**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

| **(Mark  One)**                                                                                                                                                                                                                                        |   | ** **                                                                                          |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|
| x                                                                                                                                                                                                                                                      |   | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**   |
| **For the quarterly period ended June 30, 2006.**                                                                                                                                                                                                 |
| **or**                                                                                                                                                                                                                                                 |
| o                                                                                                                                                                                                                                                      |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
| **For the transition period from                  to                      ** |

 

**CommissionFile Number 333-56365**

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**FairPointCommunications, Inc.**

(Exact Name of Registrantas Specified in Its Charter)

| **Delaware**                                 |   | **13-3725229**       |
|----------------------------------------------|--------|----------------------|
| (State or Other  Jurisdiction of             |   | (I.R.S. Employer     |
| Incorporation or  Organization)              |   | Identification  No.) |
| **521 East Morehead Street, Suite 250** |   |                 |
| **Charlotte,  North Carolina**               |   | **28202**            |
| (Address of  Principal Executive Offices)    |   | (Zip Code)           |

 

**(704) 344-8150**

(Registrant’s telephonenumber, including area code)

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Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.Yes x  No o

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

| Large accelerated  filer o |   | Accelerated filer  o |   | Non-accelerated  filer x |
|---------------------------------|--------|----------------------|--------|--------------------------|

 

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

As of August 1, 2006, there were 35,039,235shares of the Registrant’s common stock, par value $0.01 per share,outstanding.

Documentsincorporated by reference: **None**

 

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**INDEX**

|                                         | ** ** | ** **                                                                                                                | ** ** | **Page** | ** ** |
|-----------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| **PART I.  FINANCIAL INFORMATION** |       |                                                                                                                      |       |     |       |
| Item  1.                                |       | Financial  Statements                                                                                                     |       |     | 4          |   |   |
|                                    |       | Condensed Consolidated Balance Sheets as of  June 30, 2006 and December 31, 2005                                |       |     | 4          |   |   |
|                                    |       | Condensed Consolidated Statements of Operations for  the three and six months ended June 30, 2006 and 2005           |       |     | 5          |   |   |
|                                    |       | Condensed Consolidated Statements of Comprehensive  Income for the three and six months ended June 30, 2006 and 2005 |       |     | 6          |   |   |
|                                    |       | Condensed Consolidated Statements of Cash Flows for  the six months ended June 30, 2006 and 2005                     |       |     | 7          |   |   |
|                                    |       | Notes to Condensed Consolidated Financial Statements                                                                      |       |     | 8          |   |   |
| Item 2.                                 |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                               |       |     | 19         |   |   |
| Item 3.                                 |       | Quantitative and Qualitative Disclosures About Market  Risk                                                               |       |     | 32         |   |   |
| Item 4.                                 |       | Controls and Procedures                                                                                                   |       |     | 32         |   |   |
| **PART II.  OTHER INFORMATION**    |       |                                                                                                                      |       |     |       |
| Item  1.                                |       | Legal  Proceedings                                                                                                        |       |     | 33         |   |   |
| Item 1A.                                |       | Risk Factors                                                                                                              |       |     | 33         |   |   |
| Item 2.                                 |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                              |       |     | 33         |   |   |
| Item 3.                                 |       | Defaults Upon Senior Securities                                                                                           |       |     | 34         |   |   |
| Item 4.                                 |       | Submission of Matters to a Vote of Security Holders                                                                       |       |     | 34         |   |   |
| Item  5.                                |       | Other  Information                                                                                                        |       |     | 34         |   |   |
| Item 6.                                 |       | Exhibits                                                                                                                  |       |     | 34         |   |   |
|                                    |       | Signatures                                                                                                                |       |     | 35         |   |   |

 

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**PART I—FINANCIALINFORMATION**

**Cautionary NoteRegarding Forward-Looking Statements**

Some statements inthis Quarterly Report are known as “forward-looking statements” withinthe meaning of Section 27A of the Securities Act of 1933, or theSecurities Act, and Section 21E of the Securities Exchange Act of 1934, orthe Exchange Act. Forward-looking statements may relate to, among otherthings:

·       futureperformance generally,

·       ourdividend policy and expectations regarding dividend payments,

·       businessdevelopment activities,

·       futurecapital expenditures,

·       futureinterest expense,

·       distributionsfrom minority investments and passive partnership interests,

·       netoperating loss carry forwards,

·       technologicaldevelopments and changes in the communications industry,

·       financingsources and availability,

·       regulatorysupport payments,

·       theeffects of regulation and competition, and

·       pendinglitigation.

These forward-looking statements include, but are not limited to,statements about our plans, objectives, expectations and intentions and otherstatements 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 generallyintended to identify forward looking statements. Because these forward-lookingstatements involve known and unknown risks and uncertainties, there areimportant factors that could cause actual results, events or developments todiffer materially from those expressed or implied by these forward-lookingstatements, including our plans, objectives, expectations and intentions andother factors discussed in this Quarterly Report and in Exhibit 99.1 to ourQuarterly Report on Form 10-Q for the quarter ended March 31, 2006. Youshould not place undue reliance on such forward-looking statements, whichare based on the information currently available to us and speak only as of thedate on which this Quarterly Report was filed with the Securities and ExchangeCommission, or the SEC. We undertake no obligation to publicly update or reviseany forward-looking statements, whether as a result of new information,future events or otherwise. However, your attention is directed to any furtherdisclosures made on related subjects in our subsequent periodic reports filedwith the SEC on Forms 10-K, 10-Q and 8-K andSchedule 14A.

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**Item 1. FinancialStatements.**

*Except as otherwise required by the context,references in this Quarterly Report to “FairPoint,” “our company,” “we,” “us,”or “our” refer to the combined business of FairPoint Communications, Inc.and all of its subsidiaries. Except as otherwise required by the context, allreferences to the “Company” refer to FairPoint Communications, Inc.excluding its subsidiaries.*

**FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIESCondensed Consolidated Balance Sheets**

| ** **                                          | ** ** | **June 30,**                    | ** **  | **December 31,** | ** **  |
|-----------------------------------------------------|------------|--------------------------------------|-------------|-----------------------|-------------|
| ** **                                          | ** ** | **2006**                             | ** **  | **2005**              | ** **  |
| ** **                                          | ** ** | **(unaudited)**                      | ** **  | ** **            | ** **  |
| ** **                                          | ** ** | **(Dollars in thousands)** | ** **  |
| **Assets**                                          |       |                                 |        |                  |        |   |   |
| Current assets:                                     |       |                                 |        |                  |        |   |   |
| Cash                                                |       | $                                    | 41,228      |                  |        | $ | 5,083 |   |   |
| Accounts receivable, net                            |       | 28,026                               |        |                  | 34,985      |   |   |
| Other                                               |       | 13,616                               |        |                  | 9,200       |   |   |
| Deferred income tax, net                            |       | 22,504                               |        |                  | 29,190      |   |   |
| Assets of discontinued  operations                  |       | —                               |        |                  | 90          |   |   |
| **Total current assets**                            |       | **105,374**                          |        |                  | **78,548**  |   |   |
| Property, plant, and  equipment, net                |       | 229,631                              |        |                  | 242,617     |   |   |
| Investments                                         |       | 11,708                               |        |                  | 39,808      |   |   |
| Goodwill                                            |       | 482,315                              |        |                  | 481,343     |   |   |
| Deferred income tax, net                            |       | 39,233                               |        |                  | 47,160      |   |   |
| Deferred charges and  other assets                  |       | 22,908                               |        |                  | 18,663      |   |   |
| **Total assets**                                    |       | **$**                                | **891,169** |                  |        | **$** | **908,139** |   |   |
| **Liabilities and Stockholders’ Equity**       |       |                                 |        |                  |        |   |   |
| Current liabilities:                                |       |                                 |        |                  |        |   |   |
| Accounts payable                                    |       | $                                    | 13,670      |                  |        | $ | 12,030 |   |   |
| Dividends payable                                   |       | 13,835                               |        |                  | 13,789      |   |   |
| Current portion of  long-term debt                  |       | 696                                  |        |                  | 677         |   |   |
| Demand notes payable                                |       | 333                                  |        |                  | 338         |   |   |
| Accrued interest payable                            |       | 207                                  |        |                  | 288         |   |   |
| Other accrued liabilities                           |       | 15,037                               |        |                  | 20,808      |   |   |
| Liabilities of  discontinued operations             |       | 1,447                                |        |                  | 2,495       |   |   |
| **Total current liabilities**                       |       | **45,225**                           |        |                  | **50,425**  |   |   |
| Long-term liabilities:                              |       |                                 |        |                  |        |   |   |
| Long-term debt, net of  current portion             |       | 592,620                              |        |                  | 606,748     |   |   |
| Deferred credits and  other long-term liabilities   |       | 6,853                                |        |                  | 4,108       |   |   |
| **Total long-term liabilities**                     |       | **599,473**                          |        |                  | **610,856** |   |   |
| Minority interest                                   |       | 9                                    |        |                  | 10          |   |   |
| Stockholders’ equity:                          |       |                                 |        |                  |        |   |   |
| Common stock                                        |       | 350                                  |        |                  | 350         |   |   |
| Additional paid-in  capital                         |       | 556,809                              |        |                  | 590,131     |   |   |
| Unearned compensation                               |       | —                               |        |                  | (6,475      | ) |   |
| Accumulated deficit                                 |       | (321,841                             | )           |                  | (342,635    | ) |   |
| Accumulated other  comprehensive income, net        |       | 11,144                               |        |                  | 5,477       |   |   |
| **Total stockholders’ equity**                 |       | **246,462**                          |        |                  | **246,848** |   |   |
| **Total liabilities and stockholders’ equity** |       | **$**                                | **891,169** |                  |        | **$** | **908,139** |   |   |

 

See accompanying notes to condensed consolidated financial statements

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**FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIESCondensed Consolidated Statements of Operations (Unaudited)**

| ** **                                                   | ** ** | **Three months ended**     | ** ** | **Six months ended** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **                                                   | ** ** | **June 30,**                    | ** ** | **June 30,**              | ** ** |
| ** **                                                   | ** ** | **2006**                             | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                   | ** ** | **(Dollars in thousands)** | ** ** |
| Revenues                                                     |       | $                                    | 64,196     |                           | $          | 65,206 |   | $ | 128,987 |   | $ | 126,871 |   |
| Operating expenses:                                          |       |                                 |       |                           |       |   |   |   |   |
| Operating expenses, excluding depreciation and  amortization |       | 36,275                               |       | 35,321                         |       | 71,880 |   | 67,764 |   |
| Depreciation and amortization                                |       | 13,352                               |       | 13,106                         |       | 26,987 |   | 26,116 |   |
| Total operating  expenses                                    |       | 49,627                               |       | 48,427                         |       | 98,867 |   | 93,880 |   |
| Income from  operations                                      |       | 14,569                               |       | 16,779                         |       | 30,120 |   | 32,991 |   |
| Other income (expense):                                      |       |                                 |       |                           |       |   |   |   |   |
| Net gain (loss) on sale of investments and other  assets     |       | 14,277                               |       | (6                             | )          | 14,225 |   | (184 | ) |
| Interest and dividend income                                 |       | 2,587                                |       | 720                            |       | 2,927 |   | 1,272 |   |
| Interest expense                                             |       | (9,792                               | )          | (9,588                         | )          | (19,545 | ) | (26,558 | ) |
| Equity in net earnings of investees                          |       | 3,079                                |       | 2,796                          |       | 6,365 |   | 5,452 |   |
| Other non-operating, net                                     |       | —                               |       | (1,582                         | )          | — |   | (87,746 | ) |
| Total other  income (expense)                                |       | 10,151                               |       | (7,660                         | )          | 3,972 |   | (107,764 | ) |
| Income (loss)  before income taxes                           |       | 24,720                               |       | 9,119                          |       | 34,092 |   | (74,773 | ) |
| Income tax  (expense) benefit                                |       | (9,645                               | )          | (3,515                         | )          | (13,297 | ) | 91,419 |   |
| Minority interest                                            |       | (1                                   | )          | (1                             | )          | (1 | ) | (1 | ) |
| Net income                                                   |       | $                                    | 15,074     |                           | $          | 5,603 |   | $ | 20,794 |   | $ | 16,645 |   |
| Weighted average  shares outstanding:                        |       |                                 |       |                           |       |   |   |   |   |
| Basic                                                        |       | 34,649                               |       | 34,549                         |       | 34,601 |   | 29,260 |   |
| Diluted                                                      |       | 34,683                               |       | 34,566                         |       | 34,665 |   | 29,315 |   |
| Earnings per  share:                                         |       |                                 |       |                           |       |   |   |   |   |
| Basic                                                        |       | $                                    | 0.44       |                           | $          | 0.16 |   | $ | 0.60 |   | $ | 0.57 |   |
| Diluted                                                      |       | $                                    | 0.43       |                           | $          | 0.16 |   | $ | 0.60 |   | $ | 0.57 |   |

 

See accompanying notes to condensed consolidated financial statements

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**FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIESCondensed Consolidated Statements of Comprehensive Income(Unaudited)**

| ** **                                                                                                                                                                                                                                                                                    | ** ** | **Three months ended**     | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                    | ** ** | **June 30,**                    | ** ** | **June 30,**              | ** ** |
| ** **                                                                                                                                                                                                                                                                                    | ** ** | **2006**                             | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                                                                                                                                                                                                                    | ** ** | **(Dollars in thousands)** | ** ** |
| Net income                                                                                                                                                                                                                                                                                    |       | $                                    | 15,074     |                           | $          | 5,603 |   | $ | 20,794 |   | $ | 16,645 |   |
| Other comprehensive  income:                                                                                                                                                                                                                                                                  |       |                                 |       |                           |       |   |   |   |   |
| Cash flow hedges:                                                                                                                                                                                                                                                                             |       |                                 |       |                           |       |   |   |   |   |
| Change in net unrealized gain, net of tax expense of  $1.4 million and $3.3 million as of the three months ended June 30,  2006 and 2005, respectively, and net of tax expense of $3.4 million and $1.0  million for the six months ended June 30, 2006 and 2005, respectively |       | 2,293                                |       | (5,479                         | )          | 5,667 |   | (1,766 | ) |
| Comprehensive income                                                                                                                                                                                                                                                                          |       | $                                    | 17,367     |                           | $          | 124 |   | $ | 26,461 |   | $ | 14,879 |   |

 

See accompanying notes to condensed consolidated financial statements.

