discussion includes certain forward-looking
statements. For a discussion of important factors, which could cause actual results to differ materially from the results referred to in the forward-looking statements, see Exhibit 99.1 to this
Quarterly Report and "Special Note Concerning Forward-Looking Statements."

Overview

On March 31, 2008, the merger between Spinco and FairPoint was completed. In connection with the merger and in accordance with
the terms of the merger agreement, FairPoint issued 53,760,623 shares of common stock to Verizon stockholders. Prior to the merger, the Verizon Group engaged in a series of restructuring transactions
to effect the transfer of specified assets and liabilities of the Northern New England business to Spinco and the entities that became Spinco's subsidiaries. Spinco was then spun off from Verizon
immediately prior to the merger. While FairPoint was the surviving entity in the merger, for accounting purposes Spinco is deemed to be the acquirer. As a result, for the nine months ended
September 30, 2008, the statement of operations and the financial information derived from the statement of operations in this Quarterly Report reflect the consolidated
financial results of the Company by including the financial results of the Northern New England business for the three months ended March 31, 2008, the financial results of Spinco for the six
months ended September 30, 2008 and the financial results of FairPoint for the six months ended September 30, 2008. The statement of operations and the financial information derived from
the statement of operations for the six months ended September 30, 2008 in this Quarterly Report reflects the actual results of the consolidated Company (FairPoint and Spinco) for such period.
The balance sheet and financial information derived from the balance sheet in this Quarterly Report reflect the consolidated assets and liabilities of Legacy FairPoint and Spinco at
September 30, 2008. Certain assets and liabilities of the Northern New England business (principally related to pension, other post-employment benefits and associated deferred
taxes) were not distributed to Spinco prior to the merger. The statements of operations in this Quarterly Report may not be indicative of the Company's future results. For more information, see
note 1 to the "Condensed Consolidated Financial Statements."

We
are the eighth largest wireline telephone company in the United States, based on number of access lines as of September 30, 2008. We operate in 18 states with approximately
1.8 million access line equivalents (including voice access lines and high-speed data lines, which include DSL, fiber-to-the-premises, wireless
broadband and cable modem) as of September 30, 2008. We offer an array of services, including local and long distance voice, data, Internet and broadband product offerings to residential and
business customers, primarily in northern New England.

As
our primary source of revenues, access lines are an important element of our business. Over the past several years, communications companies, including Legacy FairPoint and the
Northern New England business, have experienced a decline in access lines due to increased competition, the introduction of DSL services (resulting in customers substituting DSL for a second line) and
challenging economic conditions. During the period under which we are operating on the transition services agreement, we have limited ability to change current product offerings. Once we have
transitioned to our own systems, we expect to be able to modify bundles and prices to be more competitive in the marketplace.

Our
board of directors has adopted a dividend policy that reflects our judgment that our stockholders would be better served if we distributed a substantial portion of the cash generated
by our business in excess of operating needs, interest and principal payments on our indebtedness, dividends on future senior classes of our capital stock, if any, capital expenditures, taxes and
future reserves, if any, as regular quarterly dividend payments to the holders of our common stock, rather than retaining

32

---



that
cash and using it for other purposes. However, our board of directors may, in its discretion, amend or repeal this dividend policy to decrease the level of dividends provided for or discontinue
entirely the payment of dividends. As a condition to the approval of the merger by state regulatory authorities, we have agreed to be subject to reductions in our dividend rate and certain other
restrictions on the payment of dividends. Our annual dividend rate may not exceed $1.03 per share until certain conditions contained in the state regulatory orders approving the merger no longer
apply. In addition to the conditions and restrictions imposed by the state regulatory orders, financial covenants in our credit
facility and the indenture governing the notes also restrict our ability to pay dividends, and certain of these restrictions may be more restrictive than the conditions and restrictions imposed by the
state regulatory orders. See "Item 2. Unregistered Sales of Equity Securities and Use of ProceedsRestrictions on Payment of Dividends."

We
are subject to regulation primarily by federal and state governmental agencies. At the federal level, the FCC generally exercises jurisdiction over facilities and services of
communications common carriers, such as us, to the extent those facilities are used to provide, originate or terminate interstate or international communications. State regulatory commissions
generally exercise jurisdiction over common carriers' facilities and services to the extent those facilities are used to provide, originate or terminate intrastate communications. In addition,
pursuant to the Telecommunications Act of 1996, which amended the Communications Act of 1934, state and federal regulators share responsibility for implementing and enforcing the domestic
pro-competitive policies introduced by that legislation.

FairPoint's
historical operations and the operations of the Northern New England business operate under different regulatory regimes in certain respects. For example, concerning
interstate access, all of the pre-merger regulated interstate services of FairPoint were regulated under a rate-of-return model, while all of the
rate-regulated interstate services provided by the Northern New England business were regulated under a price cap model. FairPoint has obtained permission to continue to operate under this
regime until the FCC completes its general review of whether to modify or eliminate the "all-or-nothing" rule. Without this permission, the
all-or-nothing rule would require that all of our regulated operations be operated under the price cap model for federal regulatory purposes. In addition, while all of our
operations generally are subject to obligations that apply to all local exchange carriers, our non-rural operations are subject to additional requirements concerning interconnection,
non-discriminatory network access for competitive communications providers and other matters, subject to substantial oversight by state regulatory commissions. In addition, the FCC has
ruled that the Northern New England business must comply with the regulations applicable to the Bell Operating Companies. The rural and non-rural operations are also subject to different
regimes concerning universal service.

The
preceding summary does not describe all present and proposed federal, state and local legislation and regulations affecting the communications industry. Some legislation and
regulations are or could in the future be the subject of judicial proceedings, legislative hearings and administrative proposals which could change the manner in which this industry operates. Neither
the outcome of any of these developments, nor their potential impact on us, can be predicted at this time. Regulation can change rapidly in the communications industry, and such changes may have an
adverse effect on us in the future. For more information about the regulations governing our operations see "Part 1.Item 1.BusinessRegulatory
Environment" in our Annual Report on Form 10-K for the year ended December 31, 2007.

Effective
April 1, 2008, we entered into labor agreements with the local chapters of the International Brotherhood of Electrical Workers and the Communications Workers of America,
which represent our union employees subject to collective bargaining agreements in northern New England. These new
labor agreements assumed the existing Verizon labor agreements and extended the term of those agreements through August 2, 2013. As a result of these new agreements, we are
re-measuring our pension and OPEB assets and liabilities to reflect changes to the collective bargaining agreement.

33

---



We
are in the process of building new systems and processes to replace those used by Verizon to operate and support the network and back office in Maine, New Hampshire and Vermont.
Currently, these services are being provided by Verizon under the transition services agreement. We currently expect to cut over from the transition services agreement by the end of January 2009.
However, as part of the state regulatory orders approving the merger, a third party monitor must review our progress against certain acceptance criteria. We must satisfactorily meet these
predetermined criteria in order for the third party monitor to recommend approval of the cutover.

Recent Developments



On March 31, 2008, in accordance with the terms of the merger agreement, Spinco merged with and into FairPoint. Following the
completion of the merger, the separate existence of Spinco ceased. Based on a calculation set forth in the merger agreement, Verizon stockholders received 53,760,623 shares of common stock of
FairPoint, as the surviving corporation. As of the closing of the merger on March 31, 2008 (and prior to the elimination of fractional shares), Verizon stockholders collectively owned
approximately 60% and Legacy FairPoint stockholders collectively owned approximately 40% of the shares of our common stock on a fully diluted basis (excluding treasury stock and certain specified
options, restricted stock units, restricted units and restricted shares outstanding). For accounting purposes, Spinco is treated as the acquirer in the merger. For more information see note 1
to the "Condensed Consolidated Financial Statements."



Prior to the merger, the Verizon Group engaged in a series of restructuring transactions to effect the transfer of specified assets and
liabilities of the local exchange business of Verizon New England in Maine, New Hampshire and Vermont and the customers of the Verizon Group's related long distance and Internet service provider
businesses in those states to Spinco and the entities that became Spinco's subsidiaries. In connection with these restructuring transactions, and immediately prior to closing of the merger on
March 31, 2008, the Verizon Group contributed certain of those assets and all of the direct and indirect equity interests of those entities to Spinco in exchange for:



As
a result of these transactions, the Verizon Group received $1.7 billion of combined cash and principal amount of notes.

The
Verizon Group also contributed approximately $316 million in cash to Spinco at the time of the spin-off, in addition to the amount of working capital that it was
required to contribute pursuant to the distribution agreement that was in effect prior to the merger. During the third quarter of 2008, we settled the working capital adjustment with Verizon,
resulting in an additional contribution to us of approximately $29.0 million from Verizon. In connection with this working capital settlement, the Company paid Verizon $66.3 million for
certain payables (offset by any receivables) owed to Verizon affiliates.

After
the contribution and immediately prior to the merger, Verizon spun off Spinco by distributing all of the shares of Spinco common stock to a third-party distribution agent to be
held collectively for the
benefit of Verizon stockholders. We refer collectively to the transactions described above as the spin-off.

