Table of Contents



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



FORM 10-Q

(Mark One)ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2009.oro

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


Commission File Number 333-56365



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

Delaware(State or Other Jurisdiction of Incorporation or Organization)

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

28202(Zip Code)(704) 344-8150(Registrant's telephone number, including area code)




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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o    No o

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

Large accelerated filer o

Accelerated filer ý

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

Smaller reporting company o


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

As of July 31, 2009, there were 90,020,657 shares of the Registrant's common stock, par value $0.01 per share, outstanding.

Documents
incorporated by reference:None



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Table of Contents

INDEX



PagePART I. FINANCIAL INFORMATIONItem 1.

Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008

5Condensed Consolidated Statements of Operations for the three and six months ended
June 30, 2009 and 2008

6Condensed Consolidated Statements of Stockholders' Equity for the six months ended
June 30, 2009

7Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and six
months ended June 30, 2009 and 2008

8Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and
2008

9Notes to Consolidated Financial Statements

10Item 2.

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

39Item 3.

Quantitative and Qualitative Disclosures About Market
Risk

60Item 4.

Controls and Procedures

61PART II. OTHER INFORMATIONItem 1.

Legal Proceedings

63Item 1A.

Risk Factors

63Item 2.

Unregistered Sales of Equity Securities and Use of
Proceeds

64Item 3.

Defaults Upon Senior Securities

64Item 4.

Submission of Matters to a Vote of Security Holders

64Item 5.

Other Information

65Item 6.

Exhibits

65Signatures

66


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PART I    CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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



These
forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions and other statements contained in this Quarterly
Report that are not historical facts. When used in this Quarterly Report, the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions are generally
intended to identify forward-looking statements. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual
results, events or developments to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors
discussed in this Quarterly Report and in "Part IItem 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended

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December 31,
2008 and "Part IIItem 1A. Risk Factors" contained in this Quarterly Report. You should not place undue reliance on such forward-looking statements, which
are based on the information currently available to us and speak only as of the date on which this Quarterly Report was filed with the SEC. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made on related subjects in our
subsequent periodic reports filed with the SEC on Forms 10-K, 10-Q and 8-K and Schedule 14A.

Except as otherwise required by the context, references in this Quarterly Report to:



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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES        Condensed Consolidated Balance Sheets        June 30, 2009 and December 31,
2008        (in thousands, except share data)

June 30,
2009

December 31,
2008(Unaudited)AssetsCurrent assets:Cash

$
80,964

$
70,325Restricted cash


1,981


8,144Accounts receivable, net


190,551


173,589Materials and supplies


36,871


38,694Other


30,268


28,747Deferred income tax, net


29,241


31,418Total current assets


369,876


350,917Property, plant and equipment, net


1,996,335


2,013,515Intangibles assets, net


223,105


234,481Prepaid pension asset


9,741


8,708Debt issue costs, net


23,617


26,047Restricted cash


1,378


60,359Other assets


16,432


21,094Goodwill


595,120


619,372Total assets

$
3,235,604

$
3,334,493Liabilities and Stockholders' EquityCurrent liabilities:Current portion of long term debt

$
45,000

$
45,000Current portion of capital lease obligations


2,046


2,231Accounts payable


158,863


147,778Dividends payable





23,008Accrued interest payable in cash


3,834


18,844Interest rate swaps


43,438


41,274Other non-operating accrued liability





19,000Other accrued liabilities


68,234


70,887Total current liabilities


321,415


368,022Long term liabilities:Capital lease obligations


6,584


7,522Accrued pension obligation


49,507


46,801Employee benefit obligations


239,152


225,840Deferred income taxes


117,184


154,757Unamortized investment tax credits


5,068


5,339Accrued interest payable in kind


14,423


Other long term liabilities


18,006


35,492Long term debt, net of current portion


2,443,647


2,425,253Interest rate swap agreements


19,386


41,681Total long-term liabilities


2,912,957


2,942,685Stockholders' equity:Common stock, $0.01 par value, 200,000,000 shares authorized; 89,496,847 and 88,995,572 shares issued and outstanding at June 30, 2009 and
December 31, 2008, respectively


895


890Additional paid-in capital


736,469


735,719Retained earnings (deficit)


(604,914
)

(578,319
)Accumulated other comprehensive loss


(131,218
)

(134,504
)Total stockholders' equity


1,232


23,786Total liabilities and stockholders' equity

$
3,235,604

$
3,334,493


See accompanying notes to condensed consolidated financial statements (unaudited)

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES    Condensed Consolidated Statements of Operations        Three and six
months ended June 30, 2009 and 2008        (Unaudited)        (in thousands, except per share data)

Three months ended
June 30,

Six months ended
June 30,2009

2008

2009

2008Revenues

$
299,611

$
344,690

$
611,241

$
627,104Operating expenses:Cost of services and sales, excluding depreciation and amortization


122,707


133,900


267,854


269,737Selling, general and administrative expense, excluding depreciation and amortization


97,986


102,290


190,398


165,406Depreciation and amortization


68,629


69,741


136,496


123,666Total operating expenses


289,322


305,931


594,748


558,809Income from operations


10,289


38,759


16,493


68,295Other income (expense):Interest expense


(54,809
)

(45,123
)

(108,288
)

(59,645
)Gain on derivative instruments


7,233


43,123


20,131


43,123Gain on early retirement of debt


7,494





12,357


Other


(58
)

264


15,857


1,250Total other expense


(40,140
)

(1,736
)

(59,943
)

(15,272
)Income (loss) before income taxes


(29,851
)

37,023


(43,450
)

53,023Income tax (expense) benefit


12,033


(13,909
)

16,855


(20,366
)Net income (loss)

$
(17,818
)
$
23,114

$
(26,595
)
$
32,657Weighted average shares outstanding:Basic


89,364


88,725


89,168


62,077Diluted


89,364


89,190


89,168


62,483Earnings per share:Basic

$
(0.20
)
$
0.26

$
(0.30
)
$
0.53Diluted


(0.20
)

0.26


(0.30
)

0.52


See
accompanying notes to condensed consolidated financial statements (unaudited)