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**FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIESCondensed Consolidated Statements of Cash Flows(Unaudited)**

| ** **                                                                                                   | ** ** | **Six months ended**       | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                   | ** ** | **June 30,**                    | ** ** |
| ** **                                                                                                   | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                                                                                                   | ** ** | **(Dollars in thousands)** | ** ** |
| Cash  flows from operating activities:                                                                       |       |                                 |       |   |   |
| Net income                                                                                                   |       | $                                    | 20,794     |   | $ | 16,645 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities of  continuing operations: |       |                                 |       |   |   |
| Dividends and accretion on  shares subject to mandatory redemption                                           |       | —                               |       | 2,362 |   |
| Loss on preferred stock  subject to mandatory redemption                                                     |       | —                               |       | 9,899 |   |
| Deferred income taxes                                                                                        |       | 11,873                               |       | (92,706 | ) |
| Amortization of debt issue  costs                                                                            |       | 825                                  |       | 1,095 |   |
| Depreciation and  amortization                                                                               |       | 26,987                               |       | 26,116 |   |
| Loss on early retirement of  debt                                                                            |       | —                               |       | 77,847 |   |
| Minority interest in income  of subsidiaries                                                                 |       | 1                                    |       | 1 |   |
| Income from equity method  investments                                                                       |       | (6,365                               | )          | (5,452 | ) |
| Net (gain) loss on sale of  investments and other assets                                                     |       | (14,225                              | )          | 184 |   |
| Other non cash items                                                                                         |       | 668                                  |       | 1,046 |   |
| Changes in assets and liabilities arising from operations:                                                   |       |                                 |       |   |   |
| Accounts receivable and other  current assets                                                                |       | 6,472                                |       | (1,795 | ) |
| Accounts payable and  accrued expenses                                                                       |       | 118                                  |       | (17,717 | ) |
| Income taxes                                                                                                 |       | 234                                  |       | (342 | ) |
| Other assets/liabilities                                                                                     |       | (130                                 | )          | 110 |   |
| Total adjustments                                                                                            |       | 26,458                               |       | 648 |   |
| Net cash provided by  operating activities of continuing operations                                          |       | 47,252                               |       | 17,293 |   |
| Cash  flows from investing activities of continuing operations:                                              |       |                                 |       |   |   |
| Acquisitions of telephone  properties, net of cash acquired                                                  |       | —                               |       | (16,449 | ) |
| Net capital additions                                                                                        |       | (17,536                              | )          | (9,652 | ) |
| Distributions from  investments                                                                              |       | 5,740                                |       | 4,791 |   |
| Net proceeds from sales of  investments and other assets                                                     |       | 43,358                               |       | 174 |   |
| Other, net                                                                                                   |       | (111                                 | )          | (281 | ) |
| Net cash provided by (used  in) investing activities of continuing operations                                |       | 31,451                               |       | (21,417 | ) |
| Cash  flows from financing activities of continuing operations:                                              |       |                                 |       |   |   |
| Net proceeds from issuance  of common stock                                                                  |       | —                               |       | 431,921 |   |
| Debt issue and offering  costs                                                                               |       | —                               |       | (8,468 | ) |
| Proceeds from issuance of  long-term debt                                                                    |       | 26,450                               |       | 638,484 |   |
| Repayments of long-term  debt                                                                                |       | (40,515                              | )          | (847,842 | ) |
| Repurchase of preferred and  common stock                                                                    |       | —                               |       | (129,278 | ) |
| Payment of fees and  penalties associated with early retirement of long term debt                            |       | —                               |       | (61,037 | ) |
| Payment of deferred  transaction fee                                                                         |       | —                               |       | (8,445 | ) |
| Proceeds from exercise of  stock options                                                                     |       | 24                                   |       | 184 |   |
| Dividends paid to common  stockholders                                                                       |       | (27,559                              | )          | (7,788 | ) |
| Net cash provided by (used  in) financing activities of continuing operations                                |       | (41,600                              | )          | 7,731 |   |
| Cash flows of discontinued operations:                                                                       |       |                                 |       |   |   |
| Operating cash flows, net  used in                                                                           |       | (958                                 | )          | (510 | ) |
| Net increase in cash                                                                                         |       | 36,145                               |       | 3,097 |   |
| Cash, beginning of period                                                                                    |       | 5,083                                |       | 3,595 |   |
| Cash, end of period                                                                                          |       | $                                    | 41,228     |   | $ | 6,692 |   |

 

See accompanying notes to condensed consolidated financial statements.

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**FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (Unaudited)**

**(1) Organizationand Basis of Financial Reporting**

The accompanying unauditedcondensed financial statements of FairPoint Communications, Inc. andsubsidiaries as of June 30, 2006 and for the three and six month periodsended June 30, 2006 and 2005 have been prepared on the same basis as theaudited consolidated financial statements for the year ended December 31,2005 and, in the opinion of the Company’s management, the unaudited condensedfinancial statements reflect all adjustments, consisting of normal recurringadjustments, necessary for a fair presentation of FairPoint’s results ofoperations, financial position, and cash flows. The results of operations forthe interim periods are not necessarily indicative of the results of operationswhich might be expected for the entire year. The unaudited condensedconsolidated financial statements should be read in conjunction with theCompany’s Annual Report on Form 10-K for the year ended December 31,2005.

**(2) Initial PublicOffering and Other Transactions**

***(a) General***

On February 8, 2005, the Company consummated aninitial public offering, or the initial public offering, of 25,000,000 sharesof its common stock, par value $0.01 per share, or common stock, at a price tothe public of $18.50 per share.

In connection with theinitial public offering, the Company entered into a new senior secured creditfacility, or the credit facility, with a syndicate of financial institutions,including Deutsche Bank Trust Company Americas, as administrative agent. Thecredit facility is comprised of a revolving facility in an aggregate principalamount of $100 million (less amounts reserved for letters of credit) and aterm facility in an aggregate principal amount of $588.5 million. Therevolving facility has a six year maturity and the term facility has a sevenyear maturity. In addition, in 2005 the Company recorded a $77.8 millionloss on early retirement of debt and a $9.9 million loss on redemption ofseries A preferred stock in connection with the initial public offering. Withrespect to the $77.8 million loss on early retirement of debt,$16.8 million was recorded for the write-off of existing debt issuancecosts and the remaining $61.0 million was fees and penalties.

***(b) Dividends***

The Company has adopted a dividend policy under whicha substantial portion of the cash generated by the Company’s business in excessof operating needs, interest and principal payments on indebtedness, dividendson future senior classes of capital stock, if any, capital expenditures, taxesand future reserves, if any, would in general be distributed as regularquarterly dividend payments to the holders of its common stock, rather than retainedand used for other purposes.

On June 21, 2006, theCompany declared a dividend totaling $13.8 million, or $0.39781 per share ofcommon stock, which was paid on July 21, 2006 to holders of record as of July 6,2006. In 2006, the Company has paid dividends totaling $27.6 million, or$0.79562 per share of common stock.

**(3) Income Taxes**

The Company’s accounting policy is to report incometax expense for interim reporting periods using an estimated annual effectiveincome tax rate. However, the effects of significant or unusual items are notconsidered in the estimated annual effective tax rate. The tax effect of suchevents is recognized in the 

8

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interim period in whichthe event occurs.For the three months ended June 30, 2006, the Companyrecorded income tax expense of $9.6 million, resulting in an effectiverate of 39.0% compared to 38.5% for the three months ended June 30, 2005.

For the six months ended June 30, 2006, theCompany recorded income tax expense of $13.3 million, resulting in aneffective rate of 39.0%. The Company’s effective annual tax rate is estimatedto be 38.6% for 2006. For the six months ended June 30, 2005, the Companyrecorded an income tax benefit of $91.4 million. The income tax benefit andeffective tax rate for the six months ended June 30, 2005 were primarilyimpacted by unusual items occurring in 2005. Income tax benefits of $23.8million were recognized due to the taxable loss for the six months ended June 30,2005 resulting from losses on the extinguishment of debt. In addition, for thesix months ended June 30, 2005, the Company recognized income tax benefitsof $66.0 million from the reversal of the deferred tax valuation allowance thatresulted from the Company’s expectation of generating future taxable incomefollowing the recapitalization. The income tax benefit also includes $1.6million for an adjustment to record the Company’s net deferred tax assets at anexpected federal income tax rate of 35%, in anticipation of higher levels oftaxable income in subsequent periods.

In assessing therealizability of deferred tax assets, management considers whether it is morelikely than not that some portion or all of the deferred tax assets will not berealized. The ultimate realization of deferred tax assets is dependent upon thegeneration of future taxable income during the periods in which temporarydifferences become deductible. Management considers the scheduled reversal ofdeferred tax liabilities, projected future taxable income, and tax planningstrategies in making this assessment, as well as all positive and negativeevidence that would affect the recoverability of deferred tax assets. TheCompany expects that future taxable income will more likely than not besufficient to recover net deferred tax assets.

**(4) Stock-BasedCompensation**

Effectiveon January 1, 2006, the Company adopted the provisions of SFAS 123(R). Asa result of this adoption, amounts previously included in stockholders’ equityas unearned compensation are included in additional paid-in capital as of June 30,2006. At June 30, 2006, the Company had $6.3 million of total unearnedcompensation cost related to non-vested share-based payment arrangementsgranted under the Company’s four stock-based compensation plans. That cost isexpected to be recognized over a weighted average period of 2.4 years. Thesestock-based compensation plans are described below. Any future shareawards under any of these plans will be made using newly issued shares. Amountsrecognized in the financial statements with respect to these plans are asfollows (in thousands):

| ** **                                                 | ** ** | **Three months  ended  June 30,** | ** ** | **Six months  ended  June 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                    | ** ** | **2005**                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Amounts charged against  income, before income tax benefit |       | $                                           | 670        |                                      | $          | 685 |   | $ | 1,284 |   | $ | 1,092 |   |
| Amount of related income  tax benefit recognized in income |       | 252                                         |       | 258                                       |       | 483 |   | 411 |   |
| Total net income impact                                    |       | $                                           | 418        |                                      | $          | 427 |   | $ | 801 |   | $ | 681 |   |

 

***(a) 1995 Stock Incentive Plan***

In February 1995, the Company adopted theFairPoint Communications, Inc. (formerly MJD Communications, Inc.)1995 Stock Incentive Plan (the 1995 Plan). The 1995 Plan covers officers,directors, and employees of the Company. The Company was allowed to issuequalified or nonqualified stock options to purchase up to 215,410 shares of theCompany’s Class A common stock to employees that would vest equally over 5years from the date of employment of the recipient and are exercisable duringyears 5 

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through 10. In 1995, theCompany granted options to purchase 161,596 shares at $1.32 per share. Nooptions have been granted since 1995. Effective in February 2005, theCompany may no longer grant awards under the 1995 Plan. As of January 1,2006, only 18,013 options remained outstanding, the life of these options hadpreviously been extended to May 21, 2008. In March 2006 the remaining18,013 options outstanding were exercised. The intrinsic value of these optionson the date of exercise was $230,000, the cash received was $24,000 and the taxbenefit was $87,000.

These stock options weregranted by the Company prior to becoming a public company and therefore theCompany is accounting for these options under the prospective method under SFAS123(R). The per share weighted average fair value of stock options grantedduring 1995 was $0.69 on the date of grant using the Black-Scholes option-pricingmodel. Input variables used in the model included no expected dividend yield, arisk-free interest rate of 6.41%, and an estimated option life of fiveyears. Because the Company was not public on the date of the grant, noassumption as to the volatility of the stock price was made.

***(b) 1998 Stock Incentive Plan***

In August 1998, the Company adopted the FairPointCommunications, Inc. (formerly MJD Communications, Inc.) StockIncentive Plan (the 1998 Plan). The 1998 Plan provided for grants of up to1,317,425 of nonqualified stock options to executives and members ofmanagement, at the discretion of the compensation committee of the board ofdirectors. Options vest in 25% increments on the second, third, fourth, andfifth anniversaries of an individual grant. In the event of a change incontrol, outstanding options will vest immediately. Effective in February 2005,the Company may no longer grant awards under the 1998 Plan.

Pursuant to the terms of the grant, options granted in1998 and 1999 become exercisable only in the event that the Company is sold, aninitial public offering of the Company’s common stock results in the principalshareholders holding less than 10% of their original ownership, or otherchanges in control, as defined, occur. The number of options that may becomeultimately exercisable also depends upon the extent to which the price pershare obtained in the sale of the Company would exceed a minimum selling priceof $22.59 per share. All options have a term of 10 years from date of grant.For those options granted in 1998 and 1999, the Company will recordcompensation expense for the excess of the estimated market value of its commonstock over the exercise price of the options when and if a sale of the Company,at the prices necessary to result in exercisable options under the grant,becomes imminent or likely. The initial public offering did not triggerexercisability of these options.   Upontermination of a plan participant’s employment with the Company, the Companymay repurchase all or any portion of the vested options for a cash paymentequal to the excess of the fair market value of the shares over the optionexercise price. The Company has not previously exercised this right and doesnot currently intend to exercise this right in the future.

These stock options were granted by the Company priorto becoming a public company and therefore the Company is accounting for theseoptions under the prospective method under SFAS 123(R). The per share weightedaverage fair value of stock options granted under the 1998 Plan was $58.95 onthe date of grant using the Black-Scholes option-pricing model. Inputvariables used in the model included no expected dividend yield, a risk-freeinterest rate of 6.52%, and an estimated option life of 10 years. Because the Companywas not public on the date of the grant, no assumption as to the volatility ofthe stock price was made. As of June 30, 2006 and December 31, 2005,options to purchase 832,888 shares of common stock were outstanding with aweighted average exercise price of $10.80.

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Thefollowing table presents the weighted average price and contractual lifeinformation about the various option groups outstanding at June 30, 2006.

| Options outstanding | ** ** | **Options exercisable** | ** ** |
|--------------------------|------------|------------------------------|------------|
| ** **               | ** ** | **Number**                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Number** | ** ** |
| ** **               | ** ** | **outstanding at**      | ** ** | **Remaining** | ** ** | **Aggregate** | ** ** | **exercisable at** | ** ** |
| **Exercise**             | ** ** | **June 30,**            | ** ** | **contractual** | ** ** | **Intrinsic** | ** ** | **June 30,** | ** ** |
| **price**                | ** ** | **2006**                     | ** ** | **life (years)** | ** ** | **Value** | ** ** | **2006** | ** ** |
| ** **               | ** ** | ** **                   | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| $9.02                    |       |                         | 756,332    |   |   |   | 2.1 |   |   |   | 4,069 |   |   |   | — |   |   |
| 14.46                    |       |                         | 29,183     |   |   |   | 3.0 |   |   |   | — |   |   |   | — |   |   |
| 36.94                    |       |                         | 47,373     |   |   |   | 5.5 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                         | 832,888    |   |   |   |   |   |   |   | 4,069 |   |   |   | — |   |   |

 

The weighted averageremaining contractual life for the options outstanding at June 30, 2006 is2.3 years. The aggregate intrinsic value in the preceding table represents thetotal pre-tax intrinsic value, based on the closing price of the Company’sstock of $14.40 on June 30, 2006.

