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

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FORM 10-Q

|(Mark One)                                    |                                                                                         
|--------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 
|For the quarterly period ended June 30, 2005.
|or                                           
|o                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from            to 

Commission File Number 333-56365

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

|Delaware(State or Other Jurisdiction of
Incorporation or Organization)                                |  | 13-3725229(I.R.S. Employer
Identification No.)
|----------------------------------------------------------------------------------------------------- |  | ----------------------------------------------
|521 East Morehead Street, Suite 250
Charlotte, North Carolina(Address of Principal Executive Offices) |  | 28202(Zip Code)                               
|(704) 344-8150(Registrant's telephone number, including area code)                                   

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in R12b-2 of the Exchange
Act). Yes o    No ý

As of August 10, 2005, there were 35,015,548 shares of the Registrant's common stock, par value $0.01 per share, outstanding.

Documents
incorporated by reference:None



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INDEX

|                              |  |                                                                                                                            |  | Page
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------------------- |  | ----
|PART I. FINANCIAL INFORMATION |  |                                                                                                                           
|Item 1.                       |  | Financial Statements                                                                                                       |  | 3   
|                              |  | Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004                                            |  | 3   
|                              |  | Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2005 and 2004                  |  | 4   
|                              |  | Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2005 and 2004 |  | 5   
|                              |  | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004                            |  | 6   
|                              |  | Notes to Condensed Consolidated Financial Statements                                                                       |  | 7   
|Item 2.                       |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                      |  | 19  
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                 |  | 33  
|Item 4.                       |  | Controls and Procedures                                                                                                    |  | 33  
|PART II. OTHER INFORMATION    |  |                                                                                                                           
|Item 1.                       |  | Legal Proceedings                                                                                                          |  | 35  
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                |  | 35  
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                            |  | 36  
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                        |  | 36  
|Item 5.                       |  | Other Information                                                                                                          |  | 36  
|Item 6.                       |  | Exhibits                                                                                                                   |  | 36  
|                              |  | Signatures                                                                                                                 |  | 37  

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PART IFINANCIAL INFORMATION

Cautionary Note Regarding Forward-Looking Statements

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



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

2

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Item 1.    Financial Statements.

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, all references to the "Company" refer to FairPoint
Communications, Inc. excluding its subsidiaries.

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES  Condensed Consolidated Balance Sheets

|                                                     |                                                                   | June 30,
2005 |         | December 31,
2004 |         
|---------------------------------------------------- | ----------------------------------------------------------------- | ------------- | ------- | ----------------- | --------
|
|
|Assets                                               |                                                                   |               |         |                   |         
|Current assets:                                      |                                                                   |               |         |                   |         
|                                                     | Cash                                                              |               | $       | 6,692             |         
|                                                     | Accounts receivable, net                                          |               |         | 33,001            |         
|                                                     | Other                                                             |               |         | 5,894             |         
|                                                     | Deferred income tax, net                                          |               |         | 784               |         
|                                                     | Assets of discontinued operations                                 |               |         | 90                |         
|                                                     |                                                                   |               |         |                   |         
|Total current assets                                 |                                                                   |               | 46,461  |                   | 40,705  
|                                                     |                                                                   |               |         |                   |         
|Property, plant, and equipment, net                  |                                                                   |               | 245,383 |                   | 252,262 
|                                                     |                                                                   |               |         |                   |         
|Other assets:                                        |                                                                   |               |         |                   |         
|                                                     | Investments                                                       |               |         | 41,238            |         
|                                                     | Goodwill                                                          |               |         | 477,047           |         
|                                                     | Deferred income tax, net                                          |               |         | 90,449            |         
|                                                     | Deferred charges and other assets                                 |               |         | 12,598            |         
|                                                     |                                                                   |               |         |                   |         
|Total other assets                                   |                                                                   |               | 621,332 |                   | 526,169 
|                                                     |                                                                   |               |         |                   |         
|Total assets                                         |                                                                   | $             | 913,176 |                   | 819,136 
|                                                     |                                                                   |               |         |                   |         
|Liabilities and Stockholders' Equity (Deficit)       |                                                                   |               |         |                   |         
|Current liabilities:                                 |                                                                   |               |         |                   |         
|                                                     | Accounts payable                                                  |               | $       | 14,784            |         
|                                                     | Current portion of long-term debt and other long-term liabilities |               |         | 659               |         
|                                                     | Demand notes payable                                              |               |         | 377               |         
|                                                     | Accrued interest payable                                          |               |         | 185               |         
|                                                     | Other accrued liabilities                                         |               |         | 17,412            |         
|                                                     | Dividends payable                                                 |               |         | 13,768            |         
|                                                     | Income taxes payable                                              |               |         | 37                |         
|                                                     | Liabilities of discontinued operations                            |               |         | 2,164             |         
|                                                     |                                                                   |               |         |                   |         
|Total current liabilities                            |                                                                   |               | 49,386  |                   | 49,906  
|                                                     |                                                                   |               |         |                   |         
|Long-term liabilities:                               |                                                                   |               |         |                   |         
|                                                     | Long-term debt, net of current portion                            |               |         | 603,086           |         
|                                                     | Preferred shares subject to mandatory redemption                  |               |         |                  |         
|                                                     | Liabilities of discontinued operations                            |               |         | 1,224             |         
|                                                     | Deferred credits and other long-term liabilities                  |               |         | 5,879             |         
|                                                     |                                                                   |               |         |                   |         
|Total long-term liabilities                          |                                                                   |               | 610,189 |                   | 941,035 
|                                                     |                                                                   |               |         |                   |         
|Commitments and contingencies                        |                                                                   |               |         |                   |         
|Minority interest                                    |                                                                   |               | 10      |                   | 11      
|                                                     |                                                                   |               |         |                   |         
|Common stock subject to put options                  |                                                                   |               |        |                   | 1,136   
|                                                     |                                                                   |               |         |                   |         
|Stockholders' equity (deficit):                      |                                                                   |               |         |                   |         
|                                                     | Common stock                                                      |               |         | 350               |         
|                                                     | Additional paid-in capital                                        |               |         | 617,572           |         
|                                                     | Unearned compensation                                             |               |         | (7,645            | )       
|                                                     | Accumulated deficit                                               |               |         | (354,920          | )       
|                                                     | Accumulated other comprehensive loss, net                         |               |         | (1,766            | )       
|                                                     |                                                                   |               |         |                   |         
|Total stockholders' equity (deficit)                 |                                                                   |               | 253,591 |                   | (172,952
|                                                     |                                                                   |               |         |                   |         
|Total liabilities and stockholders' equity (deficit) |                                                                   | $             | 913,176 |                   | 819,136 
|                                                     |                                                                   |               |         |                   |         

See accompanying notes to condensed consolidated financial statements.

3

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES        Condensed Consolidated Statements of Operations        (Unaudited)

|                                                                       |                                                                                          | Three months ended
June 30, |        | Six months ended
June 30, |        
|---------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | --------------------------- | ------ | ------------------------- | -------
|
|
|Revenues                                                               |                                                                                          | $                           | 65,206 |                           | 62,416 
|                                                                       |                                                                                          |                             |        |                           |        
|Operating expenses:                                                    |                                                                                          |                             |        |                           |        
|                                                                       | Operating expenses, excluding depreciation and amortization and stock-based compensation |                             |        | 34,636                    |        
|                                                                       | Depreciation and amortization                                                            |                             |        | 13,106                    |        
|                                                                       | Stock-based compensation                                                                 |                             |        | 685                       |        
|                                                                       |                                                                                          |                             |        |                           |        
|Total operating expenses                                               |                                                                                          |                             | 48,427 |                           | 44,436 
|                                                                       |                                                                                          |                             |        |                           |        
|Income from operations                                                 |                                                                                          |                             | 16,779 |                           | 17,980 
|                                                                       |                                                                                          |                             |        |                           |        
|Other income (expense):                                                |                                                                                          |                             |        |                           |        
|                                                                       | Net gain (loss) on sale of investments and other assets                                  |                             |        | (6                        | )      
|                                                                       | Interest and dividend income                                                             |                             |        | 720                       |        
|                                                                       | Interest expense                                                                         |                             |        | (9,588                    | )      
|                                                                       | Equity in net earnings of investees                                                      |                             |        | 2,796                     |        
|                                                                       | Realized and unrealized losses on interest rate swaps                                    |                             |        |                          |        
|                                                                       | Other nonoperating, net                                                                  |                             |        | (1,582                    | )      
|                                                                       |                                                                                          |                             |        |                           |        
|Total other expense                                                    |                                                                                          |                             | (7,660 | )                         | (22,794
|                                                                       |                                                                                          |                             |        |                           |        
|Income (loss) from continuing operations before income taxes           |                                                                                          |                             | 9,119  |                           | (4,814 
|Income tax benefit (expense)                                           |                                                                                          |                             | (3,515 | )                         | 49     
|Minority interest in income of subsidiaries                            |                                                                                          |                             | (1     | )                         |       
|                                                                       |                                                                                          |                             |        |                           |        
|Income (loss) from continuing operations                               |                                                                                          |                             | 5,603  |                           | (4,765 
|                                                                       |                                                                                          |                             |        |                           |        
|Income from discontinued operations                                    |                                                                                          |                             |       |                           | 671    
|Net income (loss)                                                      |                                                                                          | $                           | 5,603  |                           | (4,094 
|                                                                       |                                                                                          |                             |        |                           |        
|Weighted average shares outstanding:                                   |                                                                                          |                             |        |                           |        
|                                                                       | Basic                                                                                    |                             |        | 34,549                    |        
|                                                                       |                                                                                          |                             |        |                           |        
|                                                                       | Diluted                                                                                  |                             |        | 34,566                    |        
|                                                                       |                                                                                          |                             |        |                           |        
|Basic and diluted earnings (loss) from continuing operations per share |                                                                                          | $                           | 0.16   |                           | (0.50  
|                                                                       |                                                                                          |                             |        |                           |        
|Basic and diluted earnings from discontinued operations per share      |                                                                                          | $                           |       |                           | 0.07   
|                                                                       |                                                                                          |                             |        |                           |        
|Basic and diluted earnings (loss) per share                            |                                                                                          | $                           | 0.16   |                           | (0.43  
|                                                                       |                                                                                          |                             |        |                           |        

See
accompanying notes to condensed consolidated financial statements.