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES        Consolidated Statements of Stockholders' Equity        Six months
ended June 30, 2009        (Unaudited)        (in thousands)

Common Stock





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

Retained
earnings
(deficit)

Total
stockholders'
equityShares

AmountBalance at December 31, 2008


88,996

$
890

$
735,719

$
(578,319
)
$
(134,504
)
$
23,786Net loss











(26,595
)




(26,595
)Issuance of 2008 Interim Awards


502


5


(5
)







Forfeiture of restricted shares


(1
)













Stock based compensation expense








755








755Employee benefit adjustment to comprehensive income














3,286


3,286Balance at June 30, 2009


89,497

$
895

$
736,469

$
(604,914
)
$
(131,218
)
$
1,232


See accompanying notes to condensed consolidated financial statements (unaudited)

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES    Consolidated Statements of Comprehensive (Loss) Income    
Three and six months ended June 30, 2009 and 2008        (Unaudited)        (in thousands, except per share data)

Three Months ended
June 30,

Six Months ended
June 30,2009

2008

2009

2008Net (loss) income

$
(17,818
)
$
23,114

$
(26,595
)
$
32,657Other comprehensive loss, net of taxes:Defined benefit pension and post-retirement plans (net of $1.2 million and $2.1 million taxes, respectively)


1,930





3,286


Total other comprehensive loss


1,930





3,286


Comprehensive (loss) income

$
(15,888
)
$
23,114

$
(23,309
)
$
32,657


See
accompanying notes to condensed consolidated financial statements (unaudited)

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Six months ended June 30, 2009 and 2008

(Unaudited)

(in thousands)

Six months ended
June 30,2009

2008Cash flows from operating activities:Net (loss) income

$
(26,595
)
$
32,657Adjustments to reconcile net income to net cash provided by operating activities excluding impact of acquisitions:Deferred income taxes


(18,970
)

24,489Provision for uncollectible revenue


14,314


7,543Depreciation and amortization


136,496


123,666Non-cash interest expense


14,423


SFAS 106 post-retirement accruals


15,908


29,103Gain on derivative instruments


(20,131
)

(43,123
)Gain on early retirement of debt, net of cash fees


(12,477
)

Other non-cash items


6,429


(26,406
)Changes in assets and liabilities arising from operations:Accounts receivable


(29,094
)

(24,287
)Prepaid and other assets


(3,350
)

(40,750
)Accounts payable and other accrued liabilities


(31,286
)

(38,965
)Accrued interest payable


(15,011
)

18,476Other assets and liabilities, net


(2,585
)

4,113Other





(16,221
)Total adjustments


54,666


17,638Net cash provided by operating activities


28,071


50,295Cash flows from investing activities:Acquired cash balance, net





11,552Net capital additions


(90,493
)

(98,348
)Net proceeds from sales of investments and other assets


1,230


235Net cash used in investing activities


(89,263
)

(86,561
)Cash flows from financing activities:Loan origination costs


(521
)

(29,238
)Proceeds from issuance of long term debt


50,000


1,676,000Repayments of long term debt


(18,673
)

(687,491
)Contributions from Verizon





344,629Restricted cash


65,143


(80,886
)Repayment of capital lease obligations


(1,122
)

(1,637
)Dividends paid to stockholders


(22,996
)

(1,173,961
)Net cash provided by financing activities


71,831


47,416Net increase in cash


10,639


11,150Cash, beginning of period


70,325


Cash, end of period

$
80,964

$
11,150Supplemental disclosure of cash flow information:Non-cash equity consideration





316,290Non-cash issuance of senior notes





551,000


See accompanying notes to condensed consolidated financial statements (unaudited)

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

(1) Organization and Basis of Financial Reporting

FairPoint is a leading provider of communications services in rural and small urban communities, primarily in northern New England, offering an array of services, including local and
long distance voice, data, Internet and broadband product offerings, to both residential and business customers. FairPoint is the seventh largest telephone company in the United States based on the
number of access lines as of June 30, 2009. FairPoint operates in 18 states with approximately 1.7 million access line equivalents (including voice access lines and high speed data
lines, which include DSL, wireless broadband, cable modem and fiber-to-the-premises) as of June 30, 2009.

On
March 31, 2008, FairPoint completed the acquisition of Spinco, pursuant to which Spinco merged with and into FairPoint, with FairPoint continuing as the surviving corporation
for legal purposes. Spinco was a wholly-owned subsidiary of Verizon and prior to the merger the Verizon Group transferred certain specified assets and liabilities of the local exchange businesses of
Verizon New England in Maine, New Hampshire and Vermont and the customers of the related long distance and Internet service provider businesses in those states to subsidiaries of Spinco. The merger
was accounted for as a "reverse acquisition" of Legacy FairPoint by Spinco under the purchase method of accounting
because Verizon stockholders owned a majority of the shares of the consolidated Company following the merger and, therefore, Spinco is treated as the acquirer for accounting purposes. The financial
statements reflect the transaction as if Spinco had issued consideration to FairPoint stockholders. As a result, for the six months ended June 30, 2008, the statement of operations and the
financial information derived from the statement of operations in this Quarterly Report reflect the consolidated financial results of the Company by including the financial results of the Verizon
Northern New England business for the three months ended March 31, 2008 and the combined financial results of Spinco and Legacy FairPoint for the three months ended June 30, 2008.

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

Historical Verizon Northern New England business

The Verizon Northern New England business, prior to the merger, was comprised of carved-out components from each of Verizon
New England, NYNEX Long Distance Company and Bell Atlantic Communications, referred to as VLD, Verizon Internet Services Inc. and GTE.Net LLC, referred to as VOL, and Verizon Select
Services Inc., referred to as VSSI, collectively referred to as the Verizon Companies.

Prior
to the merger, financial statements were not prepared for the Verizon Northern New England business, as it was not operated as a separate business. The Verizon Northern New England
business financial statements for all periods prior to the merger have been prepared in accordance with U.S. generally accepted accounting principles using specific information where available and
allocations where data was not maintained on a state-specific basis within the Verizon Northern New England business' books and records.