***(c) 2000 Employee Stock Incentive Plan***

In May 2000, the Company adopted the FairPointCommunications, Inc. 2000 Employee Stock Incentive Plan (the2000 Plan). The 2000 Plan provided for grants to members of management ofup to 1,898,521 options to purchase common stock, at the discretion of thecompensation committee. During 2002, the Company amended the 2000 Plan to limitthe number of shares available for grant to 448,236. In December 2003, theCompany amended the 2000 Plan to allow for the grant to members of managementof up to 1,898,521 shares of stock units in addition to shares available forstock options. Options granted under the 2000 Plan may be of two types: (i) incentivestock options and (ii) non-statutory stock options. Unless thecompensation committee shall otherwise specify at the time of grant, any optiongranted under the 2000 Plan shall be a non-statutory stock option. Effective inFebruary 2005, the Company may no longer grant awards under the 2000 Plan.

Under the 2000 Plan, unless otherwise determined bythe compensation committee at the time of grant, participating employees aregranted options to purchase common stock at exercise prices not less than themarket value of the Company’s common stock at the date of grant. Options have aterm of 10 years from date of grant. Options vest in increments of 10% on thefirst anniversary, 15% on the second anniversary, and 25% on the third, fourth,and fifth anniversaries of an individual grant. Stock units vest in incrementsof 33% on each of the third, fourth, and fifth anniversaries of the award.Subject to certain provisions, the Company can cancel each option in exchangefor a payment in cash of an amount equal to the excess of the fair market valueof the shares over the exercise price for such option. The Company has notpreviously exercised this right and does not currently intend to exercise thisright in the future.

The 2000 Plan stock options and stock units weregranted by the Company prior to becoming a public company and therefore theCompany is accounting for these awards under the prospective method under SFAS123(R). The per share weighted average fair value of stock options granted underthe 2000 Plan during 2003 was $8.39 on the date of grant using the BlackScholes option-pricing model. Input variables used in the model includedno expected dividend yield, a weighted average risk free interest rate of 4.26%in 2003 and an estimated option life of 10 years. Because the Company wasnot public on the date of grant, no assumption as to the volatility of thestock price was made.

As of June 30, 2006 and December 31, 2005,there were 240,638 options outstanding under the 2000 Plan with a weightedaverage exercise price of $36.94 and remaining contractual life of 6.4 years. Asof June 30, 2006, 218,937 options with a remaining contractual life of 6.2years were exercisable with a 

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weighted average exerciseprice of $36.94. Based upon the fair market value of the stock as of June 30,2006 of $14.40, these options do not have any intrinsic value.

As of June 30, 2006,there were 26,442 stock units outstanding with a weighted average grant datefair value per share of $32.51. None of these awards were vested as of June 30,2006 or December 31, 2005.

***(d) 2005 Stock Incentive Plan***

In February 2005, the Company adopted theFairPoint Communications, Inc. 2005 Stock Incentive Plan (the 2005 Plan). The2005 Plan provides for the grant of up to 947,441 shares of non-vested stock,stock units and stock options to members of the Company’s board of directorsand certain key members of the Company’s management. At June 30, 2006, upto 469,500 additional shares of common stock may be issued in the futurepursuant to awards authorized under the 2005 Plan.

Shares granted to employees under the 2005 Plan vestover periods ranging from three to four years and certain of these shares paycurrent dividends. In March 2006, the Company’s board of directorsapproved the grant of an additional 100,000 shares to the Company’s chiefexecutive officer. These shares will be granted under the 2005 Plan, or areplacement plan approved by the Company’s shareholders, in two installments of50,000 shares each on January 1, 2007 and January 1, 2008. Theseshares are considered to have been granted in March 2006 under SFAS 123(R) ata grant date fair value of $14.02 per share.

In the second quarter of 2006 and the second quarterof 2005, the Company’s board of directors approved an annual award to each ofthe Company’s non-employee directors of approximately $30,000 in the form ofnon-vested stock or stock units, at the recipient’s option, issued under the2005 Plan. The non-vested stock and stock units will vest in four equalquarterly installments on the first day of each of the first four calendarquarters following the grant date and the holders thereof will be entitled toreceive dividends from the date of grant, whether or not vested. In the secondquarter of 2005, the Company granted 1,870 shares of non-vested stock with atotal value at the grant date of approximately $30,000 and 7,480 stock unitswith a total value at the grant date of approximately $120,000 to the Company’snon-employee directors. In the second quarter of 2006, the Company granted anadditional 2,200 shares of non-vested stock with a total value at the grantdate of approximately $30,000 and 11,000 stock units with a total value at thegrant date of approximately $150,000 to the Company’s non-employee directors. Asof June 30, 2006, an additional 1,495 stock units were granted in lieu ofdividends on the stock units. In addition, in February 2006, 467 stockunits were granted to a newly appointed non-employee director. These stockunits vested on April 1, 2006.

The fair value of the awards is calculated as the fairmarket value of the shares on the date of grant. Beginning on January 1,2006, the Company adopted the provisions of SFAS 123(R) using the modifiedprospective method for the awards under the 2005 Plan as all awards weregranted subsequent to the Company becoming public. Under this methodology, theCompany is required to estimate expected forfeitures related to these grantsand, for the non-dividend paying shares, the compensation expense is reduced bythe present value of the dividends which were not paid on those shares prior totheir vesting.

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Thefollowing table presents information regarding non-vested stock granted toemployees under the 2005 Plan during 2006:

| ** **                         | ** ** | ** ** | ** ** | **Weighted**                  | ** ** |
|------------------------------------|------------|------------|------------|-------------------------------|------------|
| ** **                         | ** ** | ** ** | ** ** | **average grant**        | ** ** |
| ** **                         | ** ** | **Shares** | ** ** | **date fair value** | ** ** |
| **Non-vested stock**          | ** ** | ** ** | ** ** | **outstanding**               | ** ** | **per share** | ** ** |
| Non-vested at January 1, 2006 |       |       | 470,029    |                          |       |   | $ | 18.13 |   |   |
| Granted                            |       |       | 50,000     |                          |       |   | 14.02 |   |   |
| Vested                             |       |       | (119,219   | )                             |       |   | 18.50 |   |   |
| Forfeited                          |       |       | (13,423    | )                             |       |   | 18.50 |   |   |
| Non-vested at  June 30, 2006  |       |       | 387,387    |                          |       |   | 17.47 |   |   |
|                                    |            |            |            |                               |            |  |  |  |  |  |  |  |

 

**(5) DiscontinuedOperations and Restructure Charges**

In November 2001, the Company announced its planto discontinue the competitive communications business operations of its whollyowned subsidiary, FairPoint Carrier Services, Inc., or Carrier Services.As a result of the adoption of the plan to discontinue the competitivecommunications operations, these operating results are presented asdiscontinued operations.

Net liabilities ofdiscontinued competitive communications operations as of June 30, 2006 andDecember 31, 2005 were $1.4 million and $2.4 million,respectively. The remaining restructuring accrual at June 30, 2006 was$0.3 million, and is primarily associated with remaining equipment andlease obligations.

**(6) Interest RateSwap Agreements**

The Company assesses interest rate cash flow risk bycontinually identifying and monitoring changes in interest rate exposures thatmay adversely impact expected future cash flows and by evaluating hedgingopportunities. The Company maintains risk management control systems to monitorinterest rate cash flow risk attributable to both the Company’s outstanding andforecasted debt obligations. The risk management control systems involve theuse of analytical techniques, including cash flow sensitivity analysis, toestimate the expected impact of changes in interest rates on the Company’s futurecash flows.

TheCompany uses variable and fixed-rate debt to finance its operations,capital expenditures and acquisitions. The variable-rate debt obligationsexpose the Company to variability in interest payments due to changes ininterest rates. The Company believes it is prudent to limit the variability ofa portion of its interest payments. To meet this objective, the Company entersinto interest rate swap agreements to manage fluctuations in cash flowsresulting from interest rate risk. These swaps change the variable-ratecash flow exposure on the debt obligations to fixed cash flows. Under the termsof the interest rate swaps, the Company pays a variable interest rate plus anadditional payment if the variable rate payment is below a contractual rate, orit receives a payment if the variable rate payment is above the contractualrate.  The chart below provides detailsof each of the Company’s interest rate swap agreements.
| Effective Date:   | ** ** | ** ** | ** **    | **Notional Amount** | ** ** | **Rate** | ** ** | **Rate, including  applicable margin** | ** ** | **Expiration Date** | ** **              |
|------------------------|------------|------------|---------------|--------------------------|------------|----------|------------|--------------------------------------------------|------------|--------------------------|-------------------------|
| February 8,  2005 |       | $          | 130.0 Million |                     | 3.76%      |     |       | 5.51%                                            |       |                     | December 31,  2007 |   |
| February 8,  2005 |       | $          | 130.0 Million |                     | 3.98%      |     |       | 5.73%                                            |       |                     | December 31,  2008 |   |
| February 8,  2005 |       | $          | 130.0 Million |                     | 4.11%      |     |       | 5.86%                                            |       |                     | December 31,  2009 |   |
| April 29,  2005   |       | $          | 50.0 Million  |                     | 4.72%      |     |       | 6.47%                                            |       |                     | March 31,  2012    |   |
| June 30,  2005    |       | $          | 50.0 Million  |                     | 4.69%      |     |       | 6.44%                                            |       |                     | March 31,  2011    |   |
| June 30, 2006     |       | $          | 50.0 Million  |                     | 5.36%      |     |       | 7.11%                                            |       |                     | December 31, 2009  |   |

 

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As a result of these swap agreements, as ofJune 30, 2006, approximately 92% of the Company’s indebtedness boreinterest at fixed rates rather than variable rates. Effective onSeptember 30, 2005, the Company amended the terms of its credit facility.This amendment reduced the effective interest rate margins applicable to theCompany’s interest rate swap agreements by 0.25% to 1.75%.

These interest rate swapsqualify as cash flow hedges for accounting purposes. The effect of hedgeineffectiveness on net earnings was insignificant for the three and six monthsended June 30, 2006. At June 30, 2006, the fair market value of theseswaps was approximately $17.9 million and has been recorded, net of tax of$6.7 million, as an increase in comprehensive income. Of the$17.9 million, $7.1 million has been included in other current assetsand $10.8 million has been included in other long-term assets.

**(7) Investments**

The Company has a 7.5%ownership in Orange County Poughkeepsie Limited Partnership, which is accountedfor under the equity method. Summary financial information for the partnershipfollows (in thousands): 

| ** **                          | ** ** | **March 31,2006** | ** ** | **December 31,2005** | ** ** |
|-------------------------------------|------------|------------------------|------------|---------------------------|------------|
| Current assets                      |       |                   | $          | 11,432                    |       |   |   | $ | 9,812 |   |   |
| Property, plant  and equipment, net |       |                   | 37,556     |                      |       |   | 37,516 |   |   |
| Total assets                        |       |                   | $          | 48,988                    |       |   |   | $ | 47,328 |   |   |
| Total liabilities                   |       |                   | $          | 679                       |       |   |   | $ | 432 |   |   |
| Partners’ capital              |       |                   | 48,309     |                      |       |   | 46,896 |   |   |
|                                |       |                   | $          | 48,988                    |       |   |   | $ | 47,328 |   |   |

 

| ** **       | ** ** | **Three months ended  March 31,** | ** ** | **Six months ended  March 31,** | ** ** |
|------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** **       | ** ** | **2006**                                         | ** ** | **2005**                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues         |       | $                                                | 38,469     |                                           | $          | 39,763 |   | $ | 88,694 |   | $ | 80,644 |   |
| Operating income |       | 30,195                                           |       | 33,846                                         |       | 70,878 |   | 67,357 |   |
| Net income       |       | 30,413                                           |       | 33,955                                         |       | 71,389 |   | 67,729 |   |
|                  |            |                                                  |            |                                                |            |  |  |  |  |  |  |  |  |

 

The Company also has other investments innon-marketable securities which are accounted for using the cost and equitymethods of accounting. The Company continually monitors all of these investmentsfor possible impairment by evaluating the financial performance of thebusinesses in which it invests and comparing the carrying value of theinvestment to quoted market prices (if available), or the fair values ofsimilar investments, which in certain instances, is based on traditionalvaluation models utilizing multiples of cash flows. When circumstances indicatethat a decline in the fair value of the investment has occurred and the declineis other than temporary, the Company records the decline in value as a realizedimpairment loss and a reduction in the cost of the investment.

On August 4, 2005, the Board of Directors of theRural Telephone Bank, or RTB, approved the liquidation and dissolution of theRTB. As part of such liquidation and dissolution, all RTB loans were to betransferred to the Rural Utilities Service and all shares of the RTB’sClass A Stock, Class B Stock and Class C Stock were to beredeemed at par value. The Company had no outstanding loans with the RTB butowned 2,477,493 shares of Class B Stock and 24,380 shares of Class CStock. This liquidation was completed in April 2006, and, as a result, theCompany received proceeds of $26.9 million from the RTB. The Company recorded again on this investment of approximately $4.1 million in the second quarter of2006. Some portion of the proceeds received from the RTB liquidation, while notestimable at this time, may be subject to review by regulatory authorities whomay require us to record a portion thereof as a regulatory liability.

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On May 1, 2006, theCompany completed the sale of its investment in Southern Illinois CellularCorp. from which it received total proceeds of $16.9 million. As part of thissale, the Company received a portion of total proceeds, approximately $2.1million, in the form of a dividend. In addition to the dividend income of $2.1million, the Company recorded a gain on this investment of approximately $10.2million in the second quarter of 2006. Additional proceeds of approximately$2.6 million will be held in escrow and the Company will not record the gain onthis portion of the transaction until the proceeds are received.

**(8) Long Term Debt**

Longterm debt at June 30, 2006 and December 31, 2005 is shown below: 

| ** **                                                                                               | ** ** | **June 30,  2006** | ** ** | **December 31,2005** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                                                                                               | ** ** | **(In thousands)** | ** ** |
| Senior secured  notes (credit facility), variable rate of 6.83% at June 30, 2006, due  2011 to 2012 |       | $                       | 588,500    |                      |       | $ | 602,275 |   |   |
| Senior notes,  11.875%, due 2010                                                                         |       | 2,050                   |       |                      | 2,050      |   |   |
| Senior notes to  RTFC, fixed rate, ranging from 8.2% to 9.2%, due 2009 to 2014                           |       | 2,766                   |       |                      | 3,100      |   |   |
| Total outstanding long-term debt                                                                         |       | 593,316                 |       |                      | 607,425    |   |   |
| Less current  portion                                                                                    |       | (696                    | )          |                      | (677       | ) |   |
| Total long-term  debt, net of current portion                                                            |       | $                       | 592,620    |                      |       | $ | 606,748 |   |   |

 

The approximate aggregatematurities of long-term debt for each of the five years subsequent toJune 30, 2006 are as follows (in thousands): 

| **Year ending June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|
| 2007                                    |       | $          | 696        |       |
| 2008                                    |       | 734        |       |
| 2009                                    |       | 452        |       |
| 2010                                    |       | 2,205      |       |
| 2011                                    |       | 166        |       |
| Thereafter                              |       | 589,063    |       |
|                                    |       | $          | 593,316    |       |

 

The Company has entered into a credit facilityconsisting of a revolving facility in an aggregate principal amount of up to$100.0 million and a term facility in an aggregate principal amount of$588.5 million. As of June 30, 2006, the Company had borrowed theentire $588.5 million available under the term facility and had no borrowingsoutstanding under the revolving facility.