34

---





Verizon exchanged the notes that were issued by Spinco to the Verizon Group in connection with the contribution for certain outstanding
debt obligations of Verizon, thereby reducing the Verizon Group's outstanding indebtedness. We refer collectively to these transactions as the debt exchange.



After the consummation of the debt exchange, the notes were sold through a private offering. Following consummation of the merger, the
Company assumed all obligations under the notes. We collectively refer to these transactions as the notes offering.



Immediately prior to the merger, FairPoint and Spinco entered into a $2,030 million senior secured credit facility, consisting
of a non-amortizing revolving facility in an aggregate principal amount of $200 million, a senior secured term loan A facility in an aggregate principal amount of
$500 million, a senior secured term loan B facility in the aggregate principal amount of $1,130 million and a delayed draw term loan facility in an aggregate principal amount of
$200 million. Spinco drew $1,160 million under the new term loan immediately prior to the spin-off, and then FairPoint drew $470 million under the new term loan and
$5.5 million under the new delayed draw term loan concurrently with the closing of the merger.

Upon
the closing of the transactions, the borrowings under our credit facility were primarily used as follows:

By
Spinco:



By
FairPoint:



Prior
to September 12, 2008, we had borrowed $100 million under the new delayed draw term loan. In response to uncertain financial market conditions, we borrowed the
remaining $100 million under this facility on September 12, 2008. These funds will be used for certain capital expenditures and other expenses associated with the merger.

We
also borrowed $100 million of the $200 million available under the revolving credit facility on September 12, 2008. On October 5, 2008 the administrative
agent under the credit facility filed for bankruptcy. The administrative agent accounted for thirty percent of the loan commitments under the revolving credit facility. After this borrowing, the
Company had fully drawn the $200 million available under its delayed draw term loan. Accordingly, we expect that the remaining amount available under the revolving credit facility is
$59.7 million, net of outstanding letters of credit. We are currently pursuing a change in the administrative agent.

We
collectively refer to the merger, the spin-off, the debt exchange, the notes offering, FairPoint's and Spinco's entry into the credit facility and the use of the
borrowings thereunder (as described above) as the transactions.

35

---







In connection with the merger, on January 15, 2007 we also entered into (i) a Transition Services Agreement, as amended
on March 31, 2008 (the "transition services agreement"), with certain subsidiaries of Verizon, (ii) an Employee Matters Agreement (the "employee matters agreement"), with Verizon and
Spinco, (iii) a Tax Sharing Agreement (the "tax sharing agreement"), with Verizon and Spinco, and (iv) a Master Services Agreement, as amended on July 6, 2007 and
February 25, 2008 (the "master services agreement"), with Capgemini U.S. LLC, or Capgemini. The transition services agreement allows for the provision of certain services on an interim
basis following the closing of the merger. The employee matters agreement allows for the uninterrupted continuity of employment, compensation and benefits of Spinco employees. Through the master
services agreement, we are replicating and/or replacing certain existing Verizon systems during a phased period through the end of January 2009.

Regulatory Conditions

We are subject to the orders issued by the state regulatory authorities in Maine, New Hampshire and Vermont in connection with their
approval of the merger which provide for, among other things:



36

---





These
orders also limited rates for existing retail, wholesale and DSL services for fixed periods following the closing of the merger and imposed certain obligations on the Northern New
England business related to the provision of wholesale services.

The
terms of the orders issued by the New Hampshire Public Utilities Commission (the "NHPUC") and the Maine Public Utilities Commission (the "MPUC") also contain limitations on our
ability to make additional business acquisitions following the closing of the merger. Pursuant to the NHPUC order, we are prohibited from consummating business acquisitions with an aggregate
transaction value in excess of $100.0 million during a period of one year following the closing of the merger, and for a period of up to three years following the closing of the merger if
certain financial tests are not met. In addition, the order issued by the NHPUC also prohibits us from consummating any acquisition until we meet specified service quality benchmarks. Pursuant to the
MPUC order, we are prohibited from consummating any business acquisition with a transaction value in excess of $100.0 million for a period of one year following the cutover and for a period of
up to three years following the closing of the merger if certain financial tests are not met.

We
have agreed to the appointment of an independent third-party monitor for the cutover process contemplated by the transition services agreement. The monitor will consult with
representatives of the Vermont Department of Public Service (the "VDPS"), the Maine Public Utilities Commission (the "MPUC"), and the NHPUC. The monitor will evaluate our testing and cutover readiness
process to evaluate our readiness to support our operations after the cutover from the systems that will be provided by the Verizon Group during the period of the transition services agreement. If the
monitor, the VDPS, the MPUC or the NHPUC disagree with our decision on the timing of the cutover, the cutover could be delayed.

The
parties also obtained the approval of the FCC, in an order dated January 9, 2008, which imposed no additional conditions.

Revenues

We derive our revenues from:



37

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The
following table summarizes revenues and the percentage of revenues from the listed sources (in thousands, except for percentage of revenues data):

Revenues

% of RevenuesThree months ended
September 30,

Nine months ended
September 30,

Three months ended
September 30,

Nine months ended
September 30,2008

2007

2008

2007

2008

2007

2008

2007Revenue Source:Local calling services

$
135,587

$
140,282

$
406,202

$
422,038


41
%

46
%

42
%

47
%Interstate access


80,382


71,878


235,111


216,398


24
%

23
%

25
%

24
%Intrastate access


12,165


9,230


33,970


23,302


4
%

3
%

4
%

3
%Long distance services


50,161


46,330


140,518


131,803


15
%

15
%

15
%

15
%Data and Internet services


32,873


21,681


85,445


61,602


10
%

7
%

9
%

7
%Universal Service Fund high-cost loop


9,375


5,549


24,412


16,904


3
%

2
%

3
%

2
%Other services


7,712


11,308


29,701


31,567


3
%

4
%

2
%

2
%Total

$
328,255

$
306,258

$
955,359

$
903,614


100
%

100
%

100
%

100
%


Operating Expenses

Our operating expenses are categorized as operating expenses, consisting of cost of services and sales, selling, general and
administrative expenses, and depreciation and amortization.

38

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Because
the Northern New England business has been operating as the local exchange carrier of Verizon in Maine, New Hampshire and Vermont, and not as a standalone telecommunications
provider, the historical operating results of the Northern New England business for the three months ended March 31, 2008 and the nine months ended September 30, 2007 include
approximately $58 million and $193.8 million, respectively, of expenses for services provided by the Verizon Group, including information systems and information technology, shared
assets including office space outside of New England, supplemental customer sales and service and operations. Following the merger, and after a transition period which is expected to be ten months, we
will receive these services from internal operations or from third-party service providers and not from Verizon.

Results of Operations

Three Months Ended September 30, 2008 Compared with Three Months Ended September 30, 2007

The
following table sets forth the percentages of revenues represented by selected items reflected in the statements of operations. The year-to-year comparisons
of financial results are not necessarily indicative of future results (in thousands, except percentage of revenues data):

Three months ended September 30,2008

% of Revenues

2007

% of RevenuesRevenues

$
328,255


100
%
$
306,258


100
%Operating expensesCost of services and sales


152,579


46
%

141,645


46
%Selling, general and administrative


104,679


32
%

67,340


22
%Depreciation and amortization


60,768


19
%

58,360


19
%Total operating expenses


318,026


97
%

267,345


87
%Income from operations


10,229


3
%

38,913


13
%Interest expense


(49,665
)

(15)
%

(17,052
)

(6)
%Other income


(2,849
)

(1)
%

852


0
%Income (loss) before income taxes


(42,285
)

(13)
%

22,713


7
%Income tax (expense) benefit


17,176


5
%

(8,903
)

(3)
%Net income (loss)

$
(25,109
)

(8)
%
$
13,810


4
%


39

---



Revenues
increased $22.0 million to $328.3 million in 2008 compared to 2007. The acquisition of Legacy FairPoint contributed $65.7 million to total revenues in the
three months ended September 30, 2008. Excluding the impact of the merger, combined total revenue would have decreased $43.7 million. We derive our revenues from the following sources:

Local calling services.Local calling services revenues decreased $4.7 million to $135.6 million during the third quarter of 2008 compared to the
same period in 2007. Legacy FairPoint contributed $16.6 million to local revenue in the three months ended September 30, 2008. Excluding the impact of the merger, local calling services
revenues would have decreased $21.3 million compared to the prior year. This decrease is primarily due to lower demand and usage of our basic local exchange and accompanying services as well as
a mandated local rate decrease in Maine. Total voice access lines in service decreased 11.2% at September 30, 2008 as compared to September 30, 2007. The revenue decline was mainly
driven by the effects of competition and technology substitution.