4

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES        Condensed Consolidated Statements of Comprehensive Income (Loss)        (Unaudited)

Three months ended
June 30,

Six months ended
June 30,2005

2004

2005

2004(Dollars in thousands)Net income (loss)




$
5,603



(4,094
)


16,645



(8,701
)Other comprehensive income (loss):Available-for-sale securities:Unrealized holding loss arising during period

$





(710
)






(1,146
)Less reclassification for gain included in net income







(67
)






(214
)



(777
)






(1,360
)Cash flow hedges:Change in net unrealized gain, net of tax benefit of $3.3 million as of the three months ended June 30, 2005 and net of tax benefit of $1.0 million for the six months ended June 30, 2005





(5,479
)






(1,766
)


Reclassification adjustment









26







103Other comprehensive income (loss)





(5,479
)


(751
)


(1,766
)


(1,257
)Comprehensive income (loss)




$
124



(4,845
)


14,879



(9,958
)


See accompanying notes to condensed consolidated financial statements.

5

---





FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES        Condensed Consolidated Statements of Cash Flows        (Unaudited)

Six months ended
June 30,2005

2004(Dollars in thousands)Cash flows from operating activities:Net income (loss)

$
16,645

(8,701
)Adjustments to reconcile net income (loss) to net cash provided by operating activities of continuing operations:Income from discontinued operations




(671
)Dividends and accretion on shares subject to mandatory redemption


2,362

9,660Loss on preferred stock subject to mandatory redemption


9,899

Deferred income taxes


(92,706
)
Amortization of debt issue costs


1,095

2,301Depreciation and amortization


26,116

24,700Loss on early retirement of debt


77,847

Minority interest in income of subsidiaries


1

1Income from equity method investments


(5,452
)
(5,054
)Other non cash items


1,230

(898
)Changes in assets and liabilities arising from operations:Accounts receivable and other current assets


(1,795
)
(2,094
)Accounts payable and accrued expenses


(17,717
)
861Income taxes


(342
)
(182
)Other assets/liabilities


110

83Total adjustments


648

28,707Net cash provided by operating activities of continuing operations


17,293

20,006Cash flows from investing activities of continuing operations:Acquisitions of telephone properties, net of cash acquired


(16,449
)
Net capital additions


(9,652
)
(16,599
)Distributions from investments


4,791

8,799Net proceeds from sales of investments and other assets


174

356Other, net


(281
)
(234
)Net cash used in investing activities of continuing operations


(21,417
)
(7,678
)Cash flows from financing activities of continuing operations:Net proceeds from issuance of common stock


431,921

Debt issue and offering costs


(8,468
)
(3,719
)Proceeds from issuance of long-term debt


638,484

107,035Repayments of long-term debt


(847,842
)
(111,561
)Repurchase of preferred and common stock


(129,278
)
(1,002
)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


184

Dividends paid to common stockholders


(7,788
)
Net cash provided by (used in) financing activities of continuing operations


7,731

(9,247
)Net cash contributed from continuing operations to discontinued operations


(510
)
(912
)Net increase in cash


3,097

2,169Cash, beginning of period


3,595

5,603Cash, end of period

$
6,692

7,772


See accompanying notes to condensed consolidated financial statements.

6

---





FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES  NOTES TO CONDENSED CONSOLIDATED  FINANCIAL STATEMENTS (Unaudited)

(1)    Organization and Basis of Financial Reporting

The accompanying unaudited condensed financial statements of FairPoint Communications, Inc. and subsidiaries as of June 30, 2005 and for the three
and six month periods ended June 30, 2005 and 2004 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2004 and, in the
opinion of the Company's management, the unaudited condensed financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of FairPoint's
results of operations, financial position, and cash flows. The results of operations for the interim periods are not necessarily indicative of the results of operations which might be expected for the
entire year. The unaudited condensed consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 2004.

(2)    Initial Public Offering and Other Transactions

(a)    General

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

In
connection with the offering, the Company entered into a new senior secured credit facility, or the credit facility, with a syndicate of financial institutions, including Deutsche
Bank Trust Company Americas, as administrative agent. The credit facility is comprised of a revolving facility in an aggregate principal amount of $100 million (less amounts reserved for
letters of credit) and a term facility in an aggregate principal amount of $588.5 million (including a $22.5 million delayed draw facility). The revolving facility has a six year
maturity and the term facility has a seven year maturity. The offering, the credit facility and the transactions described below are referred to herein collectively as the transactions.

The
Company used the gross proceeds of $462.5 million from the offering together with borrowings of $566.0 million under the term facility of the credit facility as
follows:



7

---





On
March 10, 2005, the Company used the $18.4 million which it had invested in temporary investments, together with $6.6 million of cash on hand, to redeem the
$0.2 million aggregate principal amount of the 91/2% notes (including accrued interest and redemption premiums) that were not tendered in the tender offer for such notes and the
$24.2 million aggregate principal amount of the floating rate notes (including accrued interest) that were not tendered in the tender offer for such notes.

On
May 2, 2005, the Company used $22.4 million of borrowings under the delayed draw facility of the credit facility to redeem the $19.9 million aggregate principal
amount of the 121/2% notes (including accrued interest and redemption premiums) that were not tendered in the tender offer for such notes. In connection with such redemption, a premium
of $1.2 million was recorded and an additional $0.4 million of existing debt issuance costs has been subsequently charged off, resulting in the recognition of a loss of
$1.6 million for retirement of debt in the second quarter of 2005.

The
Company reported other expense in the amount of $87.7 million, comprised of a $77.8 million loss on early retirement of debt and a $9.9 million loss on
redemption of series A preferred stock. With respect to the $77.8 million loss on early retirement of debt, $16.8 million was recorded for the
write-off of existing debt issuance costs and the remaining $61.0 million was fees and penalties.

(b)    Issuance of Common Stock

On January 28, 2005, the Company effected a 5.2773714 for one reverse stock split of the common stock, which has been given retroactive effect in the
accompanying financial statements. In connection with the offering, the Company reclassified all of its class A common stock and class C common stock on a
one-for-one basis into a single class of common stock of which 200 million shares are authorized. After the stock split, but prior to the issuance of any new shares in
the offering, 9,451,719 shares of common stock were outstanding. All common stock issued and outstanding has a $0.01 par value.

8

---



The
Company received gross proceeds of $462.5 million from the offering which, net of costs incurred of $30.6 million related to the offering, has been allocated to
paid-in capital.

(c)    Dividends

The
Company has adopted a dividend policy under which a substantial portion of the cash generated by the Company's business in excess of operating needs, interest and principal payments
on indebtedness, dividends on future senior classes of capital stock, if any, capital expenditures, taxes and future reserves, if any, would in general be distributed as regular quarterly dividend
payments to the holders of its common stock, rather than retained and used for other purposes.

On
June 16, 2005, the Company declared a dividend of $0.39781 per share of common stock, which was paid on July 19, 2005 to holders of record as of June 30, 2005. On
March 3, 2005, the Company declared a dividend of $0.22543 per share of common stock, which was paid on April 15, 2005 to holders of record as of March 31, 2005. In 2005, the
Company has paid dividends totaling $21.5 million, or $0.62324 per share of common stock.

(3)    Income Taxes

The Company's accounting policy is to report income tax expense for interim reporting periods using an estimated annual effective income tax rate. However, the
effects of significant or unusual 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 the event occurs.

For
the three months ended June 30, 2005, the Company recorded income tax expense of $3.5 million. The tax rate for the second quarter of 2005 was approximately 38.5%, as
compared to 0.1% for the second quarter of 2004. The higher tax rate in 2005 resulted primarily from taxable income during 2005 versus losses incurred in prior periods. Exclusive of unusual items
affecting the tax rate, the Company's effective annual tax rate is 41.7% for 2005.

For
the six months ended June 30, 2005, the Company recorded an income tax benefit of $91.4 million. The income tax benefit and effective tax rate were primarily impacted
by unusual items occurring during the six months ended June 30, 2005. Income tax benefits of $23.8 million were recognized due to the taxable loss in the first six months of 2005,
resulting from losses on the extinguishment of debt. In addition, the Company recognized income tax benefits of $66.0 million from the reduction of the deferred tax valuation allowance. The
income tax benefit also includes $1.6 million for an adjustment to record the Company's net deferred tax assets at an expected federal income tax rate of 35% (from 34%), in anticipation of
higher levels of taxable income in subsequent periods. During the six months ended June 30, 2004, income tax expense was $0.2 million related primarily to income taxes owed in certain
states.

The
valuation allowance for deferred tax assets as of December 31, 2004 was $66.0 million. In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this

9

---



assessment,
as well as all positive and negative evidence that would affect the recoverability of deferred tax assets. As a result of the offering, the Company has reduced its aggregate long term debt
and expects a significant reduction in its annual interest expense. When considered together with the Company's history of producing positive operating results and other evidence affecting the
recoverability of deferred tax assets, the Company expects that future taxable income will more likely than not be sufficient to recover net deferred tax assets.

(4)    Stock-Based Compensation

The Company accounts for its stock option plans using the intrinsic value based method prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees,or APB No. 25, and related interpretations. As such, compensation expense is recorded on the
date of grant only if the current market price of the underlying stock exceeds the exercise price. Statement of Financial Accounting Standards No. 123,Accounting for
Stock Based Compensation,or SFAS No. 123, permits entities to recognize as expense over the vesting period the fair value of all stock based awards on the date
of grant. SFAS No. 123 allows entities to continue to apply the provisions of APB No. 25 and provide pro forma net income (loss) disclosures as if the
fair-value method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the intrinsic value based method of accounting under
APB No. 25 and has adopted the disclosure requirements of SFAS No. 123.

The
Company granted 473,716 shares of restricted stock issued under the Company's 2005 Stock Incentive Plan to certain employees concurrently with the closing of the offering. These
shares vest over periods ranging from three to four years. In connection with this grant, the Company recorded unearned compensation of $8.8 million, which has been reduced to
$7.6 million as of June 30, 2005. During the second quarter of 2005, 9,474 shares of restricted stock were forfeited.