The term facility matures in February 2012 andthe revolving facility matures in February 2011. Borrowings bear interest,at the Company’s option, for the revolving facility and for the term facilityat either (a) the Eurodollar rate (as defined in the credit facility) plusan applicable margin or (b) the Base rate (as defined in the creditfacility) plus an applicable margin. The Eurodollar rate applicable margin andthe Base rate applicable margin for loans under the credit facility are 2.0%and 1.0%, respectively. Effective on September 30, 2005, the Companyamended its credit facility to reduce the effective interest rate margins onthe $588.5 million term facility by 0.25% to 1.75% on Eurodollar loans and to0.75% for Base rate loans. Interest with respect to Base rate loans is payablequarterly in arrears and interest with respect to Eurodollar loans is payableat the end of the applicable interest period and every three months in the caseof interest periods in excess of three months.

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The credit facility provides for payment to thelenders of a commitment fee on any unused commitments equal to 0.5% per annum,payable quarterly in arrears, as well as other fees.

The credit facility requires certain mandatoryprepayments, including first to prepay outstanding term loans under the creditfacility and, thereafter, to repay loans under the revolving facility and/or toreduce revolving facility commitments with, subject to certain conditions andexceptions, 100% of the net cash proceeds the Company receives from any sale,transfer or other disposition of any assets (subject to certain reinvestmentelection provisions and excluded assets sales), 100% of net casualty insurance proceedsand 100% of the net cash proceeds the Company receives from the issuance ofpermitted securities and, at certain times if the Company is not permitted topay dividends, with 50% of the increase in the Company’s CumulativeDistributable Cash (as defined in the credit facility) during the prior fiscalquarter. Reductions to the revolving commitments under the credit facility fromthe foregoing recapture events will not reduce the revolving commitments underthe credit facility below $50.0 million.

The credit facility provides for voluntary prepaymentsof the revolving facility and the term facility and voluntary commitmentreductions of the revolving facility, subject to giving proper notice andcompensating the lenders for standard Eurodollar breakage costs, if applicable.

The credit facilityrequires that the Company maintain certain financial covenants. The creditfacility contains customary affirmative covenants, including, withoutlimitation, the following tests:  aminimum interest coverage ratio equal to or greater than 3.0:1 and a maximumleverage ratio equal to or less than 5.25:1. The credit facility also containsnegative covenants and restrictions, including, among others, with respect toredeeming and repurchasing other indebtedness, loans and investments,additional indebtedness, liens, capital expenditures, changes in the nature ofthe Company’s business, mergers, acquisitions, asset sales and transactionswith the Company’s affiliates. The credit facility restricts the Company’sability to declare and pay dividends on its common stock as follows:

·       TheCompany may use its cumulative distributable cash to pay dividends,but may not in general pay dividends in excess of the amount of itscumulative distributable cash. “Cumulative distributable cash” is defined inthe credit facility as the amount of “Available cash” generated beginning onApril 1, 2005 through the end of the Company’s most recent fiscal quarterfor which financial statements are available and a compliance certificate hasbeen delivered, (a) minus the aggregate amount of dividends paid afterJuly 30, 2005 and the aggregate amount of investments made afterApril 1, 2005 using such cash, (b) plus the aggregate amount ofdistributions received from such investments (not to exceed the amountoriginally invested). “Available cash” is defined in the credit facility asAdjusted EBITDA (a) minus (i) cash interest expense (adjusted foramortization, swap interest and dividends and accretion on series A preferredstock), (ii) scheduled principal payments on indebtedness,(iii) capital expenditures, (iv) investments, (v) cash incometaxes, and (vi) non-cash items excluded from Adjusted EBITDA and paid incash and, (b) plus (i) the cash amount of any extraordinary gains andgains realized on asset sales other than in the ordinary course of business and(ii) cash received on account of non-cash gains or non-cash incomeexcluded from Adjusted EBITDA. “Adjusted EBITDA” is defined in the creditfacility as Consolidated Net Income (which is defined in the credit facilityand includes distributions from investments) (a) plus the following to theextent deducted from Consolidated Net Income: provision for income taxes,consolidated interest expense, depreciation, amortization, losses on sales ofassets and other extraordinary losses, and certain other non-cash items, eachas defined, (b) minus gains on sales of assets and other extraordinarygains and all non-cash items increasing Consolidated Net Income.

·       TheCompany may not pay dividends if a default or event of default under the creditfacility has occurred and is continuing or would exist after giving effect tosuch payment, if the Company’s leverage ratio is above 5.00 to 1.00 or if theCompany does not have at least $10 million of cash on hand (includingunutilized commitments under the credit facility’s revolving facility).

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The credit facility also permits the Company to useavailable cash to repurchase shares of its capital stock, subject to the sameconditions.

The Company may obtain letters of credit under therevolving facility to support obligations of the Company and/or obligations ofits subsidiaries incurred in the ordinary course of business in an aggregateprincipal amount not to exceed $10.0 million and subject to limitations onthe aggregate amount outstanding under the revolving facility. As ofJune 30, 2006, a letter of credit had been issued for $1.3 million.

The credit facility is guaranteed, jointly andseverally, subject to certain exceptions, by all first tier subsidiaries of theCompany. The Company has provided to Deutsche Bank Trust Company Americas, ascollateral agent for the benefit of the lenders under the credit facility andcertain hedging creditors under permitted hedging agreements, collateralconsisting of (subject to certain exceptions) 100% of the Company’s equityinterests in the subsidiary guarantors and certain other intermediate holdingcompany subsidiaries. Newly acquired or formed direct or indirect subsidiariesof the Company which own equity interests of any subsidiary that is anoperating company will be required to provide the collateral described above.

The credit facilitycontains customary events of default, including but not limited to, failure topay principal, interest or other amounts when due, breach of covenants orrepresentations, cross-defaults to certain other indebtedness in excessof specified amounts, judgment defaults in excess of specified amounts, certainERISA defaults, the failure of any guaranty or security document supporting thecredit facility and certain events of bankruptcy and insolvency.

**(9) Earnings PerShare**

Earnings per share has been computed in accordancewith SFAS No. 128, *Earnings Per Share*.Basic earnings per share is computed by dividing net income by the weighted averagenumber of shares of common stock outstanding for the period. Except when theeffect would be anti-dilutive, the diluted earnings per share calculationcalculated using the treasury stock method includes the impact of stock units,shares of non-vested common stock and shares that could be issued underoutstanding stock options. For the three and six months ended June 30,2006 and June 30, 2005, diluted weighted average shares of common stockoutstanding included 34,272 and 63,920 shares, respectively, associated withoutstanding stock options and non-vested stock and stock units.

The number of potentialshares of common stock excluded from the calculation of diluted net income pershare, prior to the application of the treasury stock method, is as follows (inthousands): 

| ** **                                         | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Contingent stock  options                          |       | 833                                             |       | 833                                           |       | 833 |   | 833 |   |
| Shares excluded as  effect would be anti-dilutive: |       |                                            |       |                                          |       |   |   |   |   |
| Stock options                                      |       | 241                                             |       | 241                                           |       | 241 |   | 241 |   |
| Restricted stock                                   |       | 464                                             |       | 466                                           |       | 441 |   | 466 |   |
| Restricted stock units                             |       | 37                                              |       | 33                                            |       | 38 |   | 33 |   |
| Total                                              |       | 1,575                                           |       | 1,573                                         |       | 1,553 |   | 1,573 |   |

 

**(10) SubsequentEvent**

On July 26, 2006, theCompany announced that it had completed the purchase of the assets of CassCounty Telephone Company Limited Partnership and LEC Long Distance, Inc.(collectively, Cass County) for the purchase price of approximately $33.0million, subject to adjustment. Cass County provides 

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telecommunicationsand Internet services to rural areas of Missouri and Kansas. Cass County hasapproximately 8,600 access line equivalents currently in operation, consistingof approximately 6,800 residential lines, 1,000 business lines and 800 highspeed data subscribers. The Company funded the Cass County acquisition fromcash on hand and from borrowings under the revolving facility of our creditfacility.

**(11) Litigation**

On June 6, 2005, a purported class actioncomplaint was filed in the General Court of Justice, Superior Court Division,of the State of North Carolina by Robert Lowinger on behalf of himself and allother similarly situated persons against the Company, the Company’s Chairmanand Chief Executive Officer, certain of the Company’s current and formerdirectors and certain of the Company’s stockholders. The complaint allegesviolations of Sections 11 and 12(a)(2) and liability under Section 15of the Securities Act, and alleges that the Company’s registration statement onForm S-1 (which was declared effective by the SEC onFebruary 3, 2005) and the related prospectus dated February 3, 2005,each relating to the Company’s initial public offering of common stock,contained certain material misstatements and omitted certain materialinformation necessary to be included relating to the Company’s broadbandproducts and access line trends. The plaintiff, who has been a plaintiff inseveral prior securities cases, seeks rescission rights and unspecified damageson behalf of a purported class of purchasers of the common stock “issuedpursuant and/or traceable to the Company’s IPO during the period fromFebruary 3, 2005 through March 21, 2005”. The Company removed theaction to Federal Court. The plaintiff filed a motion to remand the action tothe North Carolina State Court, which was denied by the Federal Magistrate. Theplaintiff has objected to and appealed the Magistrate’s decision to theDistrict Court Judge. The Company has contested the appeal and filed a Motionto Dismiss the action. The Magistrate, on February 9, 2006, issued aMemorandum and a Recommendation to the District Court Judge that the Motion toDismiss be granted and that the complaint be dismissed with prejudice. Theplaintiff has filed a Notice of Objection to the Magistrate’s Recommendation.Both the appeal of denial of the Motion to Remand and the Motion to Dismiss arepending before the District Court Judge. The Company believes that this actionis without merit and intends to continue to defend the litigation vigorously.

From time to time, the Company is involved in litigationand regulatory proceedings arising out of its operations. Management believesthat the Company is not currently a party to any legal proceedings, the adverseoutcome of which, individually or in the aggregate, would have a materialadverse effect on the Company’s financial position or results of operations.

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**Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

The following discussionand analysis provides information that the Company’s management believes isrelevant to an assessment and understanding of the consolidated results ofoperations and financial condition of FairPoint Communications, Inc. andits subsidiaries. The discussion should be read in conjunction with FairPoint’sConsolidated Financial Statements for the year ended December 31, 2005included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2005.

**Overview**

We are a leading provider of communications servicesin rural communities, offering an array of services, including local and longdistance voice, data, Internet and broadband product offerings. We are one ofthe largest telephone companies in the United States focused on serving ruralcommunities and we are the 17th largest local telephone company, in each casebased on number of access lines. We operate in 17 states with 292,910 accessline equivalents (including voice access lines and high speed data lines, whichinclude digital subscriber lines, or DSL, wireless broadband and cable modems)in service as of June 30, 2006.

We were incorporated in February 1991 for thepurpose of acquiring and operating incumbent telephone companies in ruralmarkets. Since 1993, we have acquired 33 such businesses, 29 of which wecontinue to own and operate (including Cass County which was acquired inJuly 2006). Many of our telephone companies have served their respectivecommunities for over 75 years. The majority of the rural communities weserve have fewer than 2,500 access lines. All of our telephone companiesqualify as rural local exchange carriers under the Telecommunications Act of1996, or the Telecommunications Act.

Rural local exchange carriers generally arecharacterized by stable operating results and strong cash flow margins andoperate in supportive regulatory environments. In particular, existing stateand federal regulations permit us to charge rates that enable us to recover ouroperating costs, plus a reasonable rate of return on our invested capital (asdetermined by relevant regulatory authorities). Competition is typicallylimited because rural local exchange carriers primarily serve sparselypopulated rural communities with predominantly residential customers, and thecost of operations and capital investment requirements for new entrants ishigh. As a result, in our markets, we have experienced limited wirelinecompetition and limited voice competition from cable providers. We also aresubject to competition from wireless and various other technologies which mayincrease in the future. If competition were to increase, the originating andterminating access revenues we receive may be reduced as a result of wireless,voice over internet protocol, or VOIP, or other new technology utilization. Weperiodically negotiate interconnection agreements with other telecommunicationsproviders which could ultimately result in increased competition in thosemarkets.

Access lines are an important element of our business.Historically, rural telephone companies have experienced consistent growth inaccess lines because of positive demographic trends, insulated rural localeconomies and little competition. Recently, however, many rural telephonecompanies have experienced a loss of access lines due to challenging economicconditions, increased competition and the introduction of DSL services(resulting in customers canceling second lines in favor of DSL). We have notbeen immune to these conditions. We have been able to mitigate our access lineloss somewhat through bundling services, retention programs, continuedcommunity involvement and a variety of other focused programs.

We are continuing our billing conversion and havecurrently converted approximately 36% of the access lines billed on the ICMSplatform to the MACC Customer Master platform. The conversion of the remainingcompanies currently on the ICMS platform is expected to be completed bySeptember 9, 2006 with the remainder of the companies expected to becompleted by early to mid 2007.

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Our board of directors has adopted a dividend policywhich reflects our judgment that our stockholders would be better served if wedistributed a substantial portion of the cash generated by our business inexcess of operating needs, interest and principal payments on our indebtedness,dividends on future senior classes of our capital stock, if any, capitalexpenditures, taxes and future reserves, if any, as regular quarterly dividendpayments to the holders of our common stock, rather than retained and used forother purposes.

We are subject to regulation primarily by federal andstate governmental agencies. At the federal level, the FCC has jurisdictionover interstate and international communications services. Statetelecommunications regulators exercise jurisdiction over intrastatecommunications services.

We face risks that couldmaterially adversely affect our business, consolidated financial condition,results of operations, liquidity and/or the market price of our common stock.For a discussion of certain of the risks facing us, see Exhibit 99.1 to ourQuarterly Report on Form 10-Q for the period ended March 31, 2006.

**Revenues**

We derive our revenuesfrom:

·       *Local calling services*.   We receiverevenues from providing local exchange telephone services, including monthlyrecurring charges for basic service, usage charges for local calls and servicecharges for special calling features.

·       *Universal Service Fund high cost loop support*.   Wereceive payments from the Universal Service Fund to support the high cost ofour operations in rural markets. This revenue stream fluctuates based upon ouraverage cost per loop compared to the national average cost per loop. Forexample, if the national average cost per loop increases and our operatingcosts (and average cost per loop) remain constant or decrease, the payments wereceive from the Universal Service Fund would decline. Conversely, if thenational average cost per loop decreases and our operating costs (and averagecost per loop) remain constant or increase, the payments we receive from theUniversal Service Fund would increase. The national average cost per loop inrelation to our average cost per loop has increased, and we believe that thenational average cost per loop will likely continue to increase in relation toour average cost per loop. As a result, the payments we receive from theUniversal Service Fund have declined and will likely continue to decline.