The
Verizon Northern New England business financial statements for all periods prior to the merger include the wireline-related businesses, Internet access, long distance and customer
premises equipment services provided by the Verizon Northern New England business to customers in the states of Maine, New Hampshire and Vermont. All significant intercompany transactions have been

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

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

eliminated.
The financial statements prior to the merger also include the assets, liabilities and expenses related to employees who supported the Verizon Northern New England business, some of whom
remained employees of the Verizon Northern New England business following the acquisition of the Verizon Northern New England business by FairPoint rather than becoming employees of FairPoint.

The
preparation of financial information related to Verizon New England's, VLD's, VOL's and VSSI's operations in the states of Maine, New Hampshire and Vermont, which are
included in the balance sheet and statements of operations of the Verizon Northern New England business for all periods prior to the merger, was based on the following:

Verizon New England:For the balance sheet, property, plant and equipment, accumulated depreciation, intangible assets, materials and
supplies and
certain other assets and liabilities were determined based upon state specific records; accounts receivable were allocated based upon applicable billing system data; short term investments, prepaid
pension assets, accrued payroll related liabilities and employee benefit obligations were allocated based on employee headcount; and accounts payable were allocated based upon applicable operating
expenses. The remaining assets and liabilities were primarily allocated based upon the percentage of the Verizon Northern New England business revenues, operating expenses and headcount to the total
revenues, operating expenses and headcount of Verizon New England. For the statements of operations, operating revenues and operating expenses were based on state specific records.

VLD:For the balance sheet, receivables were allocated based on the applicable operating revenues and accounts payable were allocated
based on
applicable operating expenses. For the statements of operations, operating revenues were determined using applicable billing system data; cost of services and sales and selling, general and
administrative expenses were allocated based on the percentage of the Verizon Northern New England business revenues related to the VLD component to the total VLD revenues applied to operating
expenses for total VLD.

VOL:For the balance sheet, receivables were allocated based on applicable operating revenues; other current assets were determined
using applicable
billing system data; accounts payable were allocated based on the applicable operating expenses; and other current liabilities, which consisted of advanced billings, were allocated based on applicable
operating revenues. For the statements of operations, operating revenues were determined using applicable billing system data and average access lines in service; cost of services and sales, selling,
general and administrative expenses and interest expense were allocated based on the percentage of the Verizon Northern New England business revenues related to the VOL component to the total VOL
revenues applied to operating expenses and interest expense for total VOL.

VSSI:For the balance sheet, receivables were allocated based on the applicable operating revenues and accounts payable were allocated
based on
applicable operating expenses. For the statements of operations, operating revenues were identified using applicable system data; cost of services and sales
and selling, general and administrative expenses were allocated based on the percentage of the Verizon Northern New England business revenues related to the VSSI component to the total VSSI revenues
applied to operating expenses for total VSSI.

Management
believes the allocations used to determine selected amounts in the financial statements are appropriate methods to reasonably reflect the related assets, liabilities, revenues
and expenses of the Verizon Northern New England business for periods prior to the merger.

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(2) Accounting Policies

(a) Use of Estimates

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

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

(b) Revenue Recognition

Revenues are recognized as services are rendered and are primarily derived from the usage of the Company's networks and facilities or
under revenue-sharing arrangements with other communications carriers. Revenues are primarily derived from: access, pooling, local calling services, Universal Service Fund receipts, long distance
services, Internet and broadband services, and other miscellaneous services. Local access charges are billed to local end users under tariffs approved by each state's public utilities commission.
Access revenues are derived for the intrastate jurisdiction by billing access charges to interexchange carriers and to other local exchange carriers. These charges are billed based on toll or access
tariffs approved by the local state's public utilities commission. Access charges for the interstate jurisdiction are billed in accordance with tariffs filed by the National Exchange Carrier
Association or by the individual company and approved by the Federal Communications Commission (the "FCC").

Revenues
are determined on a bill-and-keep basis or a pooling basis. If on a bill-and-keep basis, the Company bills the charges to either
the access provider or the end user and keeps the revenue. If the Company participates in a pooling environment (interstate or intrastate), the toll or access billed is contributed to a revenue pool.
The revenue is then distributed to individual companies based on their company-specific revenue requirement. This distribution is based on individual state public utilities commissions' rates for
intrastate revenues or the FCC's approved separation rules and rates of return for interstate revenues. Distribution from these pools can change relative to changes made to expenses, plant investment,
or rate of return. Some companies participate in federal and certain state universal service programs that are pooling in nature but are regulated by rules separate from those described above. These
rules vary by state. Revenues earned through the various pooling arrangements are initially recorded based on the Company's estimates.

Long
distance retail and wholesale services are usage sensitive and are billed in arrears and recognized when earned. Internet and data services revenues are substantially all recurring
revenues and are billed one month in advance and deferred until earned. The majority of the Company's miscellaneous revenue is provided from billing and collection and directory services. The Company
earns revenue from billing and collecting charges for toll calls on behalf of interexchange carriers. The interexchange carrier pays a certain rate per each minute billed by the Company. The Company
recognizes revenue from billing and collection services when the services are provided.

Internet
and broadband services and certain other services are recognized in the month the service is provided.

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(2) Accounting Policies (Continued)

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

(c) Maintenance and Repairs

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

(d) Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

(e) Restricted Cash

As of March 31, 2008, the closing date of the merger, the Company had $80.9 million of restricted cash. Pursuant to the
regulatory orders issued in connection with the merger, the Company is required to use these funds to (i) pay for the removal of double poles in Vermont, which is estimated to cost
$6.7 million, (ii) pay for certain service quality improvements under a performance enhancement plan in Vermont totaling $25.0 million, and (iii) pay for network
improvements in New Hampshire totaling $49.2 million (the "New Hampshire funds"). During the three months ended June 30, 2009, the Company requested that the New Hampshire funds be made
available for general working capital purposes. By letter, dated as of May 12, 2009, the New Hampshire Public Utilities Commission (the "NHPUC") approved the Company's request, conditioned upon
the Company's commitment to invest funds on certain NHPUC approved network improvements in New Hampshire on the following schedule: $15 million by the end of 2010, an additional
$20 million by the
end of 2011 and an additional $30 million by the end of 2012. This investment commitment is inclusive of the $50 million previously required by the NHPUC.