Interstate access.Interstate access revenues increased $8.5 million to $80.4 million in the third quarter of 2008 compared to the third quarter of
2007. Legacy FairPoint contributed $15.2 million to interstate access revenues in the three months ended September 30, 2008. Excluding the impact of the merger, interstate access
revenues would have decreased by $6.7 million. Interstate switched minutes of use declined 9.9% in the third quarter of 2008 compared to the same period in 2007, reflecting the impact of access
line loss and technology substitution. The decline in revenues due to the decrease in switched minutes of use and access lines was partially offset by an increase in special access revenues,
reflecting continuing demand in the business market for high-capacity, high speed data services. Also contributing to the decline in interstate revenue in the third quarter were
$1.4 million of prior period revenue adjustments related to the second quarter of 2008.

Intrastate access.Intrastate access revenues increased $2.9 million to $12.2 million in the third quarter of 2008 compared to the same period in
2007. Legacy FairPoint contributed $7.7 million to intrastate access revenues in the three months ended September 30, 2008. Excluding the impact of the merger, intrastate access revenues
would have decreased $4.8 million. The decline in intrastate revenue in the third quarter was also partially due to $0.6 million of prior period revenue adjustments related to the second
quarter of 2008. The remaining decrease is primarily due to a decrease in minutes of use in the third quarter of 2008 compared to the same period in 2007.

Long distance services.Long distance services revenues increased $3.8 million to $50.2 million in the third quarter of 2008 compared to the same
period in 2007. Legacy FairPoint contributed $7.9 million to long distance in the three months ended September 30, 2008. Excluding the impact of the merger, long distance revenues would
have decreased $4.1 million. The decrease was primarily attributable to a decrease in the number of subscriber lines in 2008, partially offset by increased revenue from bundled product
offerings designed to retain customers and generate more revenue.

Data and Internet services.Data and Internet services revenues increased $11.2 million to $32.9 million in the third quarter of 2008 compared to the
same period in 2007. Legacy FairPoint contributed $9.4 million to data and Internet services revenues in the three months ended September 30, 2008. Excluding the impact of the merger,
data and Internet services revenues would have increased $1.8 million. The increase was primarily driven by an increase in the number of high speed data customers as we continue to actively
market our high speed data services. We have added 6,662 new subscribers since September 30, 2007 for a total of 294,134 subscribers at September 30, 2008.

Universal Service Fund high-cost loop support.Universal Service Fund high-cost loop payments increased $3.8 million to
$9.4 million in the third quarter of 2008 compared to the same period in 2007. Legacy FairPoint contributed $4.5 million to universal service high-cost loop support revenue
in

40

---



the
three months ended September 30, 2008. Excluding the impact of the merger, Universal Service Fund high-cost loop support revenue would have decreased by $0.7 million
compared to the prior year.

Other services.Other services revenues decreased $3.6 million to $7.7 million in the third quarter of 2008 compared to the same period in 2007.
Legacy FairPoint contributed $4.4 million to other services revenues in the three months ended September 30, 2008. Excluding the impact of the merger, other services revenues would have
decreased $8.0 million of which $3.3 million is attributable to prior period revenue adjustments related to the second quarter of 2008.



Cost of services and sales.Cost of services and sales increased $10.9 million to $152.6 million in the third quarter of 2008
compared
to the same period in 2007. Legacy FairPoint contributed $26.0 million to cost of services and sales expenses in the three months ended September 30, 2008. Also included in cost of
services and sales for the three months ended September 30, 2008 are $18.9 million of transition services agreement expenses. Excluding the impact of the merger and the transition
services agreement, cost of services and sales would have declined $34.0 million. The decline reflects the elimination of costs allocated from Verizon affiliates prior to close, which has more
than offset direct costs incurred by the Company to operate the Northern New England business. The decrease in cost of services and sales in the third quarter of 2008 was partially offset by
$2.6 million of prior period adjustments related to the second quarter of 2008.

Selling, general and administrative.Selling, general and administrative ("SG&A") expenses increased
$37.3 million to $104.7 million in the third quarter of 2008 compared to the same period in 2007. Legacy FairPoint contributed $13.1 million to SG&A expenses in the three months
ended September 30, 2008. Included in SG&A expenses for the three months ended September 30, 2008 are $30.5 million of transition services agreement expenses, $15.2 million
of one-time merger related costs (which the Company is allowed to add back to Adjusted EBITDA under its credit facility) and $5.7 million of non-cash pension and other
post-employment benefit expenses. Excluding the impact of the merger and the transition services agreement, SG&A expenses would have decreased $21.5 million. The decrease in SG&A
expenses is due primarily to the elimination of costs allocated from Verizon affiliates prior to close, which has more than offset the direct costs incurred by the Company to operate the Northern New
England business.

Depreciation and amortization.Depreciation and amortization expense increased $2.4 million to $60.8 million in the third quarter of 2008 compared to
the same period in 2007. Legacy FairPoint contributed $13.3 million to depreciation and amortization expenses in the three months ended September 30, 2008. Excluding the impact of the
merger, depreciation and amortization expense would have decreased $10.9 million. The decrease in depreciation and amortization expenses was partially due to $4.6 million of prior period
adjustments related to the second quarter of 2008. The remaining decrease is due to the maturing nature of our plant assets.



Interest expense.Interest expense increased $32.6 million to $49.7 million in the third quarter of 2008 compared to the same
period in
2007. This increase is due to the debt that we incurred upon and after closing of the merger.

Other income (expense).Other income includes principally gains and losses recognized on the change in fair market value of interest rate swap derivatives. During
the third quarter of 2008, we recognized a non-cash loss of $5.0 million related to our derivative financial instruments.

41

---



Income taxes.The effective income tax rate is the provision for income taxes stated as a percentage of income before the provision for income taxes. The effective
income tax rate in the third quarter of 2008 and 2007 was 40.6% and 39.2%, respectively.

Net income (loss).Net loss for the three months ended September 30, 2008 was $25.1 million compared to net income of $13.8 million for the
same period in 2007. The difference in net income (loss) between 2008 and 2007 is a result of the factors discussed above.

Nine Months Ended September 30, 2008 Compared with Nine Months Ended September 30, 2007

The following table sets forth the percentages of revenues represented by selected items reflected in our statements of operations. The
year-to-year comparisons of financial results are not necessarily indicative of future results (in thousands, except percentage of revenues data):

Nine months ended September 30,2008

% of Revenues

2007

% of RevenuesRevenues

$
955,359


100
%
$
903,614


100
%Operating expensesCost of services and sales


422,316


44
%

419,290


46
%Selling, general and administrative


270,085


29
%

196,545


22
%Depreciation and amortization


184,434


19
%

174,361


19
%Total operating expenses


876,835


92
%

790,196


87
%Income from operations


78,524


8
%

113,418


13
%Interest expense


(109,310
)

(11)
%

(52,871
)

(6)
%Other income


41,524


4
%

2,651


0
%Income before income taxes


10,738


1
%

63,198


7
%Income tax expense


(3,190
)

0
%

(24,639
)

(3)
%Net income

$
7,548


1
%
$
38,559


4
%


Revenues
increased $51.7 million to $955.4 million in 2008 compared to 2007. The acquisition of Legacy FairPoint contributed $131.8 million to total revenues in the
nine months ended September 30, 2008. Excluding the impact of the merger, combined total revenue would have decreased $80.1 million. We derive our revenues from the following sources:

Local calling services.Local calling services revenues decreased $15.8 million to $406.2 million during the nine months ended September 30,
2008 compared to the same period in 2007. Legacy FairPoint contributed $33.3 million to local revenue in the nine months ended September 30, 2008. Excluding the impact of the merger,
local calling service revenues would have decreased $49.1 million compared to the prior year. This decrease is primarily due to lower demand and usage of the Company's basic local exchange and
accompanying services, as reflected by a decline in total voice access lines in service of 11.2% at September 30, 2008 compared to September 30, 2007. The revenue decline was mainly
driven by the effects of competition and technology substitution.

Interstate access.Interstate access revenues increased $18.7 million to $235.1 million for the nine months ended September 30, 2008 compared
to the same period of 2007. Legacy FairPoint contributed $31.4 million to interstate access revenues in the nine months ended September 30, 2008. Excluding the impact of the merger,
interstate access revenues would have decreased by $12.7 million. Interstate switched minutes of use declined 13.0% in the nine months ended September 30, 2008 compared to the same
period in 2007, reflecting the impact of access line loss and technology substitution. The decline in revenues due to the decrease in switched minutes of use and access lines was partially offset by
an
increase in special access revenues, reflecting continuing demand in the business market for high-capacity, high speed data services.

42

---



Intrastate access.Intrastate access revenues increased $10.7 million to $34.0 million for the nine months ended September 30, 2008 compared
to the same period in 2007. Legacy FairPoint contributed $15.5 million to intrastate access revenues in the nine months ended September 30, 2008. Excluding the impact of the merger,
intrastate access revenues would have decreased $4.8 million. The remaining decrease is primarily due to a decrease in minutes of use in the nine months ended September 30, 2008 compared
to the same period in 2007.

Long distance services.Long distance services revenues increased $8.7 million to $140.5 million for the nine months ended September 30, 2008
compared to the same period in 2007. Legacy FairPoint contributed $15.5 million to long distance in the nine months ended September 30, 2008. Excluding the impact of the merger, long
distance revenues would have decreased $6.8 million. The decrease was primarily attributable to a decrease in the number of subscriber lines in 2008, partially offset by increased revenue from
bundled product offerings designed to retain customers and generate more revenue.