·       *Interstate access revenue*.   Theserevenues are primarily based on a regulated return on rate base and recovery ofallowable expenses associated with the origination and termination ofinterstate long distance telephone calls both to and from our customers.Interstate access charges to long distance carriers and other customers arebased on access rates filed with the Federal Communications Commission. Theserevenues also include Universal Service Fund payments for local switchingsupport, long term support and interstate common line support.

·       *Intrastate access revenue*.   Theserevenues consist primarily of charges paid by long distance companies and othercustomers for access to our networks in connection with the origination andtermination of intrastate long distance telephone calls both to and from ourcustomers. Intrastate access charges to long distance carriers and othercustomers are based on access rates filed with the state regulatory agencies.

·       *Long distance services*.   We receiverevenues from long distance services we provide to our residential and businesscustomers. In addition, Carrier Services provides communications providers notaffiliated with us with wholesale long distance services.

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·       *Data and Internet services*.   Wereceive revenues from monthly recurring charges for services, including highspeed data, special access, private lines, Internet and other services.

·       *Other services*.   We receive revenuesfrom other services, including billing and collection, directory services andsale and maintenance of customer premise equipment.

Thefollowing summarizes our revenues and percentage of revenues from continuingoperations from these sources (in thousands): 

| ** **                            | ** ** | **Revenues**                               | ** ** | **% of Revenues**              | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                            | ** ** | **Three months  ended June 30,** | ** ** | **Six months  ended June 30,** | ** ** | **Three months  ended June 30,** | ** ** | **Six months  ended June 30,** | ** ** |
| ** **                            | ** ** | **2006**                                   | ** ** | **2005**                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ***Revenue  Source***                 |       |                                       |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Local calling services                |       | $                                          | 16,609     |                                     | $          | 15,982 |   | $ | 32,891 |   | $ | 31,599 |   |   | 26 | % |   |   | 25 | % |   |   | 25 | % |   |   | 25 | % |   |
| Universal service fund-high cost loop |       | 4,731                                      |       | 4,707                                    |       | 9,550 |   | 9,503 |   |   | 7 | % |   |   | 7 | % |   |   | 7 | % |   |   | 7 | % |   |
| Interstate access revenues            |       | 16,589                                     |       | 20,083                                   |       | 34,225 |   | 36,963 |   |   | 26 | % |   |   | 31 | % |   |   | 26 | % |   |   | 30 | % |   |
| Intrastate access revenues            |       | 8,888                                      |       | 9,534                                    |       | 17,865 |   | 19,617 |   |   | 14 | % |   |   | 15 | % |   |   | 14 | % |   |   | 15 | % |   |
| Long distance services                |       | 5,630                                      |       | 4,798                                    |       | 11,029 |   | 9,480 |   |   | 9 | % |   |   | 7 | % |   |   | 9 | % |   |   | 8 | % |   |
| Data and Internet services            |       | 6,890                                      |       | 5,937                                    |       | 13,569 |   | 11,529 |   |   | 11 | % |   |   | 9 | % |   |   | 11 | % |   |   | 9 | % |   |
| Other services                        |       | 4,859                                      |       | 4,165                                    |       | 9,858 |   | 8,180 |   |   | 7 | % |   |   | 6 | % |   |   | 8 | % |   |   | 6 | % |   |
| Total                                 |       | $                                          | 64,196     |                                     | $          | 65,206 |   | $ | 128,987 |   | $ | 126,871 |   |   | 100 | % |   |   | 100 | % |   |   | 100 | % |   |   | 100 | % |   |

 

**Operating Expenses**

Our operating expenses are categorized as operatingexpenses and depreciation and amortization.

·       Operating expenses includecash expenses incurred in connection with the operation of our central officesand outside plant facilities and related operations. In addition to theoperational costs of owning and operating our own facilities, we also purchaselong distance services from the regional bell operating companies, largeindependent telephone companies and third party long distance providers. Inaddition, our operating expenses include expenses relating to sales andmarketing, customer service and administration and corporate and personneladministration. Also included in operating expenses are non-cash expensesrelated to stock based compensation. Stock based compensation consists ofcompensation charges incurred in connection with the employee stock options,stock units and non-vested stock granted to our executive officers anddirectors.

·       Depreciationand amortization includes depreciation of our communications network andequipment.

**Acquisitions**

We intend to continue to pursue selectiveacquisitions:

·       On July 26, 2006, wecompleted the purchase of the assets of Cass County Telephone Company LimitedPartnership and LEC Long Distance, Inc., or Cass County, for approximately$33.0 million, subject to adjustment. Cass County served approximately 8,600access line equivalents, as of the date of acquisition, in Missouri and Kansas.

·       On July 26, 2006, weannounced an agreement to purchase Unite Communications Systems, Inc., orUnite, for approximately $10.8 million, subject to adjustment. Unite owns ExOpof Missouri, Inc., which is a facilities-based voice, data and videoservice provider located outside of Kansas City, Missouri. Unite serves approximately4,200 access lines in Kearney and Platte City, Missouri, approximately 50 milesnorth of the Cass County service territory.

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·       On May 2, 2005, wecompleted the acquisition of Berkshire Telephone Corporation, or Berkshire, fora purchase price of approximately $20.3 million (or $16.4 million net ofcash acquired). Berkshire is an independent local exchange carrier thatprovides voice communication, cable and internet services to over 7,200 accessline equivalents, as of the date of acquisition, serving five communities inNew York State. Berkshire’s communities of service are adjacent to those ofTaconic Telephone Corp., one of the Company’s subsidiaries.

·       On September 1, 2005,we completed the acquisition of Bentleyville Communications Corporation, orBentleyville, for a purchase price of approximately $11.0 million (or $9.3million net of cash acquired), subject to adjustment. Bentleyville, which hadapproximately 3,600 access line equivalents as of the date of acquisition,provides telecommunications, cable and internet services to rural areas ofSouthwestern Pennsylvania which are adjacent to our existing operations inPennsylvania.

In the normal course ofbusiness, we evaluate selective acquisitions and may enter into non-bindingletters of intent with respect to such acquisitions, subject to customaryconditions. Management currently intends to fund future acquisitions throughthe use of the revolving facility of our credit facility or additional debtfinancing or the issuance of additional shares of our common stock. However,our substantial amount of indebtedness and our dividend policy could restrictour ability to obtain such financing on acceptable terms or at all.

**Results ofOperations**

The following tables setforth the percentages of revenues represented by selected items reflected inour consolidated statements of operations. The comparisons of financial resultsare not necessarily indicative of future results.

**Three Months Ended June 30, 2006 Compared withThree Months Ended June 30, 2005**

| ** **                                               | ** ** | **Three months  ended June 30,** | ** ** | **Three months  ended June 30,** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                        | ** ** | **% of revenue**                      | ** ** | **2005** | ** ** | **% of revenue** | ** ** |
| ** **                                               | ** ** | **(in thousands)**                         | ** ** |
| Revenues                                                 |       | $                                               | 64,196     |                                            |       | 100.0 | % |   | $ | 65,206 |   |   | 100.0 | % |   |
| Operating expenses                                       |       | 36,275                                          |       |                                            | 56.5       | % |   | 35,321 |   |   | 54.2 | % |   |
| Depreciation and  amortization                           |       | 13,352                                          |       |                                            | 20.8       | % |   | 13,106 |   |   | 20.1 | % |   |
| Total operating  expenses                                |       | 49,627                                          |       |                                            | 77.3       | % |   | 48,427 |   |   | 74.3 | % |   |
| Income from  operations                                  |       | 14,569                                          |       |                                            | 22.7       | % |   | 16,779 |   |   | 25.7 | % |   |
| Net gain (loss) on sale of investments and other  assets |       | 14,277                                          |       |                                            | 22.2       | % |   | (6 | ) |   | (0.0 | )% |   |
| Interest and  dividend income                            |       | 2,587                                           |       |                                            | 4.0        | % |   | 720 |   |   | 1.1 | % |   |
| Interest expense                                         |       | (9,792                                          | )          |                                            | (15.2      | )% |   | (9,588 | ) |   | (14.7 | )% |   |
| Equity in net  earnings of investees                     |       | 3,079                                           |       |                                            | 4.8        | % |   | 2,796 |   |   | 4.3 | % |   |
| Other  non-operating, net                                |       | —                                          |       |                                            | —     |   |   | (1,582 | ) |   | (2.4 | )% |   |
| Total other income  (expense)                            |       | 10,151                                          |       |                                            | 15.8       | % |   | (7,660 | ) |   | (11.7 | )% |   |
| Income before  income taxes                              |       | 24,720                                          |       |                                            | 38.5       | % |   | 9,119 |   |   | 14.0 | % |   |
| Income tax  expense                                      |       | (9,645                                          | )          |                                            | (15.0      | )% |   | (3,515 | ) |   | (5.4 | )% |   |
| Minority interest  in income of subsidiaries             |       | (1                                              | )          |                                            | (0.0       | )% |   | (1 | ) |   | 0.0 | % |   |
| Net income                                               |       | $                                               | 15,074     |                                            |       | 23.5 | % |   | $ | 5,603 |   |   | 8.6 | % |   |

 

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**Revenues**

*Revenues.**  *Revenues decreased$1.0 million to $64.2 million in 2006 compared to $65.2 millionin 2005. Excluding the impact of acquired operations, revenues decreased $2.4million compared to the second quarter of 2005. We derived our revenues fromthe following sources:

*Localcalling services.**  *Localcalling service revenues increased $0.6 million to $16.6 million in 2006compared to $16.0 million in 2005. Excluding the impact of acquired operations,local calling service revenues increased $0.4 million compared to the secondquarter of 2005. The primary driver of this increase is an increase in wirelessinterconnection revenue. Voice access lines, including lines acquired,decreased 2.1% from the second quarter of 2005 but increased slightly comparedto the first quarter of 2006. Voice access lines, excluding acquired lines,decreased 3.3% from the second quarter of 2005.

*UniversalService Fund high cost loop.**  *Universal Service Fund high cost loop receiptsremained flat at $4.7 million in the second quarter of 2006 and 2005.

*Interstateaccess revenues.**  *Interstateaccess revenues were $16.6 million for the three months ended June 30,2006 compared to $20.1 million for the three months ended June 30, 2005. Excludingthe impact of acquired companies, interstate access revenues decreased $3.8million compared to 2005. The primary drivers of this decrease were decreasesin revenue settlements and adjustments related to prior years. In the secondquarter of 2005, these revenue settlements and adjustments increased revenue by$1.9 million while in the second quarter of 2006, the settlements andadjustments decreased revenue by approximately $1.0 million. Therefore, the twoadjustments combined resulted in a decrease in interstate revenues of $2.9million.

*Intrastateaccess revenues.**  *Intrastateaccess revenues decreased $0.6 million from $9.5 million in 2005 to$8.9 million in 2006. Excluding the impact of acquired companies,intrastate access revenues decreased $0.9 million compared to 2005. Intrastateaccess revenue declined primarily due to a decrease in access rates and adecrease in minutes of use compared to the second quarter of 2005. The ratedecrease is primarily due to intrastate rate reductions implemented in Maine inthe second quarter of 2005. Intrastate revenues are expected to continue todecline.

*Longdistance services.**  *Longdistance services revenues increased $0.8 million from $4.8 millionin 2005 to $5.6 million in 2006. This is attributable to the increase insubscribers and minutes related to bundles and packages sold to our existingcustomers. Interstate long distance penetration as of June 30, 2006 was46.8% of voice access lines as compared to 41.7% as of June 30, 2005.

*Dataand Internet services.**  *Dataand Internet services revenues increased $1.0 million to $6.9 millionin 2006 compared to 2005. This increase is due primarily to increases in highspeed data customers as we continue to market our broadband services. Our highspeed data subscribers increased from 40,910 as of June 30, 2005 to 51,331as of June 30, 2006 and represent a 21.2% penetration of voice accesslines.

*Other services.**  *Other revenues increased from$4.2 million in 2005 to $4.9 million in 2006. Excluding the impact ofacquired companies, other revenues increased $0.5 million compared to 2005. Thisincrease is principally driven by an increase in directory revenues in 2006.

**Operating Expenses**

*Operatingexpenses, excluding depreciation and amortization.**  *Operating expenses increased$1.0 million to $36.3 million in 2006 from $35.3 million in 2005.Approximately $0.9 million of this increase is related to operating expenses ofthe companies acquired during 2005. In addition, this increase is primarilydriven by an increase in salaries and wages of $0.8 million, an increase inexpenses related to HSD and long distances services of $0.4 million, anincrease in billing expenses of $0.3 million and increases in various otherexpenses. These increases were offset by a decrease in consulting expenses of 

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$1.7 million due toexpenses incurred in 2005 related to our preparation for compliance under Section 404of the Sarbanes-Oxley Act. Included in operating expenses are non-cash stockbased compensation expenses associated with the award of restricted stock andrestricted units. For the three months ended June 30, 2006 and 2005, stockbased compensation expenses totaled $0.7 million and $0.7 million,respectively.

*Depreciationand amortization.**  *Depreciationand amortization expense increased $0.2 million to $13.4 million in2006.

*Incomefrom operations.**  *Incomefrom operations decreased $2.2 million to $14.6 million in 2006. Thiswas driven principally by the increased percentage of lower margin unregulatedrevenues in our total business mix due to DSL and long distance revenue growth,which offset declining higher margin regulated revenues. In addition to theincrease in unregulated products, we experienced declines in interstate andintrastate revenues which have significantly higher margins and we have alsoexperienced an increase in operating expenses.

*Otherincome (expense).**  *Totalother income (expense) increased $17.8 million to $10.2 million in 2006. Gainson sale of investments increased $14.3 million due to the sale of ourinvestments in the Rural Telephone Bank and Southern Illinois CellularCorporation. Interest and dividend income increased $1.9 million as a result ofa dividend distribution from Southern Illinois Cellular Corporation associatedwith the sale. Interest expense increased $0.2 million to$9.8 million in 2006. Also, in 2005, the redemption of the 12 1⁄2% notes in May 2005resulted in other non-operating losses of $1.6 million due to fees andpenalties paid on the redemption and for the write-off of unamortized debtissuance costs.

*Incometax (expense) benefit.**  *Incometax expense of $9.6 million was recorded for the three months ended June 30,2006, resulting in an effective rate of 39.0% as compared to 38.5% as of June 30,2005.   Our accounting policy is toreport income tax expense for interim reporting periods using an estimatedannual effective income tax rate. However, the effects of significant orunusual items are not considered in the estimated annual effective tax rate.The tax effect of such events is recognized in the interim period in which theevent occurs.

*Net income.**  *Net income was $15.1 million forthe three months ended June 30, 2006 as compared to net income of$5.6 million for the three months ended June 30, 2005. Thedifferences between 2006 and 2005 are a result of the factors discussed above.