In
the second quarter of 2005, the Company's board of directors approved an annual award to each of the Company's non-employee directors of approximately $30,000 in the form
of restricted stock or restricted units, at the recipient's option, issued under the Company's 2005 Stock Incentive Plan. The restricted stock and restricted stock units will vest in four equal
quarterly installments on the first day of each of the first four calendar quarters following the grant date, commencing on July 1, 2005, and the holders thereof will be entitled to receive
dividends from the date of grant, whether or not vested. In the second quarter of 2005, the Company granted 1,870 shares of restricted stock with a total value at the grant date of $30,000 and 7,480
restricted stock units with a total value at the grant date of $120,000 to the Company's non-employee directors.

In
total, the Company has recorded stock-based compensation expense of $0.7 million and $1.1 million, respectively, in the three and six months ended June 30, 2005
related to these stock compensation plans. The Company recorded stock-based compensation expense of $44,000 and $88,000, respectively, in the three and six months ended June 30, 2004.

The
Company calculates stock-based compensation pursuant to the disclosure provisions of SFAS No. 123 using the straight-line method over the vesting period of
the option. Had the Company

10

---



determined
compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income would have been (in thousands, except per share
amounts):

Three months ended June 30,

Six months ended June 30,2005

2004

2005

2004Net income (loss), as reported

$
5,603

$
(4,094
)
$
16,645

$
(8,701
)Stock-based compensation expense included in reported net income, net of tax


427


44


681


88Stock-based compensation determined under fair value based method, net of tax


(360
)

(241
)

(708
)

(480
)Pro forma net income (loss)

$
5,670

$
(4,291
)
$
16,618

$
(9,093
)Basic earnings (loss) per share:As reported

$
0.16

$
(0.43
)
$
0.57

$
(0.92
)Pro forma


0.16


(0.45
)

0.57


(0.96
)Diluted earnings (loss) per share:As reported

$
0.16

$
(0.43
)
$
0.57

$
(0.92
)Pro forma


0.16


(0.45
)

0.57


(0.96
)


In
December 2004, the FASB issued SFAS No. 123(R). This new standard requires companies to adopt the fair value methodology of valuing stock-based compensation and
recognize that valuation in the financial statements from the date of grant. Accordingly, the adoption of SFAS No. 123(R)'s fair value method may have an adverse impact on the Company's
income from operations, although it will have no impact on the Company's overall financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it
will partially depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS No. 123(R) in prior periods, the impact of that standard would have
approximated the impact of SFAS No. 123 as shown in the table above. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost
to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. The Company expects to adopt the provisions of SFAS No. 123(R) on a
modified prospective application method effective January 1, 2006, with no restatement of any prior periods. SFAS No. 123(R) is effective for the Company as of the beginning of
the first annual reporting period that begins after June 15, 2005.

11

---





(5)    Acquisitions

On May 2, 2005, the Company completed the acquisition of Berkshire Telephone Corporation, or Berkshire. The purchase price was approximately
$20.4 million (or $16.4 million net of cash acquired), subject to adjustment. The Company incurred acquisition costs of $0.6 million. Berkshire is an independent local exchange
carrier that provides voice communication, cable and internet services. Berkshire's communities of service are adjacent to those of Taconic Telephone Corp., one of the Company's subsidiaries. The
acquisition is referred to herein as the Berkshire acquisition. The Berkshire acquisition was accounted for using the purchase method of accounting for business combinations.

The
Berkshire acquisition has been accounted for using the purchase method of accounting for business combinations and, accordingly, the acquired assets and liabilities have been
recorded at their estimated fair values as of the date of acquisition, and its results of operations have been included in the Company's consolidated financial statements from the date of acquisition.
Based upon the Company's preliminary purchase price allocation, the excess of the purchase price and acquisition costs over the fair value of the net identifiable assets acquired was approximately
$10.9 million. The Company recorded an intangible asset related to the acquired company's customer list of $2.4 million and the remaining $8.5 million has been recognized as
goodwill. The estimated useful life of the $2.4 million intangible asset is 15 years.

The
following unaudited pro forma information presents the combined results of operations of the Company as though the Berkshire acquisition had been consummated on January 1,
2004. These results include certain adjustments, mainly associated with increased interest expense on debt related to the acquisition and the related income tax effects. The proforma financial
information does not necessarily reflect the results of operations as if the Berkshire acquisition had been consummated at the beginning of the period or which may be attained in the future.

Three months ended
June 30,

Six months ended
June 30,2005

2004

2005

2004(in thousands)Revenues

$
65,706

$
63,915

$
128,869

$
126,398Income (loss) from continuing operations


5,549


(4,930
)

16,428


(9,700
)Net income (loss)


5,549


(4,259
)

16,428


(9,029
)Earnings (loss) per share:Basic

$
0.16

$
(0.45
)
$
0.56

$
(0.95
)Diluted


0.16


(0.45
)

0.56


(0.95
)


On
April 22, 2005, the Company entered into an agreement to acquire Bentleyville Communications Corporation, or Bentleyville, for approximately $11.0 million in cash,
subject to adjustment based on whether the amount of Bentleyville's cash and cash equivalents is greater than or less than $1.5 million at closing. Bentleyville provides telecommunications,
cable and internet services to rural areas of Southwestern Pennsylvania which are adjacent to the Company's existing operations in Pennsylvania. The acquisition is referred to herein as the
Bentleyville acquisition. The Bentleyville acquisition is expected to close during the third quarter of 2005.

12

---



(6)    Discontinued Operations and Restructure Charges

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

Net
liabilities of discontinued competitive communications operations as of June 30, 2005 and December 31, 2004 were $3.3 million and $3.7 million,
respectively. The remaining restructuring accrual at June 30, 2005 was $2.2 million, and is primarily associated with remaining equipment and lease obligations. The change in the
restructuring accrual from December 31, 2004 to June 30, 2005 was comprised of payments towards the lease obligations.

The
income from discontinued operations of $0.7 million for the six months ended June 30, 2004 resulted from the re-evaluation of certain accrued liabilities
associated with the Company's discontinued operations.

(7)    Interest Rate Swap Agreements

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

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

On
February 8, 2005, the Company entered into three interest rate swap agreements, with notional amounts of $130 million each, to effectively convert a portion of its
variable rate interest exposure to fixed rates ranging from 5.76% to 6.11%. These swap agreements expire beginning December 31, 2007 through December 31, 2009. On April 7, 2005,
the Company entered into two additional interest rate swap agreements, one with the notional amount of $50.0 million to effectively convert a portion of its variable rate interest exposure to a
fixed rate of 6.69% beginning on April 29, 2005 and ending on March 31, 2011, and one with the notional amount of $50.0 million to effectively convert a portion of its variable
rate interest exposure to a fixed rate of 6.72% beginning on June 30, 2005 and ending on March 31, 2012. As a result of these swap agreements, as of June 30, 2005, approximately
82% of the Company's indebtedness bore interest at fixed rates rather than variable rates.

13

---



These
interest rate swaps qualify as cash flow hedges for accounting purposes. The effect of hedge ineffectiveness on net earnings was insignificant for the three and six months ended
June 30, 2005. At June 30, 2005, the fair market value of these swaps was approximately $2.8 million and has been recorded, net of tax of $1.0 million, as a decrease in
comprehensive income. Of the $2.8 million, $1.3 million has been included in other accrued liabilities as a current liability and $1.5 million has been included in deferred
credits and other long-term liabilities.

During
2004, the Company had two interest rate swap agreements with a combined notional amount of $50.0 million which expired in May 2004. Amounts receivable or payable
under these interest rate swap agreements were accrued at each balance sheet date and included as adjustments to realized and unrealized gains (losses) on interest rate swaps because these interest
rate swap agreements were not considered effective accounting hedges.

(8)    Investments

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

March 31,
2005

December 31,
2004Current assets

$
1,860

$
1,545Property, plant and equipment, net


35,824


34,525Total assets

$
37,684

$
36,070Current liabilities

$
341

$
3,682Partners' capital


37,343


32,388$
37,684

$
36,070


Three months ended
March 31,

Six months ended
March 31,2005

2004

2005

2004Revenues

$
39,763

$
37,441

$
80,644

$
74,468Operating income


33,846


31,935


67,357


62,346Net income


33,955


32,203


67,729


62,944


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

14

---



(9)    Long Term Debt

Long term debt at June 30, 2005 and December 31, 2004 is shown below:

June 30,
2005

December 31,
2004(In thousands)Senior secured notes, variable rates ranging from 5.4375% to 7.25% at June 30, 2005, due in 2011

$
598,280

$
Senior secured notes, variable rates ranging from 6.44% to 8.75% at December 31, 2004, due 2005 to 2007





182,357Senior subordinated notes due 2008:Fixed rate notes, 9.50%





115,207Variable rate notes, 6.4875% at December 31, 2004





75,000Senior subordinated notes, 12.50%, due 2010





193,000Senior notes, 11.875%, due 2010


2,050


225,000Senior notes to RTFC:Fixed rate, ranging from 8.2% to 9.20%, due 2014


3,415


2,278Variable rate, 6.15% at December 31, 2004, due 2009





3,415Subordinated promissory notes, 7.00%, due 2005





7,000First mortgage notes to Rural Utilities Service, fixed rates ranging from 4.96% to 10.78%, due 2005 to 2016





6,034Senior notes to RTB, fixed rates ranging from 7.50% to 8.00%, due 2008 to 2014





1,141Total outstanding long-term debt


603,745


810,432Less current portion


(659
)

(524
)Total long-term debt, net of current portion

$
603,086

$
809,908


The
approximate aggregate maturities of long-term debt for each of the five years subsequent to June 30, 2005 are as follows:

Year ending June 30, 2005
(In thousands)2006

$
6592007


6962008


7342009


4402010


2,205Thereafter


599,011$
603,745


15

---





The Company has entered into a credit facility consisting 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. On the closing date of the offering (February 8, 2005), the Company drew $566.0 million against the term facility. In
addition, on May 2, 2005, the Company drew $22.4 million of borrowings under the delayed draw facility of the credit facility. The Company incurred approximately $9.4 million of
debt issuance costs associated with entering into the credit facility and subsequent amendments thereto.

The
term facility matures in February 2012 and the revolving facility matures in February 2011.

Borrowings
bear interest, at the Company's option, for the revolving facility and for the term facility at either (a) the Eurodollar rate (as defined in the credit facility) plus
an applicable margin (at June 30, 2005, the Eurodollar rates on the variable rate debt under the credit facility ranged from 5.4375% to 7.25%) or (b) the Base rate (as defined in the
credit facility) plus an applicable margin. The Eurodollar rate applicable margin and the Base rate applicable margin for loans under the credit facility are 2.0% and 1.0%, respectively. Interest with
respect to Base rate loans is payable quarterly in arrears and interest with respect to Eurodollar loans is payable at the end of the applicable interest period and every three months in the case of
interest periods in excess of three months.