Data and Internet services.Data and Internet services revenues increased $23.8 million to $85.4 million for the nine months ended
September 30, 2008 compared to the same period in 2007. Legacy FairPoint contributed $18.5 million to data and Internet services revenues in the nine months ended September 30,
2008. Excluding the impact of the merger, data and Internet services revenues would have increased $5.3 million. The increase was primarily driven by an increase in the number of high speed
data customers as we continue to actively market our high speed data services. We have added 6,662 new subscribers since September 30, 2007 for a total of 294,134 subscribers at
September 30, 2008.

Universal Service Fund high-cost loop support.Universal Service Fund high-cost loop payments increased $7.5 million to
$24.4 million for the nine months ended September 30, 2008 compared to the same period in 2007. Legacy FairPoint contributed $8.7 million to universal service
high-cost loop support revenue in the nine months ended September 30, 2008. Excluding the impact of the merger, Universal Service Fund high-cost loop support revenue
would have declined by $1.2 million compared to the prior year.

Other services.Other services revenues decreased $1.9 million to $29.7 million for the nine months ended September 30, 2008 compared to the
same period in 2007. Legacy FairPoint contributed $8.8 million to other services revenues in the nine months ended September 30, 2008. Excluding the impact of the merger, other services
revenues would have decreased $10.7 million.



Cost of services and sales.Cost of services and sales increased $3.0 million to $422.3 million for the nine months ended September 30, 2008
compared to the same period in 2007. Legacy FairPoint contributed $49.7 million to cost of services and sales expenses in the nine months ended September 30, 2008. Also included in cost
of services and sales for the nine months ended September 30, 2008 are $37.8 million of transition services agreement expenses. Excluding the impact of the merger and the transition
services agreement, cost of services and sales would have decreased $84.5 million. The decline reflects the elimination of costs allocated from Verizon affiliates prior to close, which has more
than offset direct costs incurred by the Company to operate the Northern New England business.

Selling, general and administrative.SG&A expenses increased $73.5 million to $270.1 million for the nine months ended September 30, 2008
compared to the same period in 2007. Legacy FairPoint contributed $29.7 million to SG&A expenses in the nine months ended September 30, 2008. Included in SG&A expenses for the nine
months ended September 30, 2008 are $61.1 million of transition services agreement expenses, and $25.3 million of one-time merger related costs (which the Company is

43

---



allowed
to add back to Adjusted EBITDA under its credit facility). Excluding the impact of the merger and the transition services agreement, SG&A expenses would have decreased $42.6 million.
The decline reflects the elimination of costs allocated from Verizon affiliates prior to close, which has more than offset direct costs incurred by the Company to operate the Northern New England
business.

Depreciation and amortization.Depreciation and amortization expense increased $10.1 million to $184.4 million for the nine months ended
September 30, 2008 compared to the same period in 2007. Legacy FairPoint contributed $27.1 million to depreciation and amortization expenses in the nine months ended September 30,
2008. Excluding the impact of the merger, depreciation and amortization would have decreased $17.0 million. The decrease is due to the maturing nature of our plant assets.



Interest expense.Interest expense increased $56.4 million to $109.3 million for the nine months ended September 30, 2008 compared to the same
period in 2007. This increase is due to the debt that we incurred upon and after closing of the merger.

Other income.Other income includes principally gains recognized on the change in fair market value of interest rate swap derivatives. During the nine months ended
September 30, 2008, we recognized non-cash gains of $38.1 million related to our derivative financial instruments.

Income taxes.The effective income tax rate is the provision for income taxes stated as a percentage of income before the provision for income taxes. The effective
income tax rate for the nine months ended September 30, 2008 and 2007 was 29.7% and 39.0%, respectively.

Net income.Net income for the nine months ended September 30, 2008 was $7.5 million compared to $38.6 million for the same period in 2007.
The difference in net income between 2008 and 2007 is a result of the factors discussed above.



The Company does not have any off-balance sheet arrangements.



The Company's critical accounting policies are as follows:



Revenue Recognition.We recognize service revenues based upon usage of our local exchange network and facilities and contract fees. Fixed fees for local telephone,
long distance, Internet services and certain other services are recognized in the month the service is provided. Revenue from other services that are not fixed fee or that exceed contracted amounts is
recognized when those services are provided. Non-recurring customer activation fees, along with the related costs up to, but not exceeding the activation fees, are deferred and amortized
over the customer relationship period.

Accounting for Pension and Other Post-retirement Benefits.Some of our employees participate in our pension plans and other post-retirement
benefit plans. In the aggregate, the fair value of pension

44

---



plan
assets exceeds pension plan benefit obligations, which contribute to pension plan income. Other post-retirement benefit plans have larger benefit obligations than plan assets,
resulting in expense. Significant pension and other post-retirement benefit plan assumptions, including the discount rate used, the long term rate of return on plan assets, and medical
cost trend rates are periodically updated and impact the amount of benefit plan income, expense, assets and obligations.

Accounting for Income Taxes.Our current and deferred income taxes are affected by events and transactions arising in the normal course of business, as well as in
connection with the adoption of new accounting standards and non-recurring items. Assessment of the appropriate amount
and classification of income taxes is dependent on several factors, including estimates of the timing and realization of deferred income tax assets and the timing of income tax payments. Actual
payments may differ from these estimates as a result of changes in tax laws, as well as unanticipated future transactions affecting related income tax balances. We account for tax benefits taken or
expected to be taken in our tax returns in accordance with FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes(FIN 48), which requires the use of a two step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in
income tax positions.

Depreciation of Property, Plant and Equipment.We recognize depreciation on property, plant and equipment principally on the composite group remaining life method
and straight-line composite rates over estimated useful lives ranging from three to 50 years. This method provides for the recognition of the cost of the remaining net investment in
telephone plant, less anticipated net salvage value (if any), over the remaining asset lives. This method requires the periodic revision of depreciation rates. Changes in the estimated useful lives of
property, plant and equipment or depreciation methods could have a material effect on our results of operations.

Valuation of long-lived assets, including goodwill.We review our long-lived assets, including goodwill, for impairment whenever events or
changes in circumstances indicate that the carrying value may not be recoverable. Several factors could trigger an impairment review, such as:



Goodwill
was $625.0 million at September 30, 2008. We have recorded intangible assets related to the acquired companies' customer relationships and trade names of
$233.0 million as of September 30, 2008. As of September 30, 2008, there was $10.9 million of accumulated amortization recorded. These intangible assets are being amortized
over a weighted average of approximately 9.7 years. The intangible assets are included in intangible assets on our consolidated balance sheet.

We
are required to perform a impairment review of goodwill as required by SFAS No. 142, "Goodwill and Other Intangible Assets" annually or when impairment indicators are noted.

Accounting for software development costs.We capitalize certain costs incurred in connection with developing or obtaining internal use software in accordance with
American Institute of Certified Public Accountants Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use"
("SOP 98-1"). Capitalized costs include direct development costs associated with internal use software, including direct labor costs and external costs of materials and services.
Costs incurred during the preliminary project stage, as well as maintenance and training costs are expensed as incurred.

45

---





In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 addresses how
companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles. As a result of
SFAS 157 there is now a common definition of fair value to be used throughout GAAP. The FASB believes that the new standard will make the measurement of fair value more consistent and
comparable and improve disclosures about those measures. The provisions of SFAS 157 were to be effective for fiscal years beginning after November 15, 2007. On February 6, 2008,
the FASB agreed to defer the effective date of SFAS 157 for one year for certain nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually). Effective for fiscal year 2008, we adopted SFAS 157 except as it applies to those nonfinancial assets and nonfinancial
liabilities. The adoption did not have any financial impact on our results of operations and financial position.

In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilitiesincluding an amendment of FASB Statement
No. 115" ("SFAS 159"). SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement of certain financial assets and liabilities
under an instrument-by-instrument election. Subsequent measurements for the financial assets and liabilities an entity elects to measure at fair value will be recognized in the
results of operations. SFAS 159 also establishes additional disclosure requirements. This standard is effective for fiscal years beginning after November 15, 2007. Effective for fiscal
year 2008, the Company has adopted the provisions of SFAS 159. The adoption did not have any financial impact on the Company's results of operations and financial position.

In
December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS 141R"). SFAS 141R replaces SFAS 141 and establishes principles and
requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the
goodwill acquired. SFAS 141R also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. This standard is
effective for fiscal years beginning after December 15, 2008 and early adoption is prohibited.

In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements" ("SFAS 160"). SFAS 160 establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest,
changes in a parent's ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes reporting requirements
that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This standard is effective for fiscal
years beginning after December 15, 2008 and early adoption is prohibited.

In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). SFAS 161 requires companies with
derivative instruments to disclose information that should enable financial statement users to understand how and why a company uses derivative instruments, how derivative instruments and related
hedged items are accounted for under FASB Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" and how derivative instruments and related hedged items affect a
company's financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008.