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**Six Months Ended June 30, 2006 Compared with SixMonths Ended June 30, 2005**

| ** **                                               | ** ** | **Six months  ended June 30,** | ** ** | **Six months  ended June 30,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                      | ** ** | **% of revenue**                    | ** ** | **2005** | ** ** | **% of revenue** | ** ** |
| ** **                                               | ** ** | **(in thousands)**                       | ** ** |
| Revenues                                                 |       | $                                             | 128,987    |                                          |       | 100.0 | % |   | $ | 126,871 |   |   | 100.0 | % |   |
| Operating expenses                                       |       | 71,880                                        |       |                                          | 55.7       | % |   | 67,764 |   |   | 53.4 | % |   |
| Depreciation and  amortization                           |       | 26,987                                        |       |                                          | 20.9       | % |   | 26,116 |   |   | 20.6 | % |   |
| Total operating expenses                                 |       | 98,867                                        |       |                                          | 76.6       | % |   | 93,880 |   |   | 74.0 | % |   |
| Income from operations                                   |       | 30,120                                        |       |                                          | 23.4       | % |   | 32,991 |   |   | 26.0 | % |   |
| Net gain (loss) on sale  of investments and other assets |       | 14,225                                        |       |                                          | 11.0       | % |   | (184 | ) |   | (0.1 | )% |   |
| Interest and dividend  income                            |       | 2,927                                         |       |                                          | 2.3        | % |   | 1,272 |   |   | 1.0 | % |   |
| Interest expense                                         |       | (19,545                                       | )          |                                          | (15.2      | )% |   | (26,558 | ) |   | (20.9 | )% |   |
| Equity in net earnings  of investees                     |       | 6,365                                         |       |                                          | 4.9        | % |   | 5,452 |   |   | 4.3 | % |   |
| Other non-operating, net                                 |       | —                                        |       |                                          | —     |   |   | (87,746 | ) |   | (69.2 | )% |   |
| Total other income  (expense)                            |       | 3,972                                         |       |                                          | 3.0        | % |   | (107,764 | ) |   | (84.9 | )% |   |
| Income (loss) before  income taxes                       |       | 34,092                                        |       |                                          | 26.4       | % |   | (74,773 | ) |   | (58.9 | )% |   |
| Income tax benefit  (expense)                            |       | (13,297                                       | )          |                                          | (10.3      | )% |   | 91,419 |   |   | 72.0 | % |   |
| Minority interest in income  of subsidiaries             |       | (1                                            | )          |                                          | (0.0       | )% |   | (1 | ) |   | 0.0 | % |   |
| Net income                                               |       | $                                             | 20,794     |                                          |       | 16.1 | % |   | $ | 16,645 |   |   | 13.1 | % |   |

 

**Revenues**

*Revenues.**  *Revenues increased$2.1 million to $129.0 million in 2006 compared to$126.9 million in 2005. Excluding the impact of acquired operations,revenues decreased $1.7 million compared to the prior year. We derived ourrevenues from the following sources:

*Localcalling services.**  *Localcalling service revenues increased $1.3 million to $32.9 million in 2006compared to $31.6 million in 2005. Excluding the impact of acquired operations,local calling service revenues increased $0.5 million compared to 2005. Theprimary driver of this increase is an increase in wireless interconnectionrevenue. Voice access lines, including lines acquired, decreased 2.1% from June 30,2005. Voice access lines, excluding acquired lines, decreased 3.3% from June 30,2005.

*UniversalService Fund high cost loop.**  *Universal Service Fund high cost loop receiptsremained flat at $9.5 million in the six month periods ended June 30,2006 and June 30, 2005.

*Interstateaccess revenues.**  *Interstateaccess revenues were $34.2 million for the six months ended June 30,2006 compared to $37.0 million for the six months ended June 30, 2005. Excludingthe impact of acquired companies, interstate access revenues decreased $3.7million compared to 2005. The primary drivers of this decrease were decreasesin revenue settlements and adjustments related to prior years. In the secondquarter of 2005, these revenue settlements and adjustments increased revenue by$1.9 million while in the second quarter of 2006, the settlements andadjustments decreased revenue by approximately $1.0 million. Therefore, the twoadjustments combined resulted in a decrease in interstate revenues of $2.9million for the six months ended June 30, 2006 compared to the six monthsended June 30, 2005.

*Intrastateaccess revenues.**  *Intrastateaccess revenues decreased $1.8 million to $17.9 million in 2006compared to 2005. Excluding the impact of acquired companies, intrastate accessrevenues decreased $2.5 million compared to 2005. Intrastate access revenuedeclined primarily due to a decrease in access rates and a decrease in minutesof use compared to 2005. The rate decrease is primarily due to intrastate ratereductions implemented in Maine in the second quarter of 2005. Intrastaterevenues are expected to continue to decline.

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*Long distance services.**  *Long distance services revenuesincreased $1.5 million from $9.5 million in 2005 to$11.0 million in 2006. This is attributable to the increase in subscribersand minutes related to bundles and packages sold to our existing customers.Interstate long distance penetration as of June 30, 2006 was 46.8% ofvoice access lines as compared to 41.7% as of June 30, 2005.

*Data and Internet services.**  *Data and Internet services revenuesincreased $2.0 million to $13.6 million in 2006 compared to 2005.This increase is due primarily to increases in high speed data customers as wecontinue to market our broadband services. Our high speed data subscribersincreased from 40,910 as of June 30, 2005 to 51,331 as of June 30,2006 and represents a 21.2% penetration of voice access lines.

*Other services.**  *Other revenues increased from$8.2 million in 2005 to $9.9 million in 2006. Excluding the impact ofacquired companies, other revenues increased $0.9 million compared to 2005. Thisincrease is principally driven by an increase in directory revenues in 2006.

**Operating Expenses**

*Operating expenses,excluding depreciation and amortization.**  *Operating expenses increased$4.1 million to $71.9 million in 2006 from $67.8 million in 2005.Approximately $2.3 million of this increase is related to operating expenses ofthe companies acquired during 2005. In addition, this increase is primarilydriven by an increase in network operations expense of $0.8 million, anincrease in billing expenses of $0.8 million, an increase in audit and taxrelated expenses of $0.6 million, an increase in employee compensation expensesof $0.4 million, an increase in lease expense of $0.3 million and an increasein expenses related to HSD and long distance services of $0.3 million. Theseincreases were offset by a decrease in consulting expenses of $1.8 million dueto expenses incurred in 2005 related to our preparation for compliance under Section 404of the Sarbanes-Oxley Act. Included in operating expenses are non-cash stockbased compensation expenses associated with the award of restricted stock andrestricted units. For the six months ended June 30, 2006 and 2005, stockbased compensation expenses totaled $1.3 million and $1.1 million,respectively.

*Depreciation andamortization.**  *Depreciationand amortization expense increased $0.9 million to $27.0 million in2006.

*Income from operations.**  *Income from operations decreased$2.9 million to $30.1 million in 2006. This was driven principally bythe increased percentage of lower margin unregulated revenues in our totalbusiness mix due to DSL and long distance revenue growth, which offsetdeclining higher margin regulated revenues. In addition to the increase inunregulated products, we experienced declines in interstate and intrastate revenueswhich have significantly higher margins and we have also experienced anincrease in operating expenses.

*Other income (expense).**  *Total other income (expense)increased $111.8 million to $4.0 million in 2006 compared to a loss in theprior year of $107.8 million. Gains on sale of investments increased $14.4million primarily due to the sale of our investments in the Rural Telephone Bankand Southern Illinois Cellular Corporation. Interest and dividend incomeincreased $1.7 million primarily as a result of a dividend distribution fromSouthern Illinois Cellular Corporation associated with the sale. Interestexpense decreased $7.0 million to $19.5 million in 2006, mainlyattributable to the initial public offering and related transactions in 2005which substantially de-leveraged us and provided a decrease in interestexpense. In addition, our series A preferred stock was repurchased whicheliminated dividends and accretion on our series A preferred stock for thesix months ended June 30, 2006, which under Statement of FinancialAccounting Standards No. 150, or SFAS No. 150, were being reported asinterest expense. Also, in 2005, in connection with the initial publicoffering, we repurchased our series A preferred stock and repaid our old creditfacility and repurchased or redeemed substantially all of our high yield debtwhich resulted in significant charges of $87.7 million due to fees andpenalties paid on the repurchase/redemption and for the write-off ofunamortized debt issuance costs.

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*Income tax (expense)benefit.**  *Incometax expense of $13.3 million was recorded for the six months ended June 30,2006, resulting in an effective rate of 39.0%. Exclusive of unusual itemsaffecting the tax rate, our effective annual tax rate was 41.7% as of June 30,2005.   For the six months ended June 30,2005, we recorded an income tax benefit of $91.4 million. Following the initialpublic offering and related transactions, we re-evaluated our expectation ofgenerating future taxable income. Based upon the results of this evaluation, weconcluded that we could reverse the deferred tax valuation allowance and, as aresult, we recognized income tax benefits of $66.0 million for the six monthsended June 30, 2005. Additional income tax benefits of $25.4 million wererecognized due to the taxable loss for the six months ended June 30, 2005,which resulted mainly from losses on the extinguishment of debt.

Our accounting policy isto report income tax expense for interim reporting periods using an estimatedannual effective income tax rate. However, the effects of significant orunusual items are not considered in the estimated annual effective tax rate.The tax effect of such events is recognized in the interim period in which theevent occurs. As of December 31, 2005, we had $291.9 million of federaland state net operating loss carryforwards. As a result, the income tax expensewe record is generally greater than the income taxes actually paid by us.

*Net income.**  *Net income was $20.8 millionfor the six months ended June 30, 2006 as compared to net income of$16.6 million for the six months ended June 30, 2005. The differencesbetween 2006 and 2005 are a result of the factors discussed above.

**Liquidity and Capital Resources**

Our short-term andlong-term liquidity needs arise primarily from: (i) interest paymentsprimarily related to our credit facility; (ii) capital expenditures; (iii) workingcapital requirements as may be needed to support the growth of our business; (iv) dividendpayments on our common stock; and (v) potential acquisitions. Our board ofdirectors has adopted a dividend policy which reflects our judgment that ourstockholders would be better served if we distributed a substantial portion ofour cash available for distribution to them instead of retaining it in ourbusiness.  However, we are not requiredto pay dividends, and our board of directors may modify or revoke our dividendpolicy at any time. Dividend payments are within the sole discretion of ourboard of directors and will depend upon, among other things, our results ofoperations, our financial condition, future developments that could differmaterially from our current expectations, including competitive ortechnological developments (which could, for example, increase our need forcapital expenditures), acquisition opportunities or other factors.

On June 21, 2006, wedeclared a dividend totaling $13.8 million, or $0.39781 per share of commonstock, which was paid on July 21, 2006 to holders of record as of July 6,2006. In 2006, we have paid dividends totaling $27.6 million, or $0.79562 pershare of common stock.

We expect to fund ouroperations, interest expense, capital expenditures and dividend payments on ourcommon stock for the next twelve months principally from cash from operationsand distributions from investments. To fund future acquisitions, we intend touse cash from operations and borrowings under our credit facility, or, subjectto the restrictions in our credit facility, proceeds from the sale of non-coreassets or to arrange additional funding through the sale of public or privatedebt and/or equity securities, or obtain additional senior bank debt.

For the six months ended June 30,2006, cash provided by operating activities of continuing operations was $47.3million compared to $17.3 million for the six months ended June 30,2005. The increase in 2006 compared to 2005 is primarily a result of theinitial public offering and related transactions in 2005 which substantially de-leveragedus, resulting in a reduction in accrued interest.

Our ability to service ourindebtedness depends on our ability to generate cash in the future. We are notrequired to make any scheduled principal payments under our credit facility’sterm facility prior to maturity in February 2012. We will need torefinance all or a portion of our indebtedness on or before maturity. We maynot be able to refinance our indebtedness on commercially reasonable terms orat all. If we were unable to renew or refinance our credit facility, ourfailure to repay all amounts due on the 

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maturitydate would cause a default under our credit facility. In addition, borrowingsunder our credit facility bear interest at variable interest rates.

We have entered intovarious interest rate swap agreements which are detailed in note 6 of the “Notesto Condensed Consolidated Financial Statements” in this Quarterly Report. As aresult of these swap agreements, as of June 30, 2006, approximately 92% ofour indebtedness bore interest at fixed rates rather than variable rates. Afterthese interest rate swap agreements expire, our annual debt service obligationson such portion of the term loans will vary from year to year unless we enterinto a new interest rate swap or purchase an interest rate cap or otherinterest rate hedge. To the extent interest rates increase in the future, wemay not be able to enter into new interest rate swaps or to purchase interestrate caps or other interest rate hedges on acceptable terms.

Based on the dividendpolicy with respect to our common stock, we may not have any significant cashavailable to meet any unanticipated liquidity requirements, other thanavailable borrowings, if any, under our revolving facility. As a result, we maynot retain a sufficient amount of cash to finance growth opportunities,including acquisitions, or unanticipated capital expenditures or to fund ouroperations. If we do not have sufficient cash for these purposes, our financialcondition and our business will suffer. However, our board of directors may, inits discretion, amend or repeal the dividend policy to decrease the level ofdividends provided for or discontinue entirely the payment of dividends.

As of December 31,2005 we had $291.9 million of federal and state net operating losscarryforwards. As a result of the utilization of the net operating losscarryforwards we are not paying significant income taxes.

On February 8, 2005,we used net proceeds received from the initial public offering, together withapproximately $566.0 million of borrowings under the term facility of ourcredit facility, to, among other things, repay all outstanding loans under ourold credit facility, repurchase all of our series A preferred stock andconsummate tender offers and consent solicitations in respect of ouroutstanding 91¤2%notes, floating rate notes, 121¤2%notes and 117¤8%notes. On March 10, 2005, we redeemed the remaining outstanding 91¤2%notes and floating rate notes. On May 2, 2005, we redeemed the remainingoutstanding 121¤2%notes with borrowings of $22.4 million under the delayed draw facility ofour credit facility.

Net cash provided byinvesting activities of continuing operations was $31.5 million for thesix months ended June 30, 2006 compared to net cash used in investing activitiesof continuing operations of $21.4 million for the six months ended June 30,2005. These cash flows primarily reflect net capital expenditures of$17.5 million and $9.7 million for the six months ended June 30,2006 and 2005, respectively. Offsetting capital expenditures were distributionsfrom investments of $5.7 million and $4.8 million for the six monthsended June 30, 2006 and 2005, respectively, and proceeds from the sale ofinvestments of $43.4 million and $0.2 million for the six months ended June 30,2006 and 2005, respectively. In April, 2006, we received proceeds of $26.9million from the liquidation of our investment in the Rural Telephone Bank. Inaddition, on May 1, 2006, we received proceeds of $14.8 million from thesale of our investment in Southern Illinois Cellular Corp. The distributionsfrom investments represent passive ownership interests in partnership and otherinvestments. We do not control the timing or amount of distributions from suchinvestments. In 2005, we also used $16.4 million in cash to acquire telephoneproperties.