The
credit facility provides for payment to the lenders 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 mandatory prepayments, including first to prepay outstanding term loans under the credit facility and, thereafter, to repay loans under the revolving
facility and/or to reduce revolving facility commitments with, subject to certain conditions and exceptions, 100% of the net cash proceeds the Company receives from any sale, transfer or other
disposition of any assets, 100% of net casualty insurance proceeds and 100% of the net cash proceeds the Company receives from the issuance of permitted securities and, at certain times if the Company
is not permitted to pay dividends, with 50% of the increase in the Company's Cumulative Distributable Cash (as defined in the credit facility) during the prior fiscal quarter. Reductions to the
revolving commitments under the credit facility from the foregoing recapture events will not reduce the revolving commitments under the credit facility below $50.0 million.

The
credit facility provides for voluntary prepayments of the revolving facility and the term facility and voluntary commitment reductions of the revolving facility, subject to giving
proper notice and compensating the lenders for standard Eurodollar breakage costs, if applicable.

The
credit facility requires that the Company maintain certain financial covenants. The credit facility contains customary affirmative covenants. The credit facility also contains
negative covenants and restrictions, including, among others, with respect to redeeming and repurchasing other indebtedness, loans and investments, additional indebtedness, liens, capital
expenditures, changes in the nature of the Company's business, mergers, acquisitions, asset sales and transactions with the Company's affiliates.

16

---



The
credit facility restricts the Company's ability to declare and pay dividends on its common stock as follows:



The
credit facility also permits the Company to use available cash to repurchase shares of its capital stock, subject to the same conditions.

The
Company may obtain letters of credit under the revolving facility to support obligations of the Company and/or obligations of its subsidiaries incurred in the ordinary course of
business in an aggregate principal amount not to exceed $5.0 million and subject to limitations on the aggregate amount outstanding under the revolving facility. As of June 30, 2005, a
letter of credit had been issued for $1.0 million.

The
credit facility is guaranteed, jointly and severally, subject to certain exceptions, by all first tier subsidiaries of the Company. The Company has provided to Deutsche Bank Trust
Company Americas, as collateral agent for the benefit of the lenders under the credit facility and certain hedging creditors under permitted hedging agreements, collateral consisting of (subject to
certain exceptions) 100% of the Company's equity interests in the subsidiary guarantors and certain other intermediate holding company subsidiaries. Newly acquired or formed direct or indirect
subsidiaries of the Company which own equity interests of any subsidiary that is an operating company will be required to provide the collateral described above.

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

17

---



(10)    Earnings Per Share

Earnings per share has been computed in accordance with SFAS No. 128,Earnings Per Share. Basic earnings
per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period. Except when the effect would be anti-dilutive, the
diluted earnings per share calculation includes the impact of restricted stock units, shares of restricted common stock and shares that could be issued under outstanding stock options. For the three
and six months ended June 30, 2005, diluted weighted average shares of common stock outstanding included 16,462 and 54,394 shares associated with outstanding stock options.

The
number of potential shares of common stock excluded from the calculation of diluted net income (loss) per share, prior to the application of the treasury stock method, is as follows
(in thousands):

Three months ended
June 30,

Six months ended
June 30,2005

2004

2005

2004Contingent stock options

833

833

833

833Shares excluded as effect would be anti-dilutive:Stock options

241

416

241

416Restricted stock

466



466

Restricted stock units

33

27

33

27Total

1,573

1,276

1,573

1,276


(11)    Litigation

On June 6, 2005, a purported class action complaint 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 all other similarly situated persons against the Company, the Company's Chairman and Chief Executive Officer,
certain of the Company's current and former directors and certain of the Company's stockholders. The complaint alleges violations of Sections 11 and 12(a)(2) and liability under Section 15 of
the Securities Act, and alleges that the Company's registration statement on Form S-1 (which was declared effective by the SEC on February 3, 2005) and the related prospectus
dated February 3, 2005, each relating to the offering, contained certain material misstatements and omitted certain material information necessary to be included 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 class of
purchasers of the common stock "issued pursuant and/or traceable to the Company's IPO during the period from February 3, 2005 through March 21, 2005". The Company has removed the action
to Federal Court but the plaintiff has filed a motion to remand the action to the North Carolina State Court. The Company believes that the complaint is without merit and intends to defend the
litigation vigorously.

The
Company currently and from time to time is involved in other litigation and regulatory proceedings incidental to the conduct of its business, but currently the Company is not a party
to any lawsuit or proceeding which, in its opinion, is likely to have a material adverse effect on the Company.

18

---



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

The following discussion and analysis provides information that the Company's management believes is relevant to an assessment and understanding of the
consolidated results of operations and financial condition of FairPoint Communications, Inc. and its subsidiaries. The discussion should be read in conjunction with FairPoint's Consolidated
Financial Statements for the year ended December 31, 2004 included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004.

Overview

We are a leading provider of communications services in rural communities, offering an array of services including local voice, long distance, data, Internet and
broadband product offerings. We are one of the largest telephone companies in the United States focused on serving rural communities, and we are the 17th largest local telephone company,
in each case based on number of access lines. We operate in 17 states with 287,723 access line equivalents (voice access lines and high speed data lines, which include digital subscriber lines, or
DSL, wireless broadband and cable modem) in service as of June 30, 2005.

We
were incorporated in February 1991 for the purpose of operating and acquiring incumbent telephone companies in rural markets. We have acquired 31 such businesses, 27 of which
we continue to own and operate. Many of our telephone companies have served their respective communities for over 75 years. The majority of the rural communities we serve have fewer than 2,500
residents. All of our telephone company subsidiaries qualify as rural local exchange carriers under the Telecommunications Act of 1996, or the Telecommunications Act.

Rural
local exchange carriers generally are characterized by stable operating results and strong cash flow margins and operate in supportive regulatory environments. In particular,
existing state and federal regulations permit us to charge rates that enable us to recover our operating costs, plus a reasonable rate of return on our invested capital (as determined by relevant
regulatory authorities). Competition is typically limited because rural local exchange carriers primarily serve sparsely populated rural communities with predominantly residential customers, and the
cost of operations and capital investment requirements for new entrants is high. As a result, in our markets, we have experienced virtually no wireline competition and limited voice competition from
cable providers. While most of our markets are served by wireless service providers, their impact on our business has been limited.

Access
lines are an important element of our business. Historically, rural telephone companies have experienced consistent growth in access lines because of positive demographic trends,
insulated rural local economies and little competition. Recently, however, many rural telephone companies have experienced a loss of access lines due to challenging economic conditions, increased
competition and the introduction of digital subscriber line services. We have not been immune to these conditions. We have been able to mitigate our access line loss through bundling services,
retention programs, continued community involvement and a variety of other focused programs.

As
of June 30, 2005, 17 of our operating companies (representing 69% of our access line equivalents) had converted to a single outsourced billing platform. This conversion has
resulted in a temporary delay in late notices, disconnect notices and non-pay disconnects at some of the converted companies.

We
are subject to regulation primarily by federal and state governmental agencies. At the federal level, the FCC has jurisdiction over interstate and international communications
services. State telecommunications regulators exercise jurisdiction over intrastate communications services.

19

---



On
February 8, 2005, we consummated the offering and entered into the credit facility. We used net proceeds received from the offering, together with borrowings under the term
facility of the credit facility, to, among other things, repay all outstanding loans under our old credit facility, repurchase all of our series A preferred stock and consummate tender offers
and consent solicitations in respect of our
outstanding 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 remaining outstanding 121/2% notes.

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

As
a result of the offering, we have and will continue to incur higher expenses as a public company. These expenses have and will include additional accounting and finance expenses,
audit fees, legal fees and increased premiums for director and officer liability insurance. We estimate that these additional expenses will be approximately $2.0 million annually, excluding
costs associated with our preparation for compliance with Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act.

We
face risks that could materially adversely affect our business, consolidated financial condition, results of operations or liquidity or the market price of our common stock. For a
discussion of certain of the risks facing us, see Exhibit 99.1 to this Quarterly Report.

Revenues

We derive our revenues from:



20

---





The
following summarizes our revenues and percentage of revenues from continuing operations from these sources (in thousands):

|                                      |  | Revenues |        | % of Revenues |  
|------------------------------------- |  | -------- | ------ | ------------- | -
|
|
|Revenue Source                        |  |          |        |               |  
|Local calling services                |  | $        | 15,982 |               | $
|Universal service fund-high cost loop |  |          | 4,707  |               |  
|Interstate access revenues            |  |          | 20,083 |               |  
|Intrastate access revenues            |  |          | 9,534  |               |  
|Long distance services                |  |          | 4,798  |               |  
|Data and Internet services            |  |          | 5,937  |               |  
|Other services                        |  |          | 4,165  |               |  
|                                      |  |          |        |               |  
|Total                                 |  | $        | 65,206 |               | $
|                                      |  |          |        |               |  

Operating Expenses

Our operating expenses are categorized as operating expenses, depreciation and amortization, and stock-based compensation.



21

---





Acquisitions

We intend to continue to pursue selective acquisitions:



In
the normal course of business, we evaluate selective acquisitions and may enter into non-binding letters of intent with respect to such acquisitions, subject to customary
conditions. Management currently intends to fund future acquisitions through the use of the revolving facility of our credit facility or additional debt financing or the issuance of additional shares
of our common stock. However, our substantial amount of indebtedness and our dividend policy could restrict our ability to obtain such financing on acceptable terms or at all.

Stock Based Compensation

In February 2005, we issued 473,716 shares of restricted stock under our 2005 Stock Incentive Plan. This issuance will result in recognition of an
additional compensation expense of approximately $2.2 million in 2005. At June 30, 2005, 473,849 shares of our common stock may be issued in the future pursuant to awards authorized
under our 2005 Stock Incentive Plan which could result in an additional compensation expense. In the second quarter of 2005, the Company's board of directors approved an annual award to each of the
Company's non-employee directors in the form of restricted stock or restricted units, at the recipient's option, which will vest on a quarterly basis, issued under the Company's 2005 Stock
Incentive Plan. The 2005 non-employee director awards began to vest on July 1, 2005. Non-cash compensation charges associated with restricted stock units and restricted stock was
$0.7 million and $1.1 million for the three and six months ended June 30, 2005, respectively. We did not recognize any additional charges associated with stockholder appreciation
rights that were settled during the first quarter of 2005.