46

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Liquidity and Capital Resources

Our short-term and long-term liquidity needs arise primarily from: (i) interest payments on our
indebtedness; (ii) capital expenditures, including those mandated by the state regulatory orders approving the merger; (iii) working capital requirements as may be needed to support the
growth of our business; (iv) dividend payments on our common stock, to the extent permitted by the agreements governing our indebtedness, including our credit facility and the indenture
governing the notes and by restrictions imposed by state regulatory authorities as conditions to their approval of the merger; (v) obligations under our employee benefit plans; and
(vi) potential acquisitions.

We
anticipate that our primary source of liquidity will be cash flow from operations and cash on hand as of September 30, 2008. We also have available funds under our revolving
credit facility, subject to certain conditions.

Our
board of directors has adopted a dividend policy which reflects our judgment that our stockholders would be better served if we distributed a substantial portion of our cash excess
to them instead of retaining it in our business. Since Legacy FairPoint's initial public offering in February 2005 until the date of the merger, Legacy FairPoint has paid dividends at an annual rate
of $1.59 per share. As a result of the conditions imposed by state regulatory authorities in connection with the approval of the merger, until the date that certain financial and other requirements
set forth in the state regulatory orders approving the mergerwe refer to this date as the termination of conditions datethe annual dividend rate paid by us on our common
stock may not exceed $1.03 per share. Financial covenants in our credit facility and the indenture governing the notes also restrict our ability to pay dividends. See "Item 2. Unregistered
Sales of Equity Securities and Use of ProceedsRestrictions on Payment of Dividends."

Our
$2,030 million senior secured credit facility consists of a non-amortizing revolving facility in an aggregate principal amount of $200 million, a senior
secured term loan A facility in an aggregate principal amount of $500 million, a senior secured term loan B facility in the aggregate principal amount of $1,130 million and a delayed
draw term loan facility in an aggregate principal amount of $200 million. Spinco drew $1,160 million under the term loan immediately prior to the spin-off, and then FairPoint
drew $470 million under the term loan and $5.5 million under the delayed draw term loan concurrently with the closing of the merger. Subsequent to March 31, 2008, the Company drew
the remaining $194.5 million under the delayed draw term loan, resulting in a total outstanding balance of $200.0 million under the delayed draw term loan as of September 30,
2008. Also, on September 12, 2008, the Company borrowed $100.0 million under the $200.0 million revolving credit facility resulting in a total outstanding balance of
$100.0 million under the revolving credit facility as of September 30, 2008.

On
October 5, 2008 the administrative agent under the credit facility filed for bankruptcy. The administrative agent accounted for thirty percent of the loan commitments under the
revolving credit facility. Accordingly, we expect that the remaining amount available under our revolving credit facility at September 30, 2008 is $59.7 million, net of outstanding
letters of credit.

The
revolving credit facility has a swingline subfacility in the amount of $10 million and a letter of credit subfacility in the amount of $30 million, which allows for
issuances of standby letters of credit for our account. Due to the bankruptcy of the administrative agent under the credit facility, we expect that the availability under the swingline subfacility and
letter of credit subfacility will be $7 million and $21 million, respectively. Our credit facility also permits interest rate and currency exchange swaps and similar arrangements that we
may enter into with the lenders under our credit facility and/or their affiliates.

The
term loan B facility and the delayed draw term loan will mature in March 2015 and the revolving credit facility and the term loan A facility will mature in March 2014. Each of the
term loan

47

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A
facility, the term loan B facility and the delayed draw term loan are repayable in quarterly installments in the manner set forth in our credit facility.

Interest
rates for borrowings under our credit facility are, at our option, for the revolver and for the term loans at either (a) the Eurodollar rate, as defined in the credit
agreement, plus an applicable margin or (b) the base rate, as defined in the credit agreement, plus an applicable margin.

Our
existing credit facility contains customary affirmative covenants and also contains negative covenants and restrictions, including, among others, with respect to the redemption or
repurchase of
our other indebtedness, loans and investments, additional indebtedness, liens, capital expenditures, changes in the nature of our business, mergers, acquisitions, asset sales and transactions with
affiliates.

Borrowings
under our credit facility bear interest at variable interest rates. We entered into various interest rate swap agreements which are detailed in Note 7 of the condensed
consolidated financial statements for the three and nine months ended September 30, 2008. As a result of these swap agreements, approximately 79% of our indebtedness bore interest at fixed
rates rather than variable rates as of September 30, 2008. After these interest rate swap agreements expire, our annual debt service obligations on such portion of the term loans will vary from
year to year unless we enter into a new interest rate swap or purchase an interest rate cap or other interest rate hedge. To the extent interest rates increase in the future, we may not be able to
enter into new interest rate swaps or to purchase interest rate caps or other interest rate hedges on acceptable terms.

Spinco
issued, and we assumed in the merger, $551.0 million aggregate principal amount of the notes. The notes mature on April 1, 2018 and are not redeemable at our option
prior to April 1, 2013. Interest is payable on the notes semi-annually, in cash, on April 1 and October 1. The notes bear interest at a fixed rate of
131/8% and principal is due at maturity. These notes were issued at a discount and, accordingly, at the date of their distribution, the notes had a carrying value of
$539.8 million (principal amount at maturity of $551.0 million less discount of $11.2 million).

The
indenture governing the notes limits, among other things, our ability to incur additional indebtedness and issue certain preferred stock, repurchase our capital stock or subordinated
debt, make certain investments, create certain liens, sell certain assets or merge or consolidate with or into other companies, incur restrictions on the ability of our subsidiaries to make
distributions or transfer assets to us and enter into transactions with affiliates.

In
connection with the transactions, we used borrowings under our credit facility, as well as cash on hand, to repay in full an aggregate of $684 million of outstanding loans
under our old credit facility which bore interest at the Eurodollar rate plus 2.0% per annum, to redeem all $2.1 million aggregate principal amount of Legacy FairPoint's 117/8%
senior notes due 2013 (which were redeemed on May 1, 2008) and to repay in full $1.9 million aggregate principal amount of senior secured floating rate notes and fixed notes issued by
two of our operating subsidiaries which bore interest at a range of 8.2% to 9.2%.

For
the nine months ended September 30, 2008 and 2007, net cash provided by operating activities of continuing operations was $36.2 million and $178.5 million,
respectively. During the nine months ended September 30, 2008, in conjunction with the final working capital settlement with Verizon, we reimbursed Verizon $66.3 million related to
amounts owed for services rendered to the Northern New England business prior to the closing of the merger. At the same time, Verizon paid us $29.0 million for the final working capital
adjustment as well as one-half of the bank fees incurred in connection with the transaction financing. The $66.3 million payment to Verizon is reflected as a reduction in cash
provided by operating activities while the $29.0 million received from Verizon is reflected as an additional capital contribution by Verizon and is included in net cash provided by
financing activities. The net impact of these one-time items caused a significant decrease in net cash provided by operating activities for the nine months ended September 30, 2008.

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Net
cash used in investing activities of continuing operations was $175.7 million and $73.0 million for the nine months ended September 30, 2008 and 2007,
respectively. These cash flows primarily reflect capital expenditures of $189.2 million and $107.1 million for the nine months ended September 30, 2008 and 2007, respectively. Net
cash used in investing activities also includes acquired cash of $11.4 million for the nine months ended September 30, 2008.

Net
cash provided by (used in) financing activities from continuing operations was $307.5 million and $(105.5) million for the nine months ended September 30, 2008 and
2007, respectively. For the nine months ended September 30, 2008, net proceeds from FairPoint's issuance of long-term debt were $1,930.0 million, repayment of
long-term debt was $687.5 million and dividends to stockholders was $1,197.0 million, of which $1,160.0 million was paid to Verizon by Spinco in connection with the
merger.

We
expect our capital expenditures will be approximately $80 million to $100 million in the three months ended December 31, 2008. In addition, we expect our capital
expenditures will be approximately $180 million to $200 million in 2009. We anticipate that we will fund these expenditures through cash flows from operations, cash on hand and, if
necessary, additional borrowings under the revolving credit facility of our credit facility.

As
a condition to the approval of the transactions by state regulatory authorities, we have agreed to make capital expenditures following the completion of the merger. As a condition to
the approval of the transactions by the state regulatory authority in Maine, we agreed that, following the closing of the merger, we will make capital expenditures in Maine during the first three
years after the closing of $48 million in the first year and an average of $48 million in the first two years and $47 million in the first three years. We are also required to
expend over a five year period not less than $40 million on equipment and infrastructure to expand the availability of broadband services in Maine, which is expected to result in capital
expenditures in Maine in excess of the minimum capital expenditure requirements described above.