As
of June 30, 2009, the Company had released $78.5 million of the restricted cash, including $1.5 million in interest earned on such restricted cash, for approved
expenditures under the required projects and had forfeited an additional $0.5 million to the Vermont Public Service Board due to an inability to spend the full $12.5 million allocated
for such projects in the 2008 calendar year.

As
of June 30, 2009, the Company had $3.4 million of restricted cash of which $2.0 million is shown in current assets and $1.4 million is shown as a
non-current asset on the condensed consolidated balance sheet.

(f) Accounts Receivable

Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company's
best estimate of the amount of probable credit losses in the Company's existing accounts receivable. The Company establishes an allowance for doubtful accounts based upon factors surrounding the
credit risk of specific customers, historical trends, and other information. Receivable balances are reviewed on an aged basis and account balances are written off against the allowance after all
means of collection have been exhausted and the potential for recovery is considered remote.

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(2) Accounting Policies (Continued)

(g) Credit Risk

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

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

As
a result of interest rate swap agreements, as of June 30, 2009, approximately 76% of the Company's indebtedness effectively bore interest at fixed rates rather than variable
rates. The Company's ability to hedge its interest rate risk is dependent on the solvency of those banks with whom the Company enters into swap agreements.

(h) Materials and Supplies

Materials and supplies include new and reusable supplies and network equipment, which are stated principally at average original cost,
except that specific costs are used in the case of large individual items.

(i) Property, Plant, and Equipment

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

At
June 30, 2009 and December 31, 2008, accumulated depreciation for property, plant and equipment was $4.1 billion and $4.0 billion, respectively.

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

Average Lives

YearsBuildings


45Central office equipment


511Outside communications plantCopper cable


1518Fiber cable


25Poles and conduit


3050Furniture, vehicles and other


315


The
Company believes that current estimated useful asset lives are reasonable. Such useful lives are subject to regular review and analysis. In the evaluation of asset lives, multiple
factors are

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NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(2) Accounting Policies (Continued)

considered,
including, but not limited to, the ongoing network deployment, technology upgrades and enhancements, planned retirements and the adequacy of reserves.

When
depreciable telephone plant used in the Company's wireline network is replaced or retired, the carrying amount of such plant is deducted from the respective accounts and charged to
accumulated depreciation. No gain or loss is recognized on disposition of assets.

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

(j) Long-Lived Assets

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

(k) Computer Software and Interest Costs

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

Subsequent
additions, modifications or upgrades to internal use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform.
Software maintenance and training costs are expensed in the period in which they are incurred.

In
addition, the Company capitalizes the interest cost associated with the period of time over which the Company's internal use software is developed or obtained in accordance with
Financial Accounting Standard No. 34,Capitalization of Interest Cost("FAS 34").

On
January 15, 2007, FairPoint entered into the Master Services Agreement (the "MSA"), with Capgemini U.S. LLC. Through the MSA, the Company replicated and/or replaced
certain existing Verizon systems during a phased period through January 2009. As of June 30, 2009, the Company had completed the application development stage of the project and was no longer
capitalizing costs in accordance with SOP 98-1. The Company has recognized both external and internal service costs associated with the MSA based on total labor incurred through the
completion of the application development stage. As of June 30, 2009, the Company had capitalized $106.9 million of MSA costs under SOP 98-1 and an additional
$6.9 million of interest costs under FAS 34.

In
addition to the MSA, the Company has other agreements and projects for which costs are capitalized in accordance with SOP 98-1 and FAS 34. During the three
and six months ended June 30, 2009, the Company capitalized $6.6 million and $11.5 million, respectively, in software costs in addition

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NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(2) Accounting Policies (Continued)

to
those capitalized under the MSA. During the three and six months ended June 30, 2009, the Company capitalized $0.5 million in interest costs in addition to those capitalized under the
MSA.

(l) Debt Issue Costs

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

On
January 21, 2009, the Company entered into an amendment to the credit facility under which, among other things, the administrative agent resigned and was replaced by a new
administrative agent. In addition, the resigning administrative agent's undrawn loan commitments under the revolving credit facility, totaling $30.0 million, were terminated and are no longer
available to the Company. The Company incurred $0.5 million of debt issue costs associated with this amendment and began to amortize these costs over the remaining life of the loan.

Concurrent
with the amendment, the Company wrote off $0.8 million of the unamortized debt issue costs associated with the original credit facility, in accordance with
EITF 98-14,Debtor's Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements.

As
of June 30, 2009, the Company had capitalized debt issue and offering costs of $23.6 million, net of amortization.

(m) Advertising Costs

Advertising costs are expensed as they are incurred.

(n) Goodwill and Other Intangible Assets

Goodwill consists of the difference between the purchase price incurred in the acquisition of Legacy FairPoint using the purchase
method of accounting and the fair value of net assets acquired. In accordance with SFAS No. 142,Goodwill and Other Intangible Assets,goodwill
is no longer amortized, but instead is assessed for impairment at least annually. During this assessment, management relies on a number of factors, including operating results, business plans, and
anticipated future cash flows.

Goodwill
impairment is determined using a two-step process. Step one compares the estimated fair value of the Company's single wireline reporting unit (calculated using both
the market approach and the income approach) to its carrying amount, including goodwill. The market approach compares the fair value of the Company, as measured by its market capitalization, to the
carrying amount of the Company, which represents its shareholders' equity balance. As of June 30, 2009, shareholders' equity totaled $1.2 million. The income approach compares the fair
value of the Company, as measured by discounted expected future cash flows, to the carrying amount of the Company. If the Company's

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NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(2) Accounting Policies (Continued)

carrying
amount exceeds its estimated fair value, there is a potential impairment and step two of the analysis must be performed.

Step
two compares the implied fair value of the Company's goodwill (i.e., the fair value of the Company less the fair value of the Company's assets and liabilities, including
identifiable intangible assets) to its goodwill carrying amount. If the carrying amount of the Company's goodwill exceeds the implied fair value of the goodwill, the excess is required to be recorded
as an impairment.