Non-cash
compensation charges associated with restricted stock units were $44,000 and $0.1 million for the three and six months ended June 30, 2004,
respectively.

22

---



Results of Operations

The following tables set forth the percentages of revenues represented by selected items reflected in our consolidated statements of operations. The
quarter-to-quarter and year-to-date comparisons of financial results are not necessarily indicative of future results.

Three Months Ended June 30, 2005 Compared with Three Months Ended June 30, 2004

|                                                             |  | Three months ended
June 30, |        | Three months ended
June 30, |      
|------------------------------------------------------------ |  | --------------------------- | ------ | --------------------------- | -----
|
|Revenues                                                     |  | $                           | 65,206 |                             | 100.0
|Operating expenses                                           |  |                             | 34,636 |                             | 53.1 
|Depreciation and amortization                                |  |                             | 13,106 |                             | 20.1 
|Stock based compensation                                     |  |                             | 685    |                             | 1.1  
|                                                             |  |                             |        |                             |      
|Total operating expenses                                     |  |                             | 48,427 |                             | 74.3 
|                                                             |  |                             |        |                             |      
|Income from operations                                       |  |                             | 16,779 |                             | 25.7 
|                                                             |  |                             |        |                             |      
|Net (loss) gain on sale of investments and other assets      |  |                             | (6     | )                           | (0.0 
|Interest and dividend income                                 |  |                             | 720    |                             | 1.1  
|Interest expense                                             |  |                             | (9,588 | )                           | (14.7
|Equity in net earnings of investees                          |  |                             | 2,796  |                             | 4.3  
|Realized and unrealized losses on interest rate swaps        |  |                             |       |                             |     
|Other non-operating, net                                     |  |                             | (1,582 | )                           | (2.4 
|                                                             |  |                             |        |                             |      
|Total other expense                                          |  |                             | (7,660 | )                           | (11.7
|                                                             |  |                             |        |                             |      
|Income (loss) from continuing operations before income taxes |  |                             | 9,119  |                             | 14.0 
|Income tax benefit (expense)                                 |  |                             | (3,515 | )                           | (5.4 
|Minority interest in income of subsidiaries                  |  |                             | (1     | )                           | (0.0 
|                                                             |  |                             |        |                             |      
|Income (loss) from continuing operations                     |  |                             | 5,603  |                             | 8.6  
|Income from discontinued operations                          |  |                             |       |                             | 0.0  
|                                                             |  |                             |        |                             |      
|Net income (loss)                                            |  | $                           | 5,603  |                             | 8.6  
|                                                             |  |                             |        |                             |      

Revenues

Revenues.Revenues increased $2.8 million to $65.2 million in 2005 compared to $62.4 million in 2004. We
derived our revenues from the following sources:

Local calling services.Local calling service revenues increased $0.2 million to $16.0 million in 2005 compared
to $15.8 million in 2004. Excluding the impact of acquired operations, local calling service revenues were flat compared to the second quarter of 2004. Voice access lines, including lines
acquired, increased 0.8% from the second quarter of 2004 and increased sequentially from the first quarter of 2005 by 3.2%. Voice access lines, excluding acquired lines, increased 0.4% from the first
quarter of 2005. Also impacting local calling service revenues was the implementation of Basic Service Calling Areas in Maine which changes and expands basic service calling areas and has the effect
of shifting revenues from intrastate access to local service.

Universal Service Fund high cost loop.Universal Service Fund high cost loop receipts decreased $1.1 million to
$4.7 million in 2005. The national average cost per loop in relation to our average cost per loop has increased and, as a result, our receipts from the Universal Service Fund have declined. We
expect that this trend will continue as we anticipate the national average cost per loop will likely continue to increase in relation to our average cost per loop.

Interstate access revenues.Interstate access revenues were $20.1 million for the three months ended June 30,
2005 compared to $17.8 million for the three months ended June 30, 2004. This $2.3 million increase is primarily due to an increase in revenue settlements and adjustments related
to prior years of $1.9 million. The remaining increase is due to the Berkshire acquisition. In total,

23

---



increased
revenues due to the recovery of allowable expenses are being offset by revenue reductions due to returns on a lower rate base.

Intrastate access revenues.Intrastate access revenues decreased $0.8 million from $10.3 million in 2004 to
$9.5 million in 2005. The decrease was mainly attributed to declines in total minutes of use combined with rate reductions implemented in Maine that effectively shifted revenues to local
calling services.

Long distance services.Long distance services revenues increased $0.6 million from $4.2 million in 2004 to
$4.8 million in 2005. This is attributable to the increase in subscribers and minutes related to bundles and packages sold to our existing customers. Interstate long distance penetration as of
June 30, 2005 was 41.7% of voice access lines as compared to 34.1% as of June 30, 2004.

Data and Internet services.Data and Internet services revenues increased $1.4 million from $4.5 million in
2004 to $5.9 million in 2005. This increase is due primarily to increases in high speed data customers as we continue to market our broadband services. Our high speed data subscribers increased
from 30,501 as of June 30, 2004 to 40,910 as of June 30, 2005 and represents a 16.6% penetration of voice access lines.

Other services.Other revenues increased from $4.0 million in 2004 to $4.2 million in 2005. Of this increase,
$0.3 million is related to the Berkshire acquisition. The increase due to the acquisition was somewhat offset with reductions in billing and collections revenues as interexchange carriers
continue to take back the billing function for their more significant long distance customers. We expect this trend to continue.

Operating Expenses

Operating expenses, excluding depreciation and amortization.Operating expenses increased $2.5 million to
$34.6 million in 2005 from $32.1 million in 2004. Consulting expenses associated with our preparation for compliance with Section 404 of the Sarbanes-Oxley Act increased
$1.5 million. We expect a substantial decrease in these costs beginning in the next quarter. Expenses related to broadband and long distance services increased $0.5 million. This was
driven primarily by the increase in our high speed data initiatives and long distance revenue growth. In addition, operating expenses increased $0.6 million from the Berkshire acquisition and
bad debt expense increased $0.2 million primarily associated with the billing conversion which has resulted in a temporary delay in late notices, disconnected notices and non-pay disconnects at
some of the converted companies.

Depreciation and amortization.Depreciation and amortization increased $0.8 million to $13.1 million in 2005
from $12.3 million in 2004.

Stock-based compensation.For the three months ended June 30, 2005, stock-based compensation associated with the award
of restricted stock and restricted stock units was $0.7 million. During the three months ended June 30, 2004, stock-based compensation associated with restricted stock units was $44,000.

Income from operations.Income from operations decreased $1.2 million to $16.8 million in 2005 from
$18.0 million in 2004. This was driven principally by the increased percentage of lower margin unregulated revenues in our total business mix due to DSL and long distance revenue growth, which
offset higher margin regulated revenues. In addition to the increase in unregulated products, we have experienced declines in Universal Service Fund and intrastate revenues which have significantly
higher margins and have experienced an increase in operating expenses.

Other income (expense).Total other expense decreased $15.1 million to $7.7 million in 2005 from
$22.8 million in 2004. Interest expense decreased $16.3 million to $9.6 million in 2005 from $25.9 million in 2004, mainly attributable to the transactions which
substantially de-leveraged us and provided a decrease in interest expense. In addition, our series A preferred stock was repurchased which eliminated dividends and accretion on our
series A preferred stock for the three months ended June 30, 2005, which under Statement of Financial Accounting Standards No. 150, or SFAS No. 150,

24

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were
being reported as interest expense. The redemption of the 121/2% notes in May resulted in other non-operating losses of $1.6 million due to fees and penalties
paid on the redemption and for the write-off of unamortized debt issuance costs.

Income tax (expense) benefit.Income tax expense of $3.5 million was recorded for the three months ended
June 30, 2005. Our accounting policy is to report income tax expense for interim reporting periods using an estimated annual effective income tax rate. However, the effects of significant or
unusual 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 the event occurs. The tax rate for the second
quarter of 2005 was approximately 38.5%, as compared to 0.1% for the second quarter of 2004. The higher tax rate in 2005 resulted primarily from taxable income during the second quarter of 2005 versus
losses incurred in prior periods. Exclusive of unusual items affecting the tax rate, we are anticipating an effective annual tax rate of 41.7% for 2005.

Net income (loss).Net income was $5.6 million for the three months ended June 30, 2005 as compared to a loss
of $4.1 million for the three months ended June 30, 2004. The differences between 2005 and 2004 are a result of the factors discussed above.

Six Months Ended June 30, 2005 Compared with Six Months Ended June 30, 2004

|                                                        |  | Six months ended
June 30, |          | Six months ended
June 30, |      
|------------------------------------------------------- |  | ------------------------- | -------- | ------------------------- | -----
|
|Revenues                                                |  | $                         | 126,871  |                           | 100.0
|Operating expenses                                      |  |                           | 66,672   |                           | 52.6 
|Depreciation and amortization                           |  |                           | 26,116   |                           | 20.6 
|Stock based compensation                                |  |                           | 1,092    |                           | 0.9  
|                                                        |  |                           |          |                           |      
|Total operating expenses                                |  |                           | 93,880   |                           | 74.1 
|                                                        |  |                           |          |                           |      
|Income from operations                                  |  |                           | 32,991   |                           | 25.9 
|                                                        |  |                           |          |                           |      
|Net (loss) gain on sale of investments and other assets |  |                           | (184     | )                         | (0.1 
|Interest and dividend income                            |  |                           | 1,272    |                           | 1.0  
|Interest expense                                        |  |                           | (26,558  | )                         | (20.9
|Equity in net earnings of investees                     |  |                           | 5,452    |                           | 4.3  
|Realized and unrealized losses on interest rate swaps   |  |                           |         |                           |     
|Other non-operating, net                                |  |                           | (87,746  | )                         | (69.2
|                                                        |  |                           |          |                           |      
|Total other expense                                     |  |                           | (107,764 | )                         | (84.9
|                                                        |  |                           |          |                           |      
|Loss from continuing operations before income taxes     |  |                           | (74,773  | )                         | (59.0
|Income tax benefit (expense)                            |  |                           | 91,419   |                           | 72.1 
|Minority interest in income of subsidiaries             |  |                           | (1       | )                         | (0.0 
|                                                        |  |                           |          |                           |      
|Income (loss) from continuing operations                |  |                           | 16,645   |                           | 13.1 
|Income from discontinued operations                     |  |                           |         |                           | 0.0  
|                                                        |  |                           |          |                           |      
|Net income (loss)                                       |  | $                         | 16,645   |                           | 13.1 
|                                                        |  |                           |          |                           |      

Revenues

Revenues.Revenues increased $3.5 million to $126.9 million in 2005 compared to $123.4 million in 2004.
We derived our revenues from the following sources:

Local calling services.Local calling service revenues increased $0.3 million for the six months ended June 30,
2005 compared to the six months ended June 30, 2004. The majority of this increase was the result of the Berkshire acquisition. Voice access lines increased 0.8% from June 30, 2004.
Voice access lines, excluding acquired lines, decreased 1.9% from June 30, 2004. Also impacting local calling service revenues was the implementation of Basic Service Calling Areas in Maine
which changes and

25

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expands
basic service calling areas and has the effect of shifting revenues from intrastate access to local service.