The
order issued by the state regulatory authority in Vermont also requires us to make capital expenditures in Vermont during the first three years after the closing of the merger in the
amount of $41 million for the first year and averaging $40 million per year in the first two years and $40 million per year in the first three years following the closing.
Pursuant to the Vermont order, we are required to remove double poles in Vermont, make service quality improvements and address certain broadband
build-out commitments under a performance enhancement plan in Vermont, using, in the case of double pole removal, $6.7 million provided by the Verizon Group and, in the case of
service quality improvements under the performance enhancement plan, $25 million provided by the Verizon Group. In Vermont we have also agreed to certain broadband build-out
milestones that require us to reach 100% broadband availability in 50% of our exchanges in Vermont, which could result in capital expenditures of $44 million in addition to the minimum capital
expenditures required by the Vermont order as set forth above.

We
are also required to make capital expenditures in New Hampshire of at least $52 million during each of the first three years after the closing of the merger and
$49 million during each of the fourth and fifth years after the closing of the merger. The amount of any shortfall in any year must be expended in the following year, and the amount of any
excess in any year may be deducted from the amount required to be expended in the following year. If any shortfall in any year exceeds $3 million, then the amount that we are required to spend
in the following year shall be increased by 150% of the amount of such shortfall. If there is any shortfall at the end of the fifth year after the closing of the merger, we will be required to spend
150% of the amount of such shortfall at the direction of the New Hampshire Public Utilities Commission. The New Hampshire Public Utilities Commission may require that a portion of these increased
capital expenditures be directed toward state programs rather than invested in our assets. We are required to spend at least $56.4 million over the 60-month period

49

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following
the closing of the merger on broadband infrastructure in New Hampshire, which is expected to result in capital expenditures in New Hampshire in excess of the minimum capital expenditure
requirements described above. We also have the availability of $49.2 million contributed to us by the Verizon Group to make capital expenditures in New Hampshire in addition to those described
above for unexpected infrastructure improvements proposed by us and approved by the New Hampshire Public Utilities Commission.

Our
ability to service our indebtedness will depend on our ability to generate cash in the future. Scheduled amortization payments will begin on the term loan A facility of our credit
facility in 2009, on the term loan B facility of our credit facility in 2010 and on the delayed draw facility in 2011. No principal payments are due on the notes prior to their maturity. We will need
to refinance all or a portion of our indebtedness on or before maturity and may not be able to refinance our indebtedness on commercially reasonable terms or at all.

We
entered into a letter agreement with Capgemini on January 17, 2008, as amended on February 28, 2008. This agreement, as amended, provides that, if, following the nine
month anniversary of the consummation of the merger, we continue to receive or request certain services under the transition services agreement, Capgemini will pay an amount not to exceed
$49.5 million of such fees for the tenth through the twelfth months, if applicable, following the consummation of the merger. In exchange for the payment of any fees under the transition
services agreement, we expect that we will issue to Capgemini either shares of our preferred stock or subordinated notes in an amount equal to the aggregate amount of such fees paid by Capgemini. The
preferred stock or subordinated notes will have a 6.75% rate of return in year one and an 8.75% rate of return in year two and each succeeding year,
which would be payable in additional shares of preferred stock or additional subordinated notes, as applicable. The preferred stock or subordinated notes issued to Capgemini will have no voting
rights, will not be convertible and will have no other rights or preferences. The preferred stock or subordinated notes will be redeemable after we meet certain financial tests and after the
expiration or termination of the Verizon systems. We currently expect to cut over from the transition services agreement by the end of January 2009. We expect to issue shares of preferred stock to
Capgemini with a liquidation preference equal to $15.5 million in exchange for Capgemini's payment of the fees under the transition services agreement for the month of January 2009. The
preferred stock is redeemable upon the satisfaction of certain conditions.

We
believe that cash generated from operations and cash on hand will be sufficient to meet our debt service, dividend, capital expenditures, employee benefit plan obligations and other
working capital requirements for the next twelve months, and to complete the back office and systems integration. We may consider additional capital expenditures if cash is available beyond these
requirements and we believe they are beneficial. Subject to restrictions in the agreements governing our indebtedness, we may incur more indebtedness for working capital, capital expenditures,
dividends, acquisitions and for other purposes. In addition, we may require additional financing or may be required to reduce our dividend payments if our results of operations or plans materially
change in an adverse manner or prove to be materially inaccurate. Additional financing, even if permitted under the terms of the agreements governing our indebtedness, may not be available on terms
acceptable to us or at all.



The following contractual obligations table represents a summary of future repayments of long-term debt obligations and
related interest expense resulting from the issuance of long-term debt as of September 30, 2008. Our management is currently in the process of evaluating our capital and operating
leases and negotiating certain contracts necessary to our operations. The capital and

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operating
lease obligations included in the following contractual obligations table are our current obligations:

Payments Due by PeriodTotal

Less Than
1 Year

13
Years

35
Years

More Than
5 Years(in thousands)Long-term debt, including current maturities(a)

$
2,481,000

$
22,500

$
99,150

$
276,600

$
2,082,750Interest payments on long-term debt obligations(b)


1,301,960


205,360


402,440


392,610


301,550Capital lease obligations


16,790


3,322


6,402


3,781


3,285Operating leases


27,721


6,966


11,100


7,173


2,482Total projected contractual obligations

$
3,827,471

$
238,148

$
519,092

$
680,164

$
2,390,067


---

The
following table discloses aggregate information about our derivative financial instruments as of September 30, 2008, including the source of fair value of these instruments
and their maturities.

Fair Value of Contracts at Period EndTotal

Less than
1 year

13
years

35
years

More than
5 years(Dollars in thousands)Source of fair value:Derivative financial instruments(1)

$
(36,557
)

(17,434
)

(19,174
)

51


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Item 3.    Quantitative and Qualitative Disclosures about Market Risk.

For the three and nine months ended September 30, 2008, approximately 79% of our indebtedness bore interest at fixed rates or
effectively at fixed rates. As of September 30, 2008, we had total debt of $2,481 million, consisting of both fixed rate and variable rate debt with interest rates ranging from 5.5% to
13.125% per annum, including applicable margins. As of September 30, 2008, the fair value of our debt was approximately $2,470 million. Our term loan A facility and revolver mature in
2014, our term loan B facility and delayed draw term loan mature in 2015 and the notes mature in 2018.

We
use variable and fixed-rate debt to finance our operations, capital expenditures and acquisitions. The variable rate debt obligations expose us to variability in interest
payments due to changes in interest rates. We believe it is prudent to limit the variability of a portion of our interest payments. To meet this objective, from time to time, we enter into interest
rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. These swaps change the variable-rate cash flow exposure on the debt obligations to fixed cash
flows. Under the
terms of the interest rate swaps, we pay a variable interest rate plus an additional payment if the variable rate payment is below a contractual rate, or we receive a payment if the variable rate
payment is above the contractual rate. Pursuant to our credit facility, we are required to reduce the risk of interest rate volatility with respect to at least 50% of our term loan borrowings.

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The
chart below provides details of each of our interest rate swap agreements.

Effective Date:

Notional Amount

Rate

Rate, including applicable margin

Expiration DateFebruary 8, 2005

$130.0 Million

3.98%

6.73%

December 31, 2008February 8, 2005

$130.0 Million

4.11%

6.86%

December 31, 2009April 29, 2005

$50.0 Million

4.72%

7.47%

March 31, 2012June 30, 2005

$50.0 Million

4.69%

7.44%

March 31, 2011June 30, 2006

$50.0 Million

5.36%

8.11%

December 31, 2009December 31, 2007

$65.0 Million

4.91%

7.66%

December 30, 2011December 31, 2007

$75.0 Million

5.46%

8.21%

December 31, 2010December 31, 2008

$100.0 Million

5.02%

7.77%

December 31, 2010December 31, 2009

$150.0 Million

5.65%

8.40%

December 31, 2011June 30, 2008

$100.0 Million

4.99%

7.74%

December 30, 2010June 30, 2008

$100.0 Million

4.95%

7.70%

June 30, 2010June 30, 2008

$100.0 Million

5.45%

8.20%

December 31, 2010June 30, 2008

$100.0 Million

5.30%

8.05%

December 30, 2010June 30, 2008

$100.0 Million

4.50%

7.25%

December 31, 2010June 30, 2008

$100.0 Million

4.50%

7.25%

December 31, 2010December 31, 2010

$300.0 Million

4.49%

7.24%

December 31, 2012June 30, 2008

$250.0 Million

3.25%

6.00%

December 31, 2010


At
September 30, 2008, the fair market value of these swaps is a net liability of approximately $36.5 million, of which $17.4 million has been included in other
current liabilities and $19.1 million has been included in other long-term liabilities. Our Annual Report on Form 10-K for the year ended December 31, 2007
contains information about market risks under "Item 7A. Quantitative and Qualitative Disclosures about Market Risk." As a result of these swap agreements, approximately 79% of the Company's
indebtedness bore interest at fixed rates rather than variable rates as of September 30, 2008. Our earnings are affected by changes in interest rates as our long-term indebtedness
under our credit facility has variable interest rates based on either the prime rate or LIBOR. If interest rates on our variable rate indebtedness (excluding variable rate indebtedness which has its
interest rate effectively fixed under interest rate swap agreements) outstanding at September 30, 2008 increased by 10%, our interest expense would have increased, and our income before taxes
would have decreased, by approximately $2.0 million for the three months ended September 30, 2008.