The
Company performed step one of its annual goodwill impairment assessment as of October 1, 2008 and concluded that there was no impairment at that time. In light of the
Company's operating performance during the first half of 2009, which has been impacted by issues associated with the January 30, 2009 systems cutover, the Company performed another goodwill
impairment assessment as of June 30, 2009. After performing the impairment test at June 30, 2009, the Company determined goodwill was not impaired.

While
no impairment charges resulted from the analysis performed at June 30, 2009, impairment charges may occur in the future due to changes in the performance and future
prospects for the business, the outcome of the Company's debt restructuring efforts, changes in estimated discount rates or other factors.

As
of June 30, 2009, the Company had goodwill of $595.1 million.

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

At
June 30,
2009Customer lists (weighted average 9.7 years):Gross carrying amount

$
208,504Less accumulated amortization


(28,215
)Net customer lists


180,289Non-Compete agreement (weighted average 1 year):Gross carrying amount


358Less accumulated amortization


(358
)Net non-compete agreement


Trade names (indefinite life):Gross carrying amount


42,816Total intangible assets, net

$
223,105


The
estimated weighted average useful lives of the intangible assets are 9.7 years for the customer relationships, one year for the non-compete agreement and an
indefinite useful life for trade names. Amortization expense was $5.7 million and $11.4 million for the three and six months ended June 30, 2009 and is expected to be
approximately $22.6 million per year.

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NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(2) Accounting Policies (Continued)

(o) Accounting for Income Taxes

The Company accounts for income taxes for interim periods in accordance with SFAS No. 109"Accounting
for Income Taxes"("SFAS 109") and FASB Interpretation ("FIN") No. 18"Accounting for Income Taxes in Interim
Periods"("FIN 18"). FIN 18 requires the tax (or benefit) related to ordinary income (or loss) to be computed at an estimated annual effective tax rate and the
tax (or benefit) related to all other items to be individually computed and recognized when the items occur unless a reliable estimated annual effective tax rate cannot be calculated.

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

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NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(2) Accounting Policies (Continued)

(p) Stock-based Compensation Plans

The Company accounts for its stock-based compensation plans in accordance with SFAS No. 123(R), Share-Based Payment("SFAS
No. 123(R)"), which establishes accounting for stock-based awards granted in exchange for employee services.
Accordingly, for employee awards which are expected to vest, stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense on a
straight-line basis over the requisite service period, which generally begins on the date the award is granted through the date the award vests. The Company elected to adopt the provisions
of SFAS No. 123(R) using the prospective application method for awards granted prior to becoming a public company and valued using the minimum value method, and using the modified prospective
application method for awards granted subsequent to becoming a public company.

On
March 3, 2009, the Company's compensation committee approved the award of performance units under the FairPoint Communications, Inc. 2008 Long Term Incentive Plan for
the performance period beginning January 1, 2009 and ending December 31, 2011 to certain key employees. As of June 30, 2009, no shares of common stock had been issued pursuant to
these grants.

On
June 10, 2009, the Company's compensation committee approved the award of certain equity incentives to David L. Hauser, the Company's new Chairman and Chief Executive Officer,
as an inducement to accept employment with the Company (the "inducement awards"). As provided in Mr. Hauser's employment agreement, dated June 11, 2009, the inducement awards include:
(i) options to purchase 1,600,000 shares of the Company's common stock (the "inducement options"); (ii) restricted shares of the Company's common stock valued at $4,000,000 (the
"inducement restricted stock"); and (iii) performance units for two performance periods beginning on July 1, 2009 and ending on December 31, 2010 and December 31, 2011,
respectively (the "inducement performance units"). The inducement options were granted on July 1, 2009, at an exercise price of $0.95 per share. The inducement options will vest and become
exercisable in three equal annual installments commencing on July 1, 2010, provided that Mr. Hauser remains employed by the Company through each such date. The inducement restricted
stock will be awarded in the following three installments: (i) $500,000 on July 1, 2009; (ii) $1,750,000 on July 1, 2010; and (iii) $1,750,000 on July 1,
2011, and will be valued based on the average closing prices of the Company's common stock during the thirty calendar days immediately preceding the applicable award date. Accordingly, on
July 1, 2009, 523,810 shares of restricted stock were awarded to Mr. Hauser. The inducement restricted stock will become fully vested on July 1, 2012, provided that
Mr. Hauser remains employed by the Company through such date. The inducement performance units will be earned and paid in shares of the Company's common stock, based on the Company's
performance during the performance periods, with a target amount of 200% of Mr. Hauser's base salary and a maximum of 400% of Mr. Hauser's base salary. The number of shares subject to
the inducement options and the option exercise price will be adjusted, and additional shares of inducement restricted stock will be awarded, as necessary to preserve the value of the inducement
options and the
inducement restricted stock awarded on July 1, 2009 if, prior to December 31, 2010, the Company completes a restructuring of its indebtedness.

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NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(2) Accounting Policies (Continued)

(q) Employee Benefit Plans

The Company accounts for pensions and other post-retirement benefit plans in accordance with SFAS No. 158, Employers' Accounting for Defined Benefit Pension
and Other Post-retirement Plansan amendment of FASB Statements No. 87, 88, 106, and
132(R)("SFAS 158"). SFAS 158 requires the recognition of a defined benefit post-retirement plan's funded status as either an asset or liability on
the balance sheet. SFAS 158 also requires the immediate recognition of the unrecognized actuarial gains and losses and prior service costs and credits that arise during the period as a
component of other accumulated comprehensive income, net of applicable income taxes. Additionally, a company must determine the fair value of plan assets as of the company's year end.

(r) Business Segments

Management views its business of providing video, data and voice communication services to residential and business customers as one
business segment as defined in SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information.The Company consists of retail
and wholesale telecommunications services, including local telephone, high speed Internet, long distance and other services in 18 states. The Company's chief operating decision maker assesses
operating performance and allocates resources based on the consolidated results.

(s) Purchase Accounting

Prior to the adoption of SFAS No. 141R,Business Combinations("SFAS 141R"), the Company recognized the acquisition of companies in accordance with SFAS No. 141,Accounting for Business Combinations("SFAS 141"). The cost of an acquisition was allocated to the
assets acquired and liabilities assumed based on their fair values as of the close of the acquisition, with amounts exceeding the fair value being recorded as goodwill. All future business
combinations will be recognized in accordance with SFAS 141R.