Universal Service Fund high cost loop.Universal Service Fund high cost loop receipts decreased $1.8 million to
$9.5 million in 2005 from $11.3 million in 2004. The national average cost per loop in relation to our average cost per loop has increased and, as a result, our receipts from the
Universal Service Fund have declined. We expect that this trend will continue as we anticipate the national average cost per loop will likely continue to increase in relation to our average cost per
loop.

Interstate access revenues.Interstate access revenues increased $2.3 million to $37.0 million for the six
months ended June 30, 2005 from $34.7 million for the six months ended June 30, 2004. This increase is primarily due to an increase in revenue settlements and adjustments related
to prior years of $1.9 million. The remaining increase is principally due to the Berkshire acquisition.

Intrastate access revenues.Intrastate access revenues decreased $1.4 million from $21.0 million in 2004 to
$19.6 million in 2005. The decrease was mainly attributed to declines in total minutes of use combined with rate reductions implemented in Maine that effectively shifted revenues to local
calling services.

Long distance services.Long distance services revenues increased $1.2 million for the six months ended
June 30, 2005 compared to the six months ended June 30, 2004. This increase is attributable to the increase in subscribers and minutes related to bundles and packages sold to our
existing customers. Interstate long distance penetration as of June 30, 2005 was 41.7% of voice access lines as compared to 34.1% as of June 30, 2004.

Data and Internet services.Data and Internet services revenues increased $3.0 million from $8.5 million in
2004 to $11.5 million in 2005. This increase is due primarily to increases in high speed data customers as we continue to aggressively market our broadband services. Our high speed data
subscribers increased from 30,501 as of June 30, 2004 to 40,910 as of June 30, 2005 and represents a 16.6% penetration of voice access lines.

Other services.Other revenues declined $0.1 million from $8.3 million in 2004 to $8.2 million in 2005.
The decrease is mainly associated with reductions in billing and collections revenues as interexchange carriers continue to take back the billing function for their more significant long distance
customers. We expect this trend to continue. The decrease in billing and collections revenue was somewhat offset by revenues associated with the Berkshire acquisition.

Operating Expenses

Operating expenses, excluding depreciation and amortization.Operating expenses increased $4.5 million to
$66.7 million in 2005 from $62.2 million in 2004. Expenses related to broadband and long distance services increased $1.8 million. This was driven primarily by the increase in our
high speed data initiatives and long distance revenue growth. Consulting expenses primarily associated with our preparation for compliance with Section 404 of the Sarbanes-Oxley Act increased
$1.5 million. We expect a substantial decrease in these costs beginning in the next quarter. Expenses associated with the conversion and outsourcing of the billing function increased
$0.7 million. Also related to the billing conversion, bad debt expense increased $0.4 million primarily as a result of a temporary delay in late notices, disconnect notices and non-pay
disconnects at some of the converted companies.

Depreciation and amortization.Depreciation and amortization increased $1.4 million to $26.1 million in 2005
from $24.7 million in 2004.

Stock based compensation.For the six months ended June 30, 2005, stock-based compensation associated with the award
of restricted stock and restricted stock units increased $1.0 million compared to the six months ended June 30, 2004.

Income from operations.Income from operations decreased $3.5 million to $33.0 million in 2005. This was driven
principally by the increased percentage of lower margin unregulated revenues in our

26

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total
business mix due to DSL and long distance revenue growth, which offset higher margin regulated revenues. In addition to the increase in unregulated products, we have experienced declines in
Universal Service Fund and intrastate revenues which have significantly higher margins and have experienced an increase in operating expenses.

Other income (expense).Total other expense increased $62.1 million to $107.8 million in 2005. Interest expense
decreased $25.0 million to $26.6 million in 2005, mainly attributable to the transactions which substantially de-leveraged us and provided a decrease in interest expense. In
addition, our series A preferred stock was repurchased which also eliminated dividends and accretion on our series A preferred stock for the six months ended June 30, 2005, which
under SFAS 150 were being reported as interest expense. The refinancing of our old credit facility and the repurchase and/or redemption of the 91/2% notes, floating rate notes,
121/2% notes and 117/8% notes resulted in significant charges of $87.7 million due to fees and penalties paid on the repurchase/redemption and for the
write-off of unamortized debt issuance costs.

Income tax (expense) benefit.Income tax benefits of $23.8 million were recorded primarily due to the taxable loss in
the six months ended June 30, 2005, driven by the expenses incurred from the transactions. In addition, we reported income tax benefits of $66.0 million from the recognition of deferred
tax benefits from the reversal of the deferred tax valuation allowance resulting from the Company's expectation of generating future taxable income following the transactions. During the six months
ended June 30, 2004, the income tax expense related primarily to income taxes owed in certain states. Our accounting policy is to report income tax expense for interim reporting periods using
an estimated annual effective income tax rate. However, the effects of significant or unusual 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 the event occurs. The tax rate for the six months ended June 30, 2005 was approximately 122.3%, as compared to 1.9% for the six months ended
June 30, 2004. The higher tax rate in 2005 resulted primarily from unusual items occurring during the first half of 2005, which included a reduction of the valuation allowance for deferred tax
assets of $66.0 million and deferred tax benefits of $29.3 million related to the extinguishment of debt. The income tax benefit for 2005 also includes $1.6 million for an
adjustment of our net deferred tax assets to an expected federal income tax rate of 35% from 34%, in anticipation of higher levels of taxable income in subsequent periods. Exclusive of unusual items
affecting the tax rate, we are anticipating an effective annual tax rate of 41.7% for 2005.

Net income (loss).Net income was $16.6 million for the six months ended June 30, 2005 as compared to a loss of
$8.7 million for the six months ended June 30, 2004. The differences between 2005 and 2004 are a result of the factors discussed above.

Liquidity and Capital Resources

Our short-term and long-term liquidity needs arise primarily from: (i) interest payments, which are expected to be approximately
$41.0 to $43.0 million in 2005 taking into account our capital structure costs before and after the transactions (including interest rate swap agreements), primarily related to our credit
facility (this estimate does not take into account the pending Bentleyville acquisition or any other potential acquisitions in 2005); (ii) capital expenditures, which are expected to be
approximately $27.0 to $28.0 million in 2005 (this estimate does not take into account the pending Bentleyville acquisition or any other potential acquisitions in 2005); (iii) working
capital requirements as may be needed to support the growth of our business; (iv) dividend payments on our common stock; and (v) potential acquisitions.

On
June 16, 2005, we declared a dividend of $0.39781 per share of our common stock, which was paid on July 19, 2005 to holders of record as of June 30, 2005. In
addition, on March 3, 2005, we declared a dividend of $0.22543 per share of our common stock, which was paid on April 15, 2005 to holders of record as of March 31, 2005. In
accordance with our dividend policy, we currently intend to continue to pay quarterly dividends at an annual rate of $1.59125 per share for the four fiscal quarters

27

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ending
March 31, 2006. However, we are not required to pay dividends, and our board of directors may modify or revoke our dividend policy at any time. Dividend payments are within the sole
discretion of our board of directors and will depend upon, among other things, our results of operations, our financial condition, future developments that could differ materially from our current
expectations, including competitive or technological developments (which could, for example, increase our need for capital expenditures), acquisition opportunities or other factors.

We
expect to fund our operations, interest expense, capital expenditures and dividend payments on our common stock for the next twelve months from cash from operations and borrowings
under our credit facility. To fund future acquisitions, we intend to use cash from operations and borrowings under our credit facility, or, subject to the restrictions in our credit facility, to
arrange additional funding through the sale of public or private debt and/or equity securities, or obtain additional senior bank debt.

For
the six months ended June 30, 2005 and 2004, cash provided by operating activities of continuing operations was $17.3 million and $20.0 million, respectively. As
a result of the transactions which substantially de-leveraged us, accrued interest balances were reduced by $16.4 million, resulting in a significant use of cash from operating
activities for the six months ended June 30, 2005.

Our
ability to service our indebtedness depends on our ability to generate cash in the future. We are not required to make any scheduled principal payments under our credit facility's
term facility prior to maturity in February 2012. We will need to refinance all or a portion of our indebtedness on or before
maturity. We may not be able to refinance our indebtedness on commercially reasonable terms or at all. If we were unable to renew or refinance our credit facility, our failure to repay all amounts due
on the maturity date would cause a default under our credit facility. In addition, borrowings under our credit facility bear interest at variable interest rates. On February 8, 2005, we entered
into three interest rate swap agreements, with notional amounts of $130 million each, to effectively convert a portion of our variable rate interest exposure to fixed rates ranging from 5.76%
to 6.11%. These swap agreements expire beginning December 31, 2007 through December 31, 2009. On April 7, 2005, we entered into two additional interest rate swap agreements, one
with the notional amount of $50.0 million to effectively convert a portion of our variable rate interest exposure to a fixed rate of 6.69% beginning on April 29, 2005 and ending on
March 31, 2011, and one with the notional amount of $50.0 million to effectively convert a portion of our variable rate interest exposure to a fixed rate of 6.72% beginning on
June 30, 2005 and ending on March 31, 2012. As a result of these swap agreements, as of June 30, 2005, approximately 82% of our indebtedness bore interest at fixed rates rather
than variable rates. After these interest rate swap agreements expire, our annual debt service obligations on such portion of the term loans will vary from year to year unless we enter into a new
interest rate swap or purchase an interest rate cap or other interest rate hedge. To the extent interest rates increase in the future, we may not be able to enter into new interest rate swaps or to
purchase interest rate caps or other interest rate hedges on acceptable terms.