We
do not hold or issue derivative financial instruments for trading or speculative purposes.

We
are also exposed to market risk from changes in the fair value of our pension plan assets. For the nine months ended September 30, 2008, the actual loss on the pension plan
assets has been approximately 14.2%. Net periodic benefit cost for 2008 assumes a weighted average annualized expected return on plan assets of approximately 8.3%. Should our actual return on plan
assets continue to be significantly lower than our expected return assumption, our net periodic benefit cost will increase in future periods and we may be required to contribute additional funds to
our pension plans after 2009.

Item 4.    Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our "disclosure controls and procedures" (as defined in
Rule 13a-15(e) of the Exchange Act). Disclosure controls and procedures are controls and other procedures of an issuer that are designed to ensure that information required to be
disclosed by

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the
issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.

Based
upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (a) are effective to ensure that
information required to be disclosed by us in this Quarterly Report has been recorded, processed, summarized and reported within the time periods specified in the rules of the SEC and
(b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated
and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls over Financial Reporting

We continue to update our internal controls over financial reporting as necessary to accommodate any modifications to our business
processes or accounting procedures. During the quarter ended September 30, 2008, there have been no changes that have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting, except as indicated below.

On
March 31, 2008, we completed the acquisition of Spinco, which was accounted for as a "reverse acquisition" with Spinco being the acquirer for accounting purposes. As a result
of the transaction, certain process level controls covered by this report have been developed and executed by Verizon. Some of these controls will continue to be executed by Verizon in accordance with
the transition services agreement. Our management has extended our overall financial reporting controls to evaluate the output from these processes, as well as existing FairPoint processes.

In
addition, in conjunction with the merger, we are in the process of developing systems and processes to support the Northern New England business. While many of these processes will
not be implemented until the conclusion of the transition services agreement, certain accounting and payroll-related processes have been implemented.

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PART IIOTHER INFORMATION

Item 1.    Legal Proceedings.

From time to time, we are involved in other litigation and regulatory proceedings arising out of our operations. Management believes
that we are not currently a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, would have a material adverse effect on our financial position or results of
operations.

Item 1A.    Risk Factors.

The following risk factor is added to the risk factors previously disclosed in "Item 1A. Risk Factors" of our Annual
Report on Form 10-K for the year ended December 31, 2007, under the heading "Risks Related to Our Business."

Our financial condition and results of operations could be adversely affected if assets held in our Company sponsored pension plans suffer significant losses in market
value.

We sponsor pension and post-retirement healthcare plans for certain employees. As of September 30, 2008, the pension
plans were fully funded and, based on the surplus of actuarial value of plan assets over the projected benefit obligations, we do not anticipate that any contributions to the pension plans will be
required during the next two years. However, since the actuarial value of plan assets is dependent on the value of the assets held by each plan, a decline in the market value of such assets could have
a detrimental impact on our pension plans and could result in us making contributions to these plans, as required under the Employee Retirement Income Security Act of 1974, as amended. Furthermore, if
the third party trustee who holds these plan assets were to become insolvent, access to the plan assets could be limited, and we could be required to pay participant benefits from our assets. Such
required contributions could have a negative impact on our financial condition and results of operations.

The
risk factors presented below amend and restate the corresponding risk factors previously disclosed in "Item 1A. Risk Factors" of our Annual Report on
Form 10-K for the year ended December 31, 2007, as amended by "Item 1A. Risk Factors" of our Quarterly Reports on Form 10-Q for the periods ended
March 31, 2008 and June 30, 2008. There have been no other material changes to the risk factors disclosed in Exhibit 99.1 to our Quarterly Report on Form 10-Q
for the period ended June 30, 2008. For a more comprehensive discussion of the risks facing us, refer to Exhibit 99.1 to this Quarterly Report.

Risks Relating to the Merger

The cutover from the Verizon systems utilized to provide services under the transition services agreement to our own systems may be delayed, which could result in additional
costs to us.

We expect to continue to require transition services agreement services from Verizon through January 2009, which is beyond the six
month period following the closing of the merger, during which we anticipated requiring such services. This will cause us to incur an additional cost of $16.5 million per month for months seven
and eight, $16.0 million for month nine, and $15.5 million for month ten.

In
addition, if we continue to require services from Verizon under the transition services agreement after the one year anniversary of the closing of the merger, the fees payable by us
to Verizon pursuant to the transition services agreement will increase significantly, which could have a material adverse effect on our business, financial condition and results of operations. The
aggregate fees expected to be payable by us under the transition services agreement for the ten month period following the merger are approximately $197.4 million. However, if we require twelve
or eighteen

54

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months
of transition services following the merger, the aggregate fees expected to be payable will be approximately $226.9 million or $336.3 million, respectively.

We
have agreed to the appointment of an independent third-party monitor for the cutover process contemplated by the transition services agreement. The monitor will consult with
representatives of the Department of Public Service in Vermont, the Maine Public Utilities Commission and the New Hampshire Public Utilities Commission. The monitor will evaluate our testing and
cutover readiness process to evaluate our readiness to support our operations after the cutover from the systems that will be provided by the Verizon Group during the period of the transition services
agreement and could disagree with the timing of our decision to implement the cutover, which could delay the cutover. Any delay caused by the evaluation and approval process would result in the
payment of monthly fees to Verizon for an additional period and limits our ability to introduce new services.

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

Unregistered Sales of Equity Securities

We did not sell any unregistered equity securities during the quarter ended September 30, 2008.

Restrictions on Payment of Dividends

Under Delaware law, our board of directors may declare dividends only to the extent of our "surplus" (which is defined as total assets
at fair market value minus total liabilities, minus statutory capital) or, if there is no surplus, out of our net profits for the then current and/or immediately preceding fiscal year.

Our
credit facility restricts our ability to declare and pay dividends on our common stock as follows:



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Our
credit facility also permits us to use available cash to repurchase shares of our capital stock, subject to the same conditions.

The
indenture governing the notes restricts our ability to pay dividends on our common stock as follows:



The
indenture also permits us to use the dividend basket to repurchase shares of our capital stock. In addition, the indenture governing the notes permits us to make certain restricted
payments, which may include, among other things, the payment of dividends, in an amount not to exceed $40 million in the aggregate.

The
orders issued by the state regulatory authorities in Maine, New Hampshire and Vermont provide for the following dividend restrictions:



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Item 3.    Defaults Upon Senior Securities.

Not applicable.

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

Not applicable.

Item 5.    Other Information.

Not applicable.

Item 6.    Exhibits.

The exhibits filed as part of this Quarterly Report are listed in the index to exhibits immediately preceding such exhibits, which
index to exhibits is incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized, and the undersigned also has signed this Quarterly Report in his capacity as the Registrant's Executive Vice
President and Chief Financial Officer (Principal Financial Officer).

FAIRPOINT COMMUNICATIONS, INC.Date: November 6, 2008

By:

/s/ ALFRED C. GIAMMARINOName:  Alfred C. Giammarino
Title:Executive Vice President
            and Chief Financial Officer


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Exhibit Index

Exhibit No.

Description2.1

Agreement and Plan of Merger, dated September 13, 2006, among FairPoint, MJD Ventures, Inc., FairPoint Germantown Corporation and The Germantown Independent Telephone Company.(1)2.2

Agreement and Plan of Merger, dated as of January 15, 2007, by and among Verizon Communications Inc., Northern New England Spinco Inc. and FairPoint.(2)2.3

Amendment No. 1 to the Agreement and Plan of Merger, dated as of April 20, 2007, by and among Verizon Communications Inc., Northern New England Spinco Inc. and FairPoint.(2)2.4

Amendment No. 2 to the Agreement and Plan of Merger, dated as of June 28, 2007, by and among Verizon Communications Inc., Northern New England Spinco Inc. and FairPoint.(3)2.5

Amendment No. 3 to the Agreement and Plan of Merger, dated as of July 3, 2007, by and among Verizon Communications Inc., Northern New England Spinco Inc. and FairPoint.(4)2.6

Amendment No. 4 to the Agreement and Plan of Merger, dated as of November 16, 2007, by and among Verizon Communications Inc., Northern New England Spinco Inc. and FairPoint.(5)2.7

Amendment No. 5 to the Agreement and Plan of Merger, dated as of February 25, 2008, by and among Verizon Communications Inc., Northern New England Spinco Inc. and FairPoint.(6)2.8

Distribution Agreement, dated as of January 15, 2007, by and between Verizon Communications Inc. and Northern New England Spinco Inc.(2)2.9

Amendment No. 1 to Distribution Agreement, dated as of March 30, 2007, by and between Verizon Communications Inc. and Northern New England Spinco Inc.(2)2.10

Amendment No. 2 to Distribution Agreement, dated as of June 28, 2007, by and between Verizon Communications Inc. and Northern New England Spinco Inc.(2)2.11

Amendment No. 3 to Distribution Agreement, dated as of July 3, 2007, by and between Verizon Communications Inc. and Northern New England Spinco Inc.(2)2.12

Amendment No. 4 to Distribution Agreement, dated as of February 25, 2008, by and between Verizon Communications Inc. and Northern New England Spinco Inc.(6)2.13

Amendment No. 5 to the Distribution Agreement, dated as of March 31, 2008, by and between Verizon Communications Inc. and Northern New England Spinco Inc.(7)2.14

Transition Services Agreement, dated as of January 15, 2007, by and among Verizon Information Technologies LLC, Northern New England Telephone Operations Inc., Enhanced Communications of Northern New
England Inc. and FairPoint.(2)2.15

Amendment No. 1 to the Transition Services Agreement, dated as of March 31, 2008, by and among FairPoint, Northern New England Telephone Operations LLC, Enhanced Communications of Northern New
England Inc. and Verizon Information Technologies LLC(7)2.16

Master Services Agreement, dated as of January 15, 2007, by and between FairPoint and Capgemini U.S. LLC.(2)2.17

Amendment No. 1 to Master Services Agreement, dated as of July 6, 2007, by and between FairPoint and Capgemini U.S. LLC.(4)2.18

Amendment No. 2 to Master Services Agreement, dated as of February 25, 2008, by and between FairPoint and Capgemini U.S. LLC.(6)


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Exhibit No.