(3) Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141(R),Business Combinations("SFAS 141(R)"), which replaces SFAS 141.
SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any controlling interest; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to
disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is to be applied prospectively to business
combinations for which the acquisition date is on or after an entity's fiscal year that begins after December 15, 2008. The Company will assess the impact of SFAS 141(R) if and when a
future acquisition occurs.

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

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NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(3) Recent Accounting Pronouncements (Continued)

FASB
Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" and how derivative instruments and related hedged items affect a company's financial position, financial
performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. The adoption of SFAS 161 did not have any
impact on the Company's consolidated results of operations and financial position.

In
May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles("SFAS 162").
SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of non-governmental entities
that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). SFAS 162 will become effective for interim or annual periods ending after
September 15, 2009. The adoption of SFAS 162 is not expected to have any impact on the Company's consolidated results of operations and financial position.

In
April 2009, the FASB issued FASB Staff Position ("FSP") No. FAS 107-1 and APB 28-1,Interim Disclosures about Fair Value
of Financial Instruments, ("FSP FAS 107-1"). FSP FAS 107-1 extends the disclosure requirements of SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to interim financial statements of publicly traded companies. FSP FAS 107-1 is
effective for interim reporting periods ending after June 15, 2009. The adoption of FSP FAS 107-1 did not have any impact on the Company's consolidated results of operations
and financial position.

In
May 2009, the FASB issued SFAS No. 165,Subsequent Events("SFAS 165"). SFAS 165 establishes principles and
requirements for identifying, recognizing and disclosing subsequent events. SFAS 165 requires that an entity identify the type of subsequent event as either recognized or unrecognized, and
disclose the date through which the entity has evaluated subsequent events. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. The adoption of
SFAS 165 did not have any impact on the Company's consolidated results of operations and financial position.

(4) Dividends

On December 5, 2008, the Company declared a dividend of $0.2575 per share of common stock, which was paid on January 16, 2009 to holders of record as of December 31,
2008.

On
March 4, 2009, the Company's board of directors voted to suspend the quarterly dividend on the Company's common stock.

(5) Acquisitions and Dispositions

On March 31, 2008, the Company completed the merger with Spinco. The merger was accounted for as a reverse acquisition of FairPoint by Spinco under the purchase method of
accounting because Verizon's stockholders owned a majority of the shares of the combined Company following the merger. The merger consideration was $316.3 million. Spinco was a wholly-owned
subsidiary of Verizon that owned Verizon's local exchange and related business activities in Maine, New Hampshire and Vermont. Spinco was spun off from Verizon immediately prior to the merger. Spinco
served approximately 1,562,000 access line equivalents as of the date of acquisition.

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NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(5) Acquisitions and Dispositions (Continued)

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



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

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

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

The
merger was accounted for using the purchase method of accounting for business combinations and, accordingly, the acquired assets and liabilities of Legacy FairPoint were recorded at
their estimated fair values as of the date of acquisition, and Legacy FairPoint's results of operations have been included in the Company's consolidated financial statements from the date of
acquisition. During the first quarter of 2009, the Company recorded an adjustment to its deferred tax account which decreased the excess of the purchase price over fair value by $24.3 million.
Based upon the Company's purchase price allocation, the excess of the purchase price over the fair value of the net tangible assets acquired was approximately $846.8 million. The Company
recorded an intangible asset related to the acquired customer relationships of $208.5 million, an intangible asset related to trade names of $42.8 million and an intangible asset related
to a non-compete agreement of $0.4 million. The remaining $595.1 million was recognized as goodwill. The estimated weighted average useful lives of the intangible assets are
9.7 years for the customer relationships, one year for the non-compete agreement and trade names have an indefinite useful life.

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NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(5) Acquisitions and Dispositions (Continued)

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

Cash

$
11,401Current assets


57,178Property, plant and equipment


303,261Investments


8,748Excess cost over fair value of net assets acquired


595,120Intangible assets


251,678Other assets


127,034Current liabilities


(179,146
)Long term debt


(687,491
)Other liabilities


(171,493
)Total net purchase price

$
316,290


The
following unaudited pro forma information presents the combined results of operations of the Company as though the merger and related transactions had been consummated on
January 1, 2008. These results include certain adjustments, mainly associated with increased interest expense on debt and amortization of intangible assets related to the acquisitions and the
related income tax effects. The pro forma financial information does not necessarily reflect the actual results of operations had the merger been consummated at the beginning of the period or which
may be attained in the future (in thousands, except per share data).

Pro forma six
months ended
June 30,
2008(unaudited)Revenue

$
694,108Income from continuing operations


13,600Net income


13,600Earnings per common share from continuing operations:Basic

$
0.15Diluted


0.15Earnings per common share:Basic

$
0.15Diluted


0.15


(6) Income Taxes

For the three months and six months ended June 30, 2009, the Company recorded an income tax benefit of $12.0 million and $16.9 million, respectively, resulting in an
effective tax rate of 40.3% and 38.8%, respectively, compared to an effective tax rate of 37.6% expense and 38.4% expense for the three months and six months ended June 30, 2008, respectively.

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NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(6) Income Taxes (Continued)

FIN 48, Accounting for Uncertainty in Income Taxes, ("FIN 48") requires the Company to apply a "more likely than not"
threshold to the recognition and de-recognition of uncertain tax positions. The Company's unrecognized tax benefits totaled $5.4 million and $8.6 million as of
June 30, 2009 and December 31, 2008, respectively. The reduction in unrecognized tax benefits was the result of the effective settlement of Spinco's IRS audit involving the 2000 through
2003 tax years and did not
have a material impact on the Company's tax provision for the three months or six months ended June 30, 2009. Of the $5.4 million of unrecognized tax benefits at June 30, 2009,
$1.0 million would impact the Company's effective rate, if recognized. The remaining unrecognized tax benefits relate to temporary items and tax reserves recorded in a business combination.
Furthermore, the Company does not anticipate any significant increase or decrease to the unrecognized tax benefits within the next twelve months.