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

We
used net proceeds received from the offering, together with approximately $566.0 million of borrowings under the term facility of our credit facility, to, among other things,
repay all outstanding loans under our old credit facility, repurchase all of our series A preferred stock and consummate tender offers and consent solicitations in respect of our outstanding
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

28

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and
floating rate notes. On May 2, 2005, we redeemed the remaining outstanding 121/2% notes with borrowings of $22.4 million under the delayed draw facility of our credit
facility.

Net
cash used in investing activities from continuing operations was $21.4 million and $7.7 million for the six months ended June 30, 2005 and 2004, respectively.
These cash flows primarily reflect net capital expenditures of $9.7 million and $16.6 million for the six months ended June 30, 2005 and 2004, respectively, and acquisitions of
telephone properties, net of cash acquired, of $16.4 million for the six months ended June 30, 2005. Offsetting capital expenditures were distributions from investments of
$4.8 million and $8.8 million for the six months ended June 30, 2005 and 2004, respectively. The $8.8 million received in 2004 included a one time $2.5 million
distribution from our equity interest in
Chouteau Cellular Telephone Company as the partnership sold the majority of its assets. In addition, distributions for the six months ended June 30, 2004 included $6.2 million from our
equity interest in Orange County Poughkeepsie Limited Partnership as compared to $4.7 million during the six months ended June 30, 2005. The distributions declined mainly due to the
timing of an additional distribution in 2004. These distributions represent passive ownership interests in partnership investments. We do not control the timing or amount of distributions from such
investments.

On
August 4, 2005 the Board of Directors of the Rural Telephone Bank, or RTB, approved the liquidation and dissolution of the RTB, pending action by Congress in its 2006
Appropriations Act to remove any legal restrictions to the redemption of the RTB's Class A Stock. As part of any such liquidation and dissolution, all RTB loans will be transferred to the Rural
Utilities Service and all of the RTB's Class A Stock, Class B Stock and Class C Stock will be redeemed at par value. We have no outstanding loans with the RTB, but we own
2,301,834 shares of Class B Stock and 24,380 shares of Class C Stock. Our current carrying value of the RTB investment is $22.8 million, which is less than the par value of the
stock. Assuming appropriate approval by Congress, payment for the redeemed stock is expected to occur within 180 days after such Congressional action. We have historically received dividends of
approximately $1.4 million per year from our investment in the RTB, which we expect to continue in 2005 but not thereafter if the dissolution is approved.

Net
cash provided by financing activities from continuing operations was $7.7 million for the six months ended June 30, 2005. Net cash used in financing activities from
continuing operations was $9.2 million for the six months ended June 30, 2004. For the six months ended June 30, 2005, net proceeds from the issuance of common stock of
$431.9 million was used for the net repayment of long term debt of $209.4 million and the repurchase of preferred and common stock of $129.3 million. Remaining proceeds were used
to pay fees and penalties associated with the early retirement of long term debt of $61.0 million, to pay a deferred transaction fee of $8.4 million and pay debt issuance costs of
$8.5 million. For the six months ended June 30, 2004, these cash flows primarily represent net repayment of long term debt of $4.5 million.

Our
annual capital expenditures for our rural telephone operations have historically been significant. Because existing regulations allow us to recover our operating and capital costs,
plus a reasonable return on our invested capital in regulated telephone assets, capital expenditures generally constitute an attractive use of our cash flow. Net capital expenditures were
approximately $9.7 million for the six months ended June 30, 2005.

On
May 2, 2005, we used borrowings under our credit facility's revolving facility to fund the Berkshire acquisition (including the repayment of $1.3 million of Berkshire's
debt). We intend to use additional borrowings under the revolving facility to fund the Bentleyville acquisition, which we expect to close in the third quarter of 2005.

Our
old credit facility consisted of an $85.0 million revolving loan facility, of which $45.0 million was available at December 31, 2004, and two term facilities, a
tranche A term loan facility of $40.0 million with $40.0 million outstanding at December 31, 2004 that was to mature on March 31, 2007 and a tranche C term loan facility
with $102.4 million outstanding as of December 31, 2004 that was to mature on March 31, 2007. We repaid all of the borrowings under our old credit facility with a portion of net
proceeds from the offering together with borrowings under our credit facility.

29

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Our
credit facility consists of a $100.0 million revolving facility, of which $85.3 million was available at August 10, 2005, that matures in February 2011
and a term facility of $588.5 million with $588.5 million outstanding at August 10, 2005 that matures in February 2012. Net borrowings under the revolving facility were
$13.7 million from February 8, 2005 through August 10, 2005 and were used primarily to fund the Berkshire acquisition (including the repayment of $1.3 million of
Berkshire's debt). A $1.2 million letter of credit was also outstanding as of August 10, 2005. On March 11, 2005 and April 29, 2005, we entered into technical amendments to
our credit facility.

In
1998, the Company issued $125.0 million aggregate principal amount of the 912% notes and $75.0 million aggregate principal amount of the
floating rate notes. Both series of these notes were to mature on May 1, 2008. On February 9, 2005, we repurchased $115.0 million principal amount of the
912% notes and $50.8 million principal amount of the floating rate notes tendered pursuant to the tender offers for such notes. We redeemed the remaining outstanding
912% notes and floating rate notes on March 10, 2005.

In
2000, the Company issued $200.0 million aggregate principal amount of the 1212% notes. These notes were to mature on May 10, 2010. On
February 9, 2005, we repurchased $173.1 million principal amount of the 1212% notes tendered pursuant to the tender offer for such notes. We redeemed the
remaining outstanding 1212% notes on May 2, 2005.

In
2003, the Company issued $225.0 million aggregate principal amount of the 117/8% notes. These notes were to mature on March 1, 2010. These notes are
general unsecured obligations of the Company, rankingpari passuin right of payment with all existing and future senior debt of the Company, including
all obligations under our credit facility, and senior in right of payment to all existing and future subordinated indebtedness of the Company. On February 9, 2005, we repurchased
$223.0 million principal amount of the 117/8% notes tendered pursuant to the tender offer for such notes. $2.1 million principal amount of the 117/8% notes
remains outstanding.

For
a summary description of our credit facility and the 117/8% notes, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of
OperationsDescription of Certain Indebtedness" in our Annual Report on Form 10-K for the year ended December 31, 2004.

Summary of Contractual Obligations

The tables set forth below contain information with regard to disclosures about contractual obligations and commercial commitments.

The
following table discloses aggregate information about our contractual obligations as of June 30, 2005 and the periods in which payments are due:

|                         |                                    | Payments due by period
|------------------------ | ---------------------------------- | ----------------------
|
|
|Contractual obligations: |                                    |                       
|                         | Debt maturing within one year      |                       
|                         | Long term debt                     |                       
|                         | Operating leases(1)                |                       
|                         | Non-compete agreements             |                       
|                         | Minimum purchase contract          |                       
|                         |                                    |                       
|                         | Total contractual cash obligations |                       
|                         |                                    |                       

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30

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The following table discloses aggregate information about our derivative financial instruments as of June 30, 2005, the source of fair value of these instruments and their
maturities.

|                                    |  | Fair Value of Contracts at Period-End |       
|----------------------------------- |  | ------------------------------------- | ------
|
|
|Source of fair value:               |  |                                       |       
|Derivative financial instruments(1) |  | $                                     | (2,830
|                                    |  |                                       |       

---

Critical Accounting Policies

Our critical accounting policies are as follows:



Revenue recognition.Certain of our interstate network access and data revenues are based on tariffed
access charges filed directly with the Federal Communications Commission; the remainder of such revenues are derived from revenue sharing arrangements with other local exchange carriers administered
by the National Exchange Carrier Association.

The
Telecommunications Act allows local exchange carriers to file access tariffs on a streamlined basis and, if certain criteria are met, deems those tariffs lawful. Tariffs that have
been "deemed lawful" in effect nullify an interexchange carrier's ability to seek refunds should the earnings from the tariffs ultimately result in earnings above the authorized rate of return
prescribed by the Federal Communications Commission. Certain of the Company's telephone subsidiaries file interstate tariffs directly with the Federal Communication Commission using this streamlined
filing approach. The settlement period related to (i) the 2001 to 2002 monitoring period lapses on September 30, 2005 and (ii) the 2003 to 2004 monitoring period lapses on
September 30, 2007. We will continue to monitor the legal status of any pending or future proceedings that could impact our entitlement to these funds, and may recognize as revenue some or all
of the over-earnings at the end of the settlement period or as the legal status becomes more certain.

Allowance for doubtful accounts.In evaluating the collectibility of our accounts receivable, we
assess a number of factors, including a specific customer's or carrier's ability to meet its financial obligations to
us, the length of time the receivable has been past due and historical collection experience. Based on these assessments, we record both specific and general reserves for uncollectible accounts
receivable to reduce the related accounts receivable to the amount we ultimately expect to collect from customers and carriers. If circumstances change or economic conditions worsen such that our past
collection experience is no longer relevant, our estimate of the recoverability of our accounts receivable could be further reduced from the levels reflected in our accompanying consolidated balance
sheet.

Accounting for income taxes.As part of the process of preparing our consolidated financial
statements we are required to estimate our income taxes. This process involves estimating our actual current tax exposure and assessing temporary differences resulting from different treatment of
items for

31

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tax
and accounting purposes as well as estimating an annual effective tax rate for purposes of allocating income tax expense to interim periods. These differences result in deferred tax assets and
liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent
we believe the recovery is not likely, we must establish a valuation allowance. Further, to the extent that we establish a valuation allowance or increase this allowance in a financial accounting
period, we must include a tax provision, or reduce our tax benefit in our consolidated statement of operations. In performing the assessment, management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income, and tax planning strategies. We use our judgment to determine our provision or benefit for income taxes, deferred tax assets and liabilities and any
valuation allowance recorded against our net deferred tax assets.

There
are various factors that may cause those tax assumptions to change in the near term. We cannot predict whether future U.S. federal income tax laws and regulations might be passed
that could have a material effect on our results of operations. We assess the impact of significant changes to the U.S. federal and state income tax laws and regulations on a regular basis and update
the assumptions and estimates used to prepare our financial statements when new regulation and legislation is enacted.