Description2.19

Letter Agreement, dated as of January 17, 2008, by and between FairPoint and Capgemini U.S. LLC.(8)2.20

Amendment to Letter Agreement, dated as of February 28, 2008, by and between FairPoint and Capgemini U.S. LLC.(9)2.21

Employee Matters Agreement, dated as of January 15, 2007, by and among Verizon Communications Inc., Northern New England Spinco Inc. and FairPoint.(2)2.22

Tax Sharing Agreement, dated as of January 15, 2007, by and among FairPoint, Verizon Communications Inc. and Northern New England Spinco Inc.(10)2.23

Partnership Interest Purchase Agreement, dated as of January 15, 2007, by and among Verizon Wireless of the East LP, Cellco Partnership d/b/a Verizon Wireless and Taconic Telephone Corp.(11)2.24

Joinder Agreement, dated as of April 5, 2007, by and among Warwick Valley Telephone Company, Taconic Telephone Corp., Cellco Partnership d/b/a Verizon Wireless and Verizon Wireless of the East LP.(11)2.25

Publishing Agreement, dated as of March 31, 2008, by and between FairPoint and Idearc Media Corp.(7)2.26

Branding Agreement, dated as of March 31, 2008, by and between FairPoint and Idearc Media Corp.(7)2.27

Non-Competition Agreement, dated as of March 31, 2008, by and between FairPoint and Idearc Media Corp.(7)2.28

Listing License Agreement, dated as of March 31, 2008, by and between FairPoint and Idearc Media Corp.(7)2.29

Intellectual Property Agreement, dated as of March 31, 2008, by and between FairPoint and Verizon Communications Inc.(7)2.30

Transition Period Trademark License Agreement, dated as of March 31, 2008, by and between FairPoint and Verizon Communications Inc.(7)3.1

Eighth Amended and Restated Certificate of Incorporation of FairPoint.(12)3.2

Amended and Restated By Laws of FairPoint.(12)4.1

Indenture, dated as of March 6, 2003, by and between FairPoint and The Bank of New York, relating to FairPoint's $225,000,000 117/8% Senior Notes due 2010.(13)4.2

Supplemental Indenture, dated as of January 20, 2005, by and between FairPoint and The Bank of New York, amending the Indenture dated as of March 6, 2003 between FairPoint and The Bank of New York.(12)4.3

Form of Initial Senior Note due 2010.(13)4.4

Form of Exchange Senior Note due 2010.(13)4.5

Indenture, dated as of March 31, 2008, by and between Northern New England Spinco Inc. and U.S. Bank National Association.(7)4.6

First Supplemental Indenture, dated as of March 31, 2008, by and between FairPoint Communications, Inc. and U.S. Bank National Association.(7)4.7

Registration Rights Agreement, dated as of March 31, 2008, by and among FairPoint Communications, Inc., Banc of America Securities LLC, Lehman Brothers Inc. and Morgan Stanley & Co.
Incorporated.(7)4.8

Form of 131/8% Senior Note due 2018 (included in Exhibit 4.6).(7)


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Exhibit No.

Description10.1

Credit Agreement, dated as of March 31, 2008, by and among FairPoint, Northern New England Spinco Inc., Bank of America, N.A, as syndication agent, Morgan Stanley Senior Funding, Inc. and Deutsche Bank
Securities Inc., as co-documentation agents, and Lehman Commercial Paper Inc., as administrative agent and lenders party thereto.(7)10.2

Subsidiary Guaranty, dated as of March 31, 2008, by and among FairPoint Broadband, Inc., MJD Ventures, Inc., MJD Services Corp., S T Enterprises, Ltd., FairPoint Carrier Services, Inc., FairPoint
Logistics, Inc. and Lehman Commercial Paper Inc.(7)10.3

Pledge Agreement, dated as of March 31, 2008, by and among FairPoint, MJD Ventures, Inc., MJD Services Corp., S T Enterprises, Ltd., FairPoint Carrier Services, Inc., FairPoint Broadband, Inc.,
FairPoint Logistics, Inc., Enhanced Communications of Northern New England, Inc., Utilities, Inc., C-R Communications, Inc., Comerco, Inc., GTC Communications, Inc., St. Joe Communications, Inc., Ravenswood
Communications, Inc., Unite Communications Systems, Inc. and Lehman Commercial Paper Inc.(7)10.4

Deposit Agreement, dated as of March 31, 2008, by and among Northern New England Telephone Operations LLC, Telephone Operating Company of Vermont LLC and Lehman Commercial Paper Inc.(7)10.5

Amended and Restated Tax Sharing Agreement, dated as of November 9, 2000, by and among FairPoint and its Subsidiaries.(14)10.6

Affiliate Registration Rights Agreement, dated as of February 8, 2005.(12)10.7

Amended and Restated Employment Agreement, dated as of April 1, 2008, by and between FairPoint and Eugene B. Johnson.(15)10.8

Change in Control and Severance Agreement, dated as of March 14, 2007, by and between FairPoint and Peter G. Nixon.(16)10.9

Change in Control and Severance Agreement, dated as of March 14, 2007, by and between FairPoint and Shirley J. Linn.(16)10.10

Change in Control and Severance Agreement, dated as of March 14, 2007, by and between FairPoint and Alfred C. Giammarino.*10.11

FairPoint Amended and Restated 1998 Stock Incentive Plan.(17)10.12

FairPoint Amended and Restated 2000 Employee Stock Incentive Plan.(18)10.13

FairPoint 2005 Stock Incentive Plan.(12)10.14

FairPoint Annual Incentive Plan.(19)10.15

FairPoint Communications, Inc. 2008 Annual Incentive Plan.(20)10.16

FairPoint Communications, Inc. 2008 Long Term Incentive Plan.(20)10.17

Form of February 2005 Restricted Stock Agreement.(19)10.18

Form of Director Restricted Stock AgreementFairPoint Communications, Inc. 2005 Stock Incentive Plan.(21)10.19

Form of Director Restricted Unit AgreementFairPoint Communications, Inc. 2005 Stock Incentive Plan.(21)10.20

Form of Non-Director Restricted Stock AgreementFairPoint Communications, Inc. 2005 Stock Incentive Plan.(22)10.21

Form of Non-Director Restricted Stock AgreementFairPoint Communications, Inc. 2008 Long Term Incentive Plan.10.22

Form of Performance Unit Award Agreement 2008 Award.(23)


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Exhibit No.

Description10.23

Form of Performance Unit Award Agreement 2008-2009 Award (Performance Unit Award, dated as of April 1, 2008, by and between FairPoint and Eugene B. Johnson).(15)10.24

Form of Performance Unit Award Agreement 2008-2010 Award.(20)10.25

Stipulation filed with the Maine Public Utilities Commission, dated December 12, 2007.(24)10.26

Amended Stipulation filed with the Maine Public Utilities Commission dated December 21, 2007(7)10.27

Stipulation filed with the Vermont Public Service Board, dated January 8, 2008.(25)10.28

Stipulation filed with the New Hampshire Public Utilities Commission, dated January 23, 2008.(8)10.29

Letter Agreement, dated as of March 30, 2008, by and between the Staff of the New Hampshire Public Utilities Commission and Verizon Communications Inc.(7)14.1

FairPoint Code of Business Conduct and Ethics.(26)14.2

FairPoint Code of Ethics for Financial Professionals.(12)21

Subsidiaries of FairPoint.(23)31.1

Certification as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*31.2

Certification as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1

Certification required by 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*32.2

Certification required by 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*99.1

Risk Factors.*99.2

Order of the Maine Public Utilities Commission, dated February 1, 2008.(27)99.3

Order of the Vermont Public Service Board, dated February 15, 2008.(28)99.4

Order of the New Hampshire Public Utilities Commission, dated February 25, 2008.(6)


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