The
Company recognizes any interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the six months ended June 30, 2009, there was a
$0.5 million decrease in interest and penalties, primarily as a result of the effective settlement of Spinco's IRS audit involving the 2000 through 2003 tax years. Cumulative interest and
penalties totaled $0.7 million and $1.2 million, net of tax, as of June 30, 2009 and December 31, 2008, respectively.

At
June 30, 2009, the Company had federal and state net operating loss carryforwards of $398.5 that will expire from 2019 to 2029. At June 30, 2009, the Company has
alternative minimum tax credits of $3.8 million that may be carried forward indefinitely. Legacy FairPoint completed an initial public offering on February 4, 2005, which resulted in an
"ownership change" within the meaning of the U.S. Federal income tax laws addressing net operating loss carryforwards, alternative minimum tax credits, and other similar tax attributes. The merger
(see Note 5) also resulted in an ownership change as of March 31, 2008. As a result of these ownership changes, there are specific limitations on the Company's ability to use its net
operating loss carryfowards and other tax attributes. It is the Company's belief that it can use the net operating losses even with these restrictions in place.

The
Company or one of its subsidiaries files income tax returns in the federal jurisdiction, and with various state and local governments. The Company is no longer subject to federal,
state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2004. As of June 30, 2009, Spinco was under IRS audit for the 2004 through 2006 fiscal
years. Management believes that the Company has adequately provided for any adjustments that may arise from these audits.

The
Verizon Northern New England business used the deferral method of accounting for investment tax credits earned prior to the repeal of investment tax credits by the Tax Reform Act of
1986. The Verizon Northern New England business also deferred certain transitional credits earned after the repeal and amortized these credits over the estimated service lives of the related assets as
a reduction to the provision for income taxes.

(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

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NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(7) Interest Rate Swap Agreements (Continued)

obligations.
The risk management control systems involve the use of analytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates on the
Company's future cash flows.

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

Effective Date:

Notional Amount

Rate

Rate, including
applicable margin

Expiration DateFebruary 8, 2005

$130.0 Million


4.11%


6.86
%
December 31, 2009April 29, 2005

$50.0 Million


4.72%


7.47
%
March 31, 2012June 30, 2005

$50.0 Million


4.69%


7.44
%
March 31, 2011June 30, 2006

$50.0 Million


5.36%


8.11
%
December 31, 2009December 31, 2007

$65.0 Million


4.91%


7.66
%
December 30, 2011December 31, 2007

$75.0 Million


5.46%


8.21
%
December 31, 2010December 31, 2008

$100.0 Million


5.02%


7.77
%
December 31, 2010December 31, 2009

$150.0 Million


5.65%


8.40
%
December 31, 2011June 30, 2008

$100.0 Million


4.99%


7.74
%
December 30, 2010June 30, 2008

$100.0 Million


4.95%


7.70
%
June 30, 2010June 30, 2008

$100.0 Million


5.45%


8.20
%
December 31, 2010June 30, 2008

$100.0 Million


5.30%


8.05
%
December 30, 2010June 30, 2008

$100.0 Million


4.50%


7.25
%
December 31, 2010June 30, 2008

$100.0 Million


4.50%


7.25
%
December 31, 2010December 31, 2010

$300.0 Million


4.49%


7.24
%
December 31, 2012June 30, 2008

$250.0 Million


3.25%


6.00
%
December 31, 2010


As
a result of the merger, the Company reassessed the accounting treatment of its swaps and determined that, beginning on April 1, 2008, these swaps did not meet the criteria for
hedge accounting. Therefore, the changes in fair value of the swap contracts subsequent to the merger have been recorded as other income (expense) on the condensed consolidated statement of
operations. As a result of these swap agreements, approximately 76% of the Company's indebtedness effectively bore interest at fixed rates rather than variable rates as of June 30, 2009. At
June 30, 2009, the fair market value of these swaps was a net liability of approximately $62.8 million, of which $43.4 million has been included in current liabilities and
$19.4 million has been included in long term liabilities. The Company has recognized gains of $7.2 million and $20.1 million, respectively on derivative instruments on the
consolidated statement of operations as a result of changes in the fair value of the swap agreements during the three months and six months ended June 30, 2009.

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Table of Contents

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(7) Interest Rate Swap Agreements (Continued)

The
following table summarizes the location and fair value of the Company's derivative instruments in the condensed consolidated balance sheets as of June 30, 2009 and
December 31, 2008 (in thousands):

Fair Value of
Liability Derivatives atJune 30,
2009

December 31,
2008Derivatives not designated as hedging instruments under SFAS 133:Interest rate contracts located within the balance sheet caption:Current liabilitiesInterest rate swaps

$
43,438

$
41,274Long term liabilitiesInterest rate swaps


19,386


41,681Total derivatives not designated as hedging instruments under SFAS 133

$
62,824

$
82,955


The
following table summarizes the location and amount of gains on the Company's derivative instruments in the condensed consolidated statements of operations for the
three-month and six-month periods ended June 30, 2009 and 2008 (in thousands):

Amount of Gain Recognized
in Income on DerivativesThree months ended June 30,

Six months ended June 30,Location of Gain
Recognized in
Income on Derivatives2009

2008

2009

2008Derivatives not designated as hedging instruments under SFAS 133Interest rate contracts

Gain on derivative instruments

$
7,233

$
43,123

$
20,131

$
43,123Total derivatives not designated as hedging instruments under SFAS 133



$
7,233

$
43,123

$
20,131

$
43,123


(8) Long Term Debt

Long term debt for the Company at June 30, 2009 and December 31, 2008 is shown below (in thousands):

June 30,
2009

December 31,
2008Senior secured credit facility, variable rates ranging from 2.94% to 5.75% (weighted average rate of 4.84%) at June 30, 2009, due 2014 to
2015

$
1,967,625

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


531,085


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


(10,063
)

(10,747
)Total outstanding long term debt


2,488,647


2,470,253Less current portion


(45,000
)

(45,000
)Total long term debt, net of current portion

$
2,443,647

$
2,425,253


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Table of Contents

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(8) Long Term Debt (Continued)

The
estimated fair value of our long term debt at June 30, 2009 is $1,056.1 million.