We
had $251.9 million in federal and state net operating loss carry forwards as of December 31, 2004. On February 8, 2005, we completed the offering which resulted
in an "ownership change" within the meaning of the U.S. federal income tax laws addressing net operating loss carry forwards, alternative minimum tax credits and other similar tax attributes. As a
result of such ownership change, there will be specific limitations on our ability to use our net operating loss carry forwards and other tax attributes. In addition, as a result of the offering, we
have substantially reduced our aggregate long term debt and expect a significant reduction in our annual interest expense. When considered together with our history of producing positive operating
results and other evidence affecting the recoverability of deferred tax assets, we expect that future taxable income will more likely than not be sufficient to recover net deferred tax assets. We have
analyzed both positive and negative evidence and have concluded that the transactions resulted in a significant change in circumstances that results in positive evidence to support that it is more
likely than not that the deferred tax asset will be utilized in the future, prior to the expiration of the net operating loss carryforwards. In order to fully realize the deferred tax assets, we will
need to generate future taxable income of approximately $250.0 million prior
to the expiration of the net operating loss carryforwards in 2024. Current projections indicate that the net operating losses will be fully utilized by 2011.

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



Goodwill
was $477.0 million at June 30, 2005. As part of the Berkshire acquisition in the second quarter of 2005, the Company has recorded an intangible asset related to
the acquired company's customer list of $2.4 million. This intangible asset will be amortized over 15 years. The intangible asset is included in Deferred Charges and Other Assets on the
Condensed Consolidated Balance Sheet.

We
are required to perform an annual impairment review of goodwill as required by Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.
No impairment of goodwill or other long-lived assets resulted from the annual valuation of goodwill.

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New Accounting Standards

In December 2004, the FASB issued SFAS No. 123(R). This new standard requires companies to adopt the fair value methodology of valuing stock-based
compensation and recognize that valuation in the financial statements from the date of grant. Accordingly, the adoption of SFAS No. 123(R)'s fair value method may have an adverse impact on our
income from operations, although it will have no impact on our overall financial position. The impact of the adoption of SFAS No. 123(R) cannot be predicted at this time because it will
partially depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the
impact of SFAS No. 123 as shown in the Stock-Based Compensation table (see Note 4). SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. We expect to elect to adopt the provisions of SFAS
No. 123(R) on a modified prospective application method effective January 1, 2006, with no restatement of any prior periods. SFAS No. 123(R) is effective for us as of the
beginning of the first annual reporting period that begins after June 15, 2005.

Inflation

We do not believe inflation has a significant effect on our operations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

As of June 30, 2005, approximately 82% of our indebtedness bore interest at fixed rates or effectively at fixed rates. Our earnings are affected by changes
in interest rates as our long-term indebtedness under our credit facility has variable interest rates based on either the prime rate or LIBOR. If interest rates on our variable rate
indebtedness (excluding variable rate indebtedness which has its interest rate effectively fixed under interest rate swap agreements) outstanding at June 30, 2005 increased by 10%, our interest
expense would have increased, and our income from continuing operations before taxes would have decreased, by approximately $0.3 million for the six months ended June 30, 2005.

We
have entered into interest rate swaps to manage our exposure to fluctuations in interest rates on our variable rate indebtedness. The fair value of these swaps was a net liability of
approximately $2.8 million at June 30, 2005. The fair value indicates an estimated amount we would have paid to cancel the contracts or transfer them to other parties. In connection with
our credit facility, on February 8, 2005, we entered into three interest rate swap agreements, with notional amounts of $130.0 million each, to effectively convert a portion of our
variable interest rate exposure to fixed rates ranging from
5.76% to 6.11%. These swap agreements expire beginning December 31, 2007 through December 31, 2009. On April 7, 2005, we entered into two additional interest rate swap agreements,
one with the notional amount of $50.0 million which will fix the interest rate at 6.69% 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 6.72% beginning on June 30, 2005 and ending on March 31, 2012.

Our
Annual Report on Form 10-K for the year ended December 31, 2004 contains information about market risks under "Item 7A. Quantitative and Qualitative
Disclosures about Market Risk."

Item 4. Controls and Procedures.

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

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

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

In
our quarterly report on Form 10-Q for the quarter ended March 31, 2005, we disclosed that KPMG LLP, or KPMG, our independent registered accounting firm, had
identified certain control deficiencies, including a material weakness in our internal controls related to financial reporting. Specifically, KPMG stated in a letter to the Audit Committee of our
board of directors that our controls over the calculation of earnings per share were not specifically designed to identify all potential errors in the calculation, including adequate review of the
analysis. KPMG further stated that, as a result of this deficiency, our management did not detect certain material errors in earnings per share amounts disclosed in our 2005 first quarter earnings
release in a timely manner. We also disclosed that KPMG had identified a significant deficiency in our internal controls with respect to our lack of sufficient depth of accounting and financial
reporting personnel for the complex nature of our
business. In response to these identified control deficiencies, we have implemented certain disclosure control enhancements, policies and procedures, including:



In
addition, from time to time in the future we expect to retain another "Big 4" accounting firm as a consultant with respect to the preparation and review of our income tax reporting
and certain non-recurring and/or unusual transactions.

Other
than as described above, there have been no changes in 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 that have materially affected, or that are reasonably likely to materially affect, our internal controls over financial reporting. In response to the
Sarbanes-Oxley Act of 2002, we are continuing a comprehensive review of our disclosure controls and procedures and will improve such controls and procedures as necessary to assure their effectiveness.

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PART IIOTHER INFORMATION

Item 1. Legal Proceedings.

On June 6, 2005, a purported class action complaint 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 all other similarly situated persons against the Company, the Company's Chairman and Chief Executive Officer, certain of the Company's current and former
directors and certain of the Company's stockholders. The complaint alleges violations of Sections 11 and 12(a)(2) and liability under Section 15 of the Securities Act, and alleges that the
Company's registration statement on Form S-1 (which was declared effective by the SEC on February 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 material information necessary to be included 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 class of
purchasers of the common stock "issued pursuant and/or traceable to the Company's IPO during the period from February 3, 2005 through March 21, 2005". The Company has removed the action
to Federal Court but the plaintiff has filed a motion to remand the action to the North Carolina State Court. The Company believes that the complaint is without merit and intends to defend the
litigation vigorously.

We
currently and from time to time are involved in other litigation and regulatory proceedings incidental to the conduct of our business, but currently we are not a party to any lawsuit
or proceeding which, in our opinion, is likely to have a material adverse effect on us.

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

Unregistered Sales of Equity Securities

We did not sell any unregistered equity securities during the quarter ended June 30, 2005.

Restrictions on Payment of Dividends

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

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



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

See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsDescription of Certain IndebtednessCredit Facility" in our
Annual Report on Form 10-K for the year ended December 31, 2004 for a more detailed description of our credit facility and these restrictions.

Item 3. Defaults Upon Senior Securities.

Not
applicable.

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

Not
applicable.

Item 5. Other Information.

Not
applicable.

Item 6. Exhibits.

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

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SIGNATURES

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

|                      |  | FAIRPOINT COMMUNICATIONS, INC.
|--------------------- |  | ------------------------------
|Date: August 12, 2005 |  | By:                           
|                      |  |                               

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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)                                                                                                                                                        
|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 $225,000,000 117/8% 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        |  | 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)
|10.5        |  | 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)                                                                                                                                                           
|10.6        |  | Form of Swingline Note.(3)                                                                                                                                                                                                                                                                                                                      
|10.7        |  | Form of RF Note.(3)                                                                                                                                                                                                                                                                                                                             
|10.8        |  | Form of B Term Note.(3)                                                                                                                                                                                                                                                                                                                         
|10.9        |  | Amended and Restated Tax Sharing Agreement, dated as of November 9, 2000, by and among FairPoint and its Subsidiaries.(6)                                                                                                                                                                                                                       
|10.10       |  | Nominating Agreement, dated as of February 8, 2005.(3)                                                                                                                                                                                                                                                                                          
|10.11       |  | Affiliate Registration Rights Agreement, dated as of February 8, 2005.(3)                                                                                                                                                                                                                                                                       
|10.12       |  | Employment Agreement, dated as of December 31, 2002, by and between FairPoint and Eugene B. Johnson.(4)                                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                 

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|10.13 |  | Letter Agreement, dated as of October 1, 2004, by and between FairPoint and Eugene B. Johnson.(7)                                    
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------
|10.14 |  | Agreement, dated as of October 1, 2004, by and between FairPoint and John P. Duda.(7)                                                
|10.15 |  | Employment Agreement, dated as of January 20, 2000, by and between FairPoint and Walter E. Leach, Jr.(8)                             
|10.16 |  | Letter Agreement, dated as of December 15, 2003, by and between FairPoint and Walter E. Leach, Jr.(9)                                
|10.17 |  | Letter Agreement, dated as of November 11, 2002, by and between FairPoint and Peter G. Nixon.(4)                                     
|10.18 |  | Letter Agreement, dated as of October 25, 2004, by and between FairPoint and Valeri A. Marks.(7)                                     
|10.19 |  | Letter Agreement, dated as of November 13, 2002, by and between FairPoint and Shirley J. Linn.(4)                                    
|10.20 |  | Letter Agreement, dated as of May 16, 2005, by and between FairPoint and John P. Crowley.(11)                                        
|10.21 |  | FairPoint 1995 Stock Option Plan.(10)                                                                                                
|10.22 |  | FairPoint Amended and Restated 1998 Stock Incentive Plan.(10)                                                                        
|10.23 |  | FairPoint Amended and Restated 2000 Employee Stock Incentive Plan.(9)                                                                
|10.24 |  | FairPoint 2005 Stock Incentive Plan.(3)                                                                                              
|10.25 |  | FairPoint Annual Incentive Plan.(3)                                                                                                  
|10.26 |  | Form of Restricted Stock Agreement.(7)                                                                                               
|10.27 |  | Form of Director Restricted Stock Agreement.(12)                                                                                     
|10.28 |  | Form of Director Restricted Unit Agreement.(12)                                                                                      
|21    |  | Subsidiaries of FairPoint.*                                                                                                          
|31.1  |  | Certification required by 18 United States Code Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 
|31.2  |  | Certification required by 18 United States Code Section 1350, 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.*                                                                                                                       

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