Net cash used in financingactivities of continuing operations was $41.6 million for the six monthsended June 30, 2006. Net cash provided by financing activities ofcontinuing operations was $7.7 million for the six months ended June 30,2005. For the six months ended June 30, 2006, we used cash to paydividends of $27.6 million and used cash of $14.1 million associated with thenet repayment of long term debt. For the six months ended June 30, 2005,net proceeds from the issuance of common stock of $431.9 million was usedfor the net repayment of long term debt of $209.4 million and therepurchase of preferred and common stock of $129.3 million. Remainingproceeds were used to pay fees and penalties associated with the earlyretirement of long term debt of $61.0 million, to pay a deferredtransaction fee of $8.4 million, to pay debt issuance costs of$8.5 million and to pay dividends of $7.8 million.

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On July 26, 2006, wecompleted the purchase of the assets of Cass County for approximately $33.0million in cash, subject to adjustment. We funded the acquisition from cash onhand and from borrowings under the revolving facility of our credit facility. Weexpect to fund the acquisition of Unite from cash on hand and from borrowingsunder the revolving facility of our credit facility.

Our annual capitalexpenditures for our rural telephone operations have historically beensignificant. Because existing regulations allow us to recover our operating andcapital costs, plus a reasonable return on our invested capital in regulatedtelephone assets, capital expenditures generally constitute an attractive useof our cash flow. Net capital expenditures were approximately$17.5 million for the six months ended June 30, 2006. We expect totalcapital expenditures for 2006 to be approximately $29.5 to $31.5 million.

Our credit facilityconsists of a $100.0 million revolving facility, of which $98.7 millionwas available at June 30, 2006, that matures in February 2011 and a termfacility of $588.5 million, of which $588.5 million was outstandingat June 30, 2006, that matures in February 2012. A $1.3 millionletter of credit was also outstanding as of June 30, 2006. On March 11,2005, April 29, 2005 and September 14, 2005, we entered intoamendments to our credit facility. For a summary description of our creditfacility, see note 8 of the “Notes to Condensed Consolidated FinancialStatements” in this Quarterly Report.

In 2003, the Companyissued $225.0 million aggregate principal amount of the 117¤8%notes. These notes were to mature on March 1, 2010. These notes aregeneral unsecured obligations of the Company, ranking *pari passu* in right of payment with allexisting and future senior debt of the Company, including all obligations underour credit facility, and senior in right of payment to all existing and futuresubordinated indebtedness of the Company. On February 9, 2005, werepurchased $223.0 million principal amount of the 117¤8% notestendered pursuant to the tender offer for such notes. $2.1 millionprincipal amount of the 117¤8%notes remains outstanding.

**Summary of Contractual Obligations**

Thetables set forth below contain information with regard to disclosures aboutcontractual obligations and commercial commitments.

Thefollowing table discloses aggregate information about our contractualobligations as of June 30, 2006 and the periods in which payments are due:

| ** **                          | ** ** | **Payments due by period** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **Total**                                 | ** ** | **Less than   1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                          | ** ** | **(Dollars in thousands)**      | ** ** |
| Contractual obligations:            |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Debt maturing within one  year      |       | $                                         | 696        |   |   | $ | 696 |   |   |   | $ | — |   |   |   | $ | — |   |   | $ | — |   |
| Long term debt                      |       | 592,620                                   |       |   | — |   |   |   | 1,186 |   |   |   | 2,371 |   |   | 589,063 |   |
| Operating leases(1)                 |       | 6,405                                     |       |   | 1,269 |   |   |   | 1,988 |   |   |   | 1,060 |   |   | 2,088 |   |
| Minimum purchase  contract          |       | 1,001                                     |       |   | 741 |   |   |   | 239 |   |   |   | 21 |   |   | — |   |
| Total contractual cash  obligations |       | $                                         | 600,722    |   |   | $ | 2,706 |   |   |   | $ | 3,413 |   |   |   | $ | 3,452 |   |   | $ | 591,151 |   |

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(1)          Realproperty lease obligations of $0.2 million associated with thediscontinued operations discussed in note (5) to our condensedconsolidated financial statements are stated in this table at total contractualamounts. Operating leases from continuing operations of $6.2 million arealso included.

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Thefollowing table discloses aggregate information about our derivative financialinstruments as of June 30, 2006, the source of fair value of theseinstruments and their maturities. 

| ** **                           | ** ** | **Fair Value of Contracts at Period-End** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                           | ** ** | **Total**                                                          | ** ** | **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) |       | $                                                                  | 17,860     |   |   | 7,051 |   |   |   | 8,408 |   |   |   | 2,155 |   |   |   | 246 |   |   |
|                                      |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Fairvalue of interest rate swaps at June 30, 2006 was provided by thecounterparties to the underlying contracts using consistent methodologies.

**Critical Accounting Policies**

Ourcritical accounting policies are as follows:

·       Revenuerecognition;

·       Allowancefor doubtful accounts;

·       Accountingfor income taxes; and

·       Valuationof long-lived assets, including goodwill.

***Revenue recognition.******  ***Certain of ourinterstate network access and data revenues are based on tariffed accesscharges filed directly with the Federal Communications Commission; theremainder of such revenues are derived from revenue sharing arrangements with otherlocal exchange carriers administered by the National Exchange CarrierAssociation.

The Telecommunications Actallows local exchange carriers to file access tariffs on a streamlined basisand, if certain criteria are met, deems those tariffs lawful. Tariffs that havebeen “deemed lawful” in effect nullify an interexchange carrier’s ability toseek refunds should the earnings from the tariffs ultimately result in earningsabove the authorized rate of return prescribed by the Federal CommunicationsCommission. Certain of our telephone subsidiaries file interstate tariffsdirectly with the Federal Communication Commission using this streamlinedfiling approach. The settlement period related to (i) the 2003 to 2004monitoring period lapses on September 30, 2007 and (ii) the 2005 to2006 monitoring period lapses on September 30, 2009. We will continue tomonitor the legal status of any pending or future proceedings that could impactour entitlement to these funds, and may recognize as revenue some or all of theover-earnings at the end of the settlement period or as the legal statusbecomes more certain.

***Allowance for doubtful accounts.******  ***In evaluatingthe collectibility of our accounts receivable, we assess a number of factors,including a specific customer’s or carrier’s ability to meet its financialobligations to us, the length of time the receivable has been past due andhistorical collection experience. Based on these assessments, we record bothspecific and general reserves for uncollectible accounts receivable to reducethe related accounts receivable to the amount we ultimately expect to collectfrom customers and carriers. If circumstances change or economic conditionsworsen such that our past collection experience is no longer relevant, ourestimate of the recoverability of our accounts receivable could be furtherreduced from the levels reflected in our accompanying consolidated balancesheet.

***Accounting for income taxes.******  ***As part of theprocess of preparing our consolidated financial statements we are required toestimate our income taxes. This process involves estimating our actual currenttax exposure and assessing temporary differences resulting from differenttreatment of items for tax and accounting purposes as well as estimating anannual effective tax rate for purposes of allocating income tax expense tointerim periods. These differences result in deferred tax assets andliabilities, which are included within our consolidated balance sheets. We mustthen assess the likelihood that our deferred tax assets will be recovered fromfuture taxable income and to the extent we believe the recovery is not likely,we must establish a valuation allowance. Further, to the extent that weestablish a valuation allowance or 

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increase thisallowance in a financial accounting period, we must include a tax provision, orreduce our tax benefit in our consolidated statement of operations. Inperforming the assessment, management considers the scheduled reversal ofdeferred tax liabilities, projected future taxable income, and tax planningstrategies. We use our judgment to determine our provision or benefit forincome taxes, deferred tax assets and liabilities and any valuation allowancerecorded against our net deferred tax assets.

There are various factorsthat may cause those tax assumptions to change in the near term. We cannotpredict whether future U.S. federal income tax laws and regulations might bepassed that could have a material effect on our results of operations. Weassess the impact of significant changes to the U.S. federal and state incometax laws and regulations on a regular basis and update the assumptions andestimates used to prepare our financial statements when new regulation andlegislation is enacted.

Based on certainassumptions, we had $291.9 million in federal and state net operating losscarry forwards as of December 31, 2005. In February 2005, wecompleted the offering which resulted in an “ownership change” within themeaning of the U.S. federal income tax laws addressing net operating loss carryforwards, alternative minimum tax credits and other similar tax attributes. Asa result of such ownership change, there will be specific limitations on ourability to use our net operating loss carry forwards and other tax attributes.In order to fully utilize the deferred tax assets, mainly generated by the netoperating losses, we will need to generate future taxable income ofapproximately $219 million prior to the expiration of the net operating losscarry forwards beginning in 2019 to 2025. In addition, as a result of theoffering, we have substantially reduced our aggregate long term debt and expecta significant reduction in our annual interest expense. When consideredtogether with our history of producing positive operating results and otherevidence affecting the recoverability of deferred tax assets, we expect thatfuture taxable income will more likely than not be sufficient to recover netdeferred tax assets.

***Valuation of long-lived assets, including goodwill.******  ***We review ourlong-lived assets, including goodwill, for impairment whenever events orchanges in circumstances indicate that the carrying value may not berecoverable. Several factors could trigger an impairment review such as:

·       significantunderperformance relative to expected historical or projected future operatingresults;

·       significantregulatory changes that would impact future operating revenues;

·       significantnegative industry or economic trends; and

·       significantchanges in the overall strategy in which we operate our overall business.

Goodwill was$482.3 million at June 30, 2006. As part of the Berkshire andBentleyville acquisitions, we have recorded intangible assets related to theacquired companies’ customer relationships of $2.4 million and $1.4 million,respectively. These intangible assets will be amortized over 15 years. Theintangible assets are included in Deferred Charges and Other Assets on theCondensed Consolidated Balance Sheet.

We are required to performan annual impairment review of goodwill as required by Statement of FinancialAccounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.No impairment of goodwill or other long-lived assets resulted from the annualvaluation of goodwill in 2005.

**New Accounting Standards**

In July 2006, the FASBissued FASB Interpretation No. (FIN) 48, Accounting for Uncertainty inIncome Taxes. FIN 48 requires applying a “more likely than not” thresholdto the recognition and de-recognition of tax positions. FIN 48 iseffective for fiscal years beginning after December 15, 2006. We have notyet determined the impact of the adoption of this interpretation on ourfinancial position, results of operations or cash flows.

**Inflation**

We do not believe inflation has a significant effecton our operations.

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**Item 3. Quantitativeand Qualitative Disclosures about Market Risk.**

As of June 30, 2006, approximately 92% of ourindebtedness bore interest at fixed rates or effectively at fixed rates. Ourearnings are affected by changes in interest rates as our long-termindebtedness under our credit facility has variable interest rates based oneither the prime rate or LIBOR. If interest rates on our variable rateindebtedness (excluding variable rate indebtedness which has its interest rateeffectively fixed under interest rate swap agreements) outstanding at June 30,2006 increased by 10%, our interest expense would have increased, and ourincome from continuing operations before taxes would have decreased, byapproximately $0.1 million for the six months ended June 30, 2006.

We have entered into interest rate swaps to manage ourexposure to fluctuations in interest rates on our variable rate indebtedness.The fair value of these swaps was a net asset of approximately$17.9 million at June 30, 2006. The fair value indicates an estimatedamount we would have received to cancel the contracts or transfer them to otherparties. In connection with our credit facility, on February 8, 2005, weentered into three interest rate swap agreements, with notional amounts of$130.0 million each, to effectively convert a portion of our variableinterest rate exposure to fixed rates ranging from 3.76% to 4.11%, plus a 1.75%margin. These swap agreements expire beginning December 31, 2007 through December 31,2009. On April 7, 2005, we entered into two additional interest rate swapagreements, one with the notional amount of $50.0 million which will fixthe interest rate at 4.69%, plus a 1.75% margin beginning on April 29,2005 and ending on March 31, 2011 and one with the notional amount of$50.0 million which will fix the interest rate at 4.72%, plus a 1.75%margin, beginning on June 30, 2005 and ending on March 31, 2012. On May 15,2006, we entered into an additional interest rate swap agreement with anotional amount of $50.0 million which will fix the interest rate at 5.36%,plus a 1.75% margin, beginning on June 30, 2006 and ending on December 31,2009.

Our Annual Report on Form 10-Kfor the year ended December 31, 2005 contains information about marketrisks under “Item 7A. Quantitative and Qualitative Disclosures about MarketRisk.”

**Item 4. Controlsand Procedures.**

As of the end of the period covered by this QuarterlyReport, we carried out an evaluation, under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, of the effectiveness of our “disclosure controls andprocedures” (as defined in Rule 13a-15(e) of the Exchange Act).Disclosure controls and procedures are controls and other procedures of anissuer that are designed to ensure that information required to be disclosed bythe issuer in the reports that it files or submits under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the rules and forms of the SEC.

Based upon this evaluation, our Chief ExecutiveOfficer and Chief Financial Officer have concluded that our disclosure controlsand procedures were effective in ensuring that information required to bedisclosed by us in this Quarterly Report has been timely recorded, processed,summarized and reported within the time periods specified in the rules ofthe SEC.

There have been no changesin our “internal controls over financial reporting” (as defined in Rule 3a-15(f)of the Exchange Act) during the period covered by this Quarterly Report thathave materially affected, or that are reasonably likely to materially affect,our internal controls over financial reporting. In response to the Sarbanes-OxleyAct, we are continuing a comprehensive review of our disclosure controls andprocedures and will improve such controls and procedures as necessary to assuretheir effectiveness.

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**PART II—OTHERINFORMATION**

**Item1. Legal Proceedings.**

On June 6, 2005, a purported class actioncomplaint was filed in the General Court of Justice, Superior Court Division,of the State of North Carolina by Robert Lowinger on behalf of himself and allother similarly situated persons against the Company, the Company’s Chairmanand Chief Executive Officer, certain of the Company’s current and formerdirectors and certain of the Company’s stockholders. The complaint allegesviolations of Sections 11 and 12(a)(2) and liability under Section 15of the Securities Act, and alleges that the Company’s registration statement onForm S-1 (which was declared effective by the SEC on February 3,2005) and the related prospectus dated February 3, 2005, each relating tothe Company’s initial public offering of common stock, contained certainmaterial misstatements and omitted certain material information necessary to beincluded relating to the Company’s broadband products and access line trends.The plaintiff, who has been a plaintiff in several prior securities cases,seeks rescission rights and unspecified damages on behalf of a purported classof purchasers of the common stock “issued pursuant and/or traceable to theCompany’s IPO during the period from February 3, 2005 through March 21,2005”. The Company removed the action to Federal Court. The plaintiff filed amotion to remand the action to the North Carolina State Court, which was deniedby the Federal Magistrate. The plaintiff has objected to and appealed theMagistrate’s decision to the District Court Judge. The Company has contestedthe appeal and filed a Motion to Dismiss the action. The Magistrate, on February 9,2006, issued a Memorandum and a Recommendation to the District Court Judge thatthe Motion to Dismiss be granted and that the complaint be dismissed withprejudice. The plaintiff has filed a Notice of Objection to the Magistrate’s Recommendation.Both the appeal of denial of the Motion to Remand and the Motion to Dismiss arepending before the District Court Judge. We believe that this action is withoutmerit and intend to continue to defend the litigation vigorously.

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

**Item1A. Risk Factors**

During the quarter ended June 30,2006, there were no material changes to the risk factors disclosed in “Item 1A.Risk Factors” of our Annual Report on Form 10-K for the year ended December 31,2005.

**Item2. Unregistered Sales of Equity Securities and Use of Proceeds.**

**Unregistered Sales of Equity Securities**

We did not sell anyunregistered equity securities during the quarter ended June 30, 2006.

**Restrictions on Payment of Dividends**

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

Ourcredit facility restricts our ability to declare and pay dividends on ourcommon stock as follows:

·       Wemay use our cumulative distributable cash to pay dividends, but maynot in general pay dividends in excess of the amount of our cumulativedistributable cash. “Cumulative distributable cash” is defined in our creditfacility as the amount of “Available cash” generated beginning on April 1,2005 through the end of the Company’s most recent fiscal quarter for whichfinancial statements are available and a compliance certificate has beendelivered (a) minus the aggregate amount of dividends paid after July 30,2005 and the aggregate amount of investments made after 

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April 1, 2005using such cash, (b) plus the aggregate amount of distributions receivedfrom such investments (not to exceed the amount originally invested). “Availablecash” is defined in the credit facility as Adjusted EBITDA (a) minus (i) cashinterest expense (adjusted for amortization, swap interest and dividends andaccretion on series A preferred stock), (ii) scheduled principal paymentson indebtedness, (iii) capital expenditures, (iv) investments, (v) cashincome taxes, and (vi) non-cash items excluded from Adjusted EBITDA andpaid in cash and (b) plus (i) the cash amount of any extraordinarygains and gains realized on asset sales other than in the ordinary course ofbusiness and (ii) cash received on account of non-cash gains and non-cashincome excluded from Adjusted EBITDA. “Adjusted EBITDA” is defined in our creditfacility as Consolidated Net Income (which is defined in the credit facilityand includes distributions from investments) (a) plus the following to theextent deducted from Consolidated Net Income: provision for income taxes,consolidated interest expense, depreciation, amortization, losses on sales ofassets and other extraordinary losses, and certain other non-cash items, eachas defined, (b) minus gains on sales of assets and other extraordinarygains and all non-cash items increasing Consolidated Net Income.

·       Wemay not pay dividends if a default or event of default under our creditfacility has occurred and is continuing or would exist after giving effect tosuch payment, if our leverage ratio is above 5.00 to 1.00 or if we do not haveat least $10 million of cash on hand (including unutilized commitmentsunder our credit facility’s revolving facility).

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

See “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Descriptionof Certain Indebtedness—Credit Facility” in our Annual Report on Form 10-Kfor the year ended December 31, 2005 and note 8 of the “Notes to CondensedConsolidated Financial Statements” in this Quarterly Report for a more detaileddescription of our credit facility and these restrictions.

**Item3. Defaults Upon Senior Securities.**

Not applicable.

**Item4. Submission of Matters to a Vote of Security Holders.**

Ourannual meeting of shareholders was held on April 24, 2006. At the meeting,our shareholders:

(1)          Electedthe following directors as “Class I directors” to serve until our annualmeeting in 2009:

| ** **               | ** ** | **Votes For:** | ** ** | **Votes Withheld:** | ** ** |
|--------------------------|------------|---------------------|------------|--------------------------|------------|
| Eugene B. Johnson        |       | 32,631,593          |       |                     | 240,910    |   |   |
| Patricia Garrison-Corbin |       | 31,848,499          |       |                     | 1,024,004  |   |   |

 

(2)          Ratifiedthe appointment of KPMG LLP as our independent public accountants for the 2006fiscal year.

| ** ** | ** ** | **Votes For:** | ** ** | **Votes Against:** | ** ** | **Abstentions:** | ** ** | ** ** | ** ** |
|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------|------------|
|       |       | 31,781,265     |       | 1,041,688          |       | 49,550           |       |       |       |

 

**Item 5. OtherInformation.**

Not applicable.

**Item 6. Exhibits.**

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

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this Quarterly Report to be signedon its behalf by the undersigned, thereunto duly authorized, and theundersigned also has signed this Quarterly Report in his capacity as theRegistrant’s Executive Vice President and Chief Financial Officer (PrincipalFinancial Officer). 

|                           |   |   | FAIRPOINT  COMMUNICATIONS, INC. |
|---------------------------|--------|--------|--------------------------------------|
|                      | By:    |   | /s/ JOHN P. CROWLEY                  |
| Date: August 7, 2006 |   |   | Name:                                | John P. Crowley |
|                      |   |   | Title:                               | Executive Vice President   and Chief Financial Officer |

 

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**Exhibit Index**

| Exhibit    No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                 |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                 |       | Agreement and Plan of Merger, dated as of  June 18, 2003, by and among FairPoint, MJD Ventures, Inc.,  FairPoint Berkshire Corporation and Berkshire Telephone Corporation.(1)                                                                                                                                                                                                        |
| 2.2                 |       | Agreement and Plan of  Merger, dated as of April 22, 2005, by and among FairPoint, MJD  Ventures, Inc., FairPoint Bentleyville Corporation and Bentleyville  Communications Corporation.(2)                                                                                                                                                                                           |
| 2.3                 | ** ** | Asset Purchase  Agreement, dated as of December 14, 2005, by and among FairPoint, Local  Exchange Company LLC, Cass County Telephone Company Limited Partnership and  LEC Long Distance, Inc.(16)                                                                                                                                                                                     |
| 2.4                 |       | Stock Purchase  Agreement, dated February 17, 2006, by and among Southern Illinois  Cellular Corp. and Crosslink Wireless, Inc., Egyptian Communication  Services, Inc., Hamilton County Communications, Inc., HTC Holding  Co., MJD Services Corp., Shawnee Communications, Inc. and Wabash Independent  Networks, Inc. and Alltel Communications, Inc.(16) |
| 2.5                 |       | Stock Purchase  Agreement, dated May 26, 2006, among MJD Services Corp., Kevin M.  Anderson, Ronald C. Reckrodt, Jeffrey S. Ingram, Dennis R. Devoy and Unite  Communications Systems, Inc.*                                                                                                                                                                                          |
| 3.1                 |       | Eighth Amended and  Restated Certificate of Incorporation of FairPoint.(3)                                                                                                                                                                                                                                                                                                                      |
| 3.2                 |       | Amended and Restated By  Laws of FairPoint.(3)                                                                                                                                                                                                                                                                                                                                                  |
| 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 11 7¤8% Senior Notes due 2010.(4)                                                                                                                                                                                                                |
| 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.(3)                                                                                                                                                                           |
| 4.3                 |       | Form of Initial  Senior Note due 2010.(4)                                                                                                                                                                                                                                                                                                                                                  |
| 4.4                 |       | Form of Exchange  Senior Note due 2010.(4)                                                                                                                                                                                                                                                                                                                                                 |
| 10.1                |       | Credit Agreement, dated  as of February 8, 2005, by and among FairPoint, various lending  institutions, Bank of America, N.A., CoBank ACB, General Electric Capital  Corporation and Deutsche Bank Trust Company Americas.(3)                                                                                                                                                              |
| 10.2                |       | First Amendment to  Credit Agreement, dated as of March 11, 2005, among FairPoint, various  lending institutions, Bank of America, N.A., CoBank ACB, General Electric  Capital Corporation and Deutsche Bank Trust Company Americas.(3)                                                                                                                                                    |
| 10.3                |       | Second Amendment and  Consent to Credit Agreement, dated as of April 29, 2005, among  FairPoint, various lending institutions, Bank of America, N.A., CoBank ACB,  General Electric Capital Corporation and Deutsche Bank Trust Company  Americas.(5)                                                                                                                                      |
| 10.4                |       | Third Amendment to  Credit Agreement, dated as of September 14, 2005, among FairPoint,  various lending institutions, Bank of America, N.A., CoBank ACB, General  Electric Capital Corporation and Deutsche Bank Trust Company Americas.(6)                                                                                                                                                |

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| 10.5  |   | Pledge Agreement, dated  as of February 8, 2005, by FairPoint, ST Enterprises, Ltd., FairPoint  Broadband, Inc., MJD Services Corp., MJD Ventures, Inc., C-R  Communications, Inc., Comerco, Inc., GTC Communications, Inc.,  Ravenswood Communications, Inc., Utilities, Inc., FairPoint Carrier  Services, Inc. and St. Joe Communications, Inc.(3) |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.6  |   | Subsidiary Guaranty,  dated as of February 8, 2005, by FairPoint Broadband, Inc., MJD  Ventures, Inc., MJD Services Corp., ST Enterprises, Ltd. and FairPoint  Carrier Services, Inc.(2)                                                                                                                                                                                            |
| 10.7  |   | Form of Swingline  Note.(3)                                                                                                                                                                                                                                                                                                                                                                        |
| 10.8  |   | Form of RF Note.(3)                                                                                                                                                                                                                                                                                                                                                                                |
| 10.9  |   | Form of B Term  Note.(3)                                                                                                                                                                                                                                                                                                                                                                           |
| 10.10 |   | Amended and Restated Tax  Sharing Agreement, dated as of November 9, 2000, by and among FairPoint  and its Subsidiaries.(7)                                                                                                                                                                                                                                                                        |
| 10.11 |   | Nominating Agreement,  dated as of February 8, 2005.(3)                                                                                                                                                                                                                                                                                                                                            |
| 10.12 |   | Affiliate Registration  Rights Agreement, dated as of February 8, 2005.(3)                                                                                                                                                                                                                                                                                                                         |
| 10.13 |   | Employment Agreement,  dated as of March 17, 2006, by and between FairPoint and Eugene B.  Johnson.(17)                                                                                                                                                                                                                                                                                       |
| 10.14 |   | Employment Agreement,  dated as of January 20, 2000, by and between FairPoint and Walter E.  Leach, Jr.(9)                                                                                                                                                                                                                                                                               |
| 10.15 |   | Letter Agreement, dated  as of December 15, 2003, by and between FairPoint and Walter E.  Leach, Jr.(10)                                                                                                                                                                                                                                                                                      |
| 10.16 |   | Letter Agreement, dated  as of November 11, 2002, by and between FairPoint and Peter G. Nixon.(4)                                                                                                                                                                                                                                                                                                  |
| 10.17 |   | Letter Agreement, dated  as of November 13, 2002, by and between FairPoint and Shirley J.  Linn.(4)                                                                                                                                                                                                                                                                                                |
| 10.18 |   | Letter Agreement, dated  as of May 16, 2005, by and between FairPoint and John P. Crowley.(12)                                                                                                                                                                                                                                                                                                     |
| 10.19 |   | FairPoint 1995 Stock  Option Plan.(13)                                                                                                                                                                                                                                                                                                                                                                  |
| 10.20 |   | FairPoint Amended and  Restated 1998 Stock Incentive Plan.(13)                                                                                                                                                                                                                                                                                                                                          |
| 10.21 |   | FairPoint Amended and  Restated 2000 Employee Stock Incentive Plan.(10)                                                                                                                                                                                                                                                                                                                                 |
| 10.22 |   | FairPoint 2005 Stock  Incentive Plan.(3)                                                                                                                                                                                                                                                                                                                                                                |
| 10.23 |   | FairPoint Annual  Incentive Plan.(3)                                                                                                                                                                                                                                                                                                                                                                    |
| 10.24 |   | Form of Restricted  Stock Agreement.(8)                                                                                                                                                                                                                                                                                                                                                            |
| 10.25 |   | Form of Director  Restricted Stock Agreement.(14)                                                                                                                                                                                                                                                                                                                                                  |
| 10.26 |   | Restricted Stock  Agreement, dated as of September 21, 2005, by and between FairPoint and  John P. Crowley.(15)                                                                                                                                                                                                                                                                                    |
| 10.27 |   | Form of Director  Restricted Unit Agreement.(14)                                                                                                                                                                                                                                                                                                                                                   |

37

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| 21   |   | Subsidiaries of FairPoint.*                                                                                                                            |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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.(17)                                                                                                                                      |

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*                                 Filedherewith.

†                                  Pursuantto Securities and Exchange Commission Release No. 33-8238, thiscertification will be treated as “accompanying” this Quarterly Report on Form 10-Qand not “filed” as part of such report for purposes of Section 18 of theSecurities Exchange Act of 1934, or otherwise subject to the liability of Section 18of the Securities Exchange Act of 1934 and this certification will not bedeemed to be incorporated by reference into any filing under the Securities Actof 1933 or the Securities Exchange Act of 1934, except to the extent that theregistrant specifically incorporates it by reference.

(1)                       Incorporatedby reference to the Registration Statement on Form S-4 of FairPoint,declared effective as of July 22, 2003.

(2)                       Incorporatedby reference to the Quarterly Report on Form 10-Q of FairPoint forthe quarter ended March 31, 2005.

(3)                       Incorporatedby reference to the Annual Report on Form 10-K of FairPoint for theyear ended December 31, 2004.

(4)                       Incorporatedby reference to the Annual Report on Form 10-K of FairPoint for theyear ended December 31, 2002.

(5)                     Incorporatedby reference to the Current Report on Form 8-K of FairPoint filed onMay 4, 2005.

(6)                     Incorporatedby reference to the Current Report on Form 8-K of FairPoint filed onOctober 3, 2005.

(7)                     Incorporatedby reference to the Quarterly Report on Form 10-Q of FairPoint forthe period ended September 30, 2000.

(8)                     Incorporatedby reference to the Registration Statement on Form S-1 of FairPoint,declared effective as of February 3, 2005.

(9)                     Incorporatedby reference to the Annual Report on Form 10-K of FairPoint for theyear ended December 31, 1999.

(10)                Incorporatedby reference to the Annual Report on Form 10-K of FairPoint for theyear ended December 31, 2003.

(11)                Incorporatedby reference to the Annual Report on Form 10-K of FairPoint for theyear ended December 31, 2004.

(12)                Incorporatedby reference to the Current Report on Form 8-K of FairPoint filed onMay 24, 2005.

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(13)                Incorporatedby reference to the Registration Statement on Form S-4 of FairPoint,declared effective as of August 9, 2000.

(14)                Incorporatedby reference to the Current Report on Form 8-K of FairPoint filed onJune 20, 2005.

(15)                Incorporatedby reference to the Current Report on Form 8-K of FairPoint filed onSeptember 23, 2005.

(16)                Incorporatedby reference to the Annual Report on Form 10-K of FairPoint for theyear ended December 31, 2005.

(17)                Incorporatedby reference to the Quarterly Report on Form 10-Q of FairPoint forthe period ended March 31, 2006.

39

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