The
approximate aggregate maturities of long term debt for each of the five years subsequent to June 30, 2009 are as follows (in thousands):

Quarter ending June 30,2010

$
45,0002011


49,0752012


61,3002013


136,3002014


273,800Thereafter


1,933,235$
2,498,710


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

On
March 31, 2008, immediately prior to the merger, FairPoint and Spinco entered into a $2,030 million credit facility consisting of a revolver in an aggregate principal
amount of $200.0 million, a term loan A facility in an aggregate principal amount of $500 million, a term loan B facility in the aggregate principal amount of $1,130 million and
together with the term loan A facility, referred to as the term loan, and a delayed draw term loan in an aggregate principal amount of $200 million. Spinco drew $1,160 million under the
term loan immediately prior to the spin-off, and then the Company drew $470 million under the term loan and $5.5 million under the delayed draw term loan concurrently with
the closing of the merger. Subsequent to the merger, the Company has drawn an additional $194.5 million under the delayed draw term loan.

On
October 5, 2008 the administrative agent under the credit facility filed for bankruptcy. The administrative agent accounted for thirty percent of the loan commitments under the
revolving credit facility. On January 21, 2009, the Company entered into an amendment to the credit facility under which, among other things, the administrative agent resigned and was replaced
by a new administrative agent. In addition, the resigning administrative agent's undrawn loan commitments under the revolving credit facility, totaling $30.0 million, were terminated and are no
longer available to the Company.

The
revolving credit facility has a swingline subfacility in the amount of $10 million and a letter of credit subfacility in the amount of $30 million, which will allow
issuances of standby letters of credit by the Company. The credit facility also permits interest rate and currency exchange swaps and similar arrangements that the Company may enter into with the
lenders under the credit facility and/or their affiliates.

As
of June 30, 2009, the Company had borrowed $150.0 million under the revolving credit facility and letters of credit had been issued for $17.9 million.
Accordingly, as of June 30, 2009, the remaining amount available under the revolving credit facility was $2.4 million. The Company also had pending commitments for additional letters of
credit totaling $1.5 million as of June 30, 2009.

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(8) Long Term Debt (Continued)

The
term loan B facility and the delayed draw term loan will mature in March 2015 and the revolving credit facility and the term loan A facility will mature in March 2014. Each of the
term loan A facility, the term loan B facility and the delayed draw term loan, collectively referred to as the term loans, are repayable in quarterly installments in the manner set forth in the credit
facility beginning June 30, 2009.

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

The
Company's Term Loan B debt is subject to a LIBOR floor of 3.00%. As a result, the Company incurs interest expense at above-market levels when LIBOR rates are below 3.00%.

The
Company's effective interest rate on all of its debt, which includes the impact of interest rate swaps, as of June 30, 2009 is 8.37%.

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

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

Voluntary
prepayments of borrowings under the term loan facilities and optional reductions of the unutilized portion of the revolving facility commitments will be permitted upon payment
of an applicable payment fee, which shall only be applicable to certain prepayments of borrowings as described in the credit facility.

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(8) Long Term Debt (Continued)

Under
the credit facility, the Company is required to meet certain financial tests, including a minimum cash interest coverage ratio and a maximum total leverage ratio. The credit
facility contains customary affirmative covenants. The credit facility also contains negative covenants and restrictions, including, among others, with respect to redeeming and repurchasing the
Company's other indebtedness, loans and investments, additional indebtedness, liens, capital expenditures, changes in the nature of the Company's business, mergers, acquisitions, asset sales and
transactions with affiliates. The credit facility contains customary events of default, including, but not limited to, failure to pay principal, interest or other amounts when due (subject to
customary grace periods), breach of covenants or representations, cross-defaults to certain other indebtedness in excess of specified amounts, judgment defaults in excess of specified amounts, certain
ERISA defaults, the failure of any guaranty or security document supporting the credit facility and certain events of bankruptcy and insolvency.

After
giving effect to the conversion of a portion of the Company's cash interest expense to non-cash interest expense as a result of the exchange offer (see note 16),
the Company was able to maintain compliance with all the financial covenants contained in the credit facility as of June 30, 2009. However, the Company currently expects that it may be at risk
of failing to comply with the interest coverage ratio maintenance covenant and/or the leverage ratio maintenance covenant in the credit facility for the measurement period ending September 30,
2009. If the Company is unable to comply with either the interest coverage ratio maintenance covenant or the leverage maintenance covenant, such failure would constitute an event of default under the
credit facility, which would permit the lenders under the credit facility to accelerate the maturity of the loans outstanding thereunder, seek foreclosure upon any collateral securing such loans and
terminate any remaining commitments to lend to the Company. If the lenders under the credit facility were to exercise such remedies, the Company does not believe that it could refinance the credit
facility on reasonable terms, or at all, in the current lending environment.

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

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

The
credit facility is secured by a first priority perfected security interest in all of the stock, equity interests, promissory notes, partnership interests and membership interests
owned by the Company.

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

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(8) Long Term Debt (Continued)

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

The
indenture governing the notes also restricts the Company's ability to pay dividends on or repurchase its common stock under certain circumstances.

During
the three and six months ended June 30, 2009, the Company repurchased $12.0 million and $19.9 million, respectively, in aggregate principal amount of the
notes for an aggregate purchase price of $4.1 million and $6.3 million, respectively, in cash. In addition, for the three and six months ended June 30, 2009, the Company repaid
$6.3 million of principal under the term loan A facility of its credit facility and for the three and six months ended June 30, 2009, repaid $2.8 million and $6.1 million,
respectively, of principal under the term loan B facility of its credit facility. In total, the Company retired $21.1 million and $32.3 million of outstanding debt during the three and
six months ended June 30, 2009, respectively.

For
a discussion of the exchange offer relating to the notes which was initiated on June 24, 2009, see note 16.

(9) Employee Benefit Plans

The Company remeasured its pension and other post-employment benefit assets and liabilities as of December 31, 2008, in accordance with SFAS 158. This
measurement is based on a 5.99% discount rate, as well as certain other valuation assumption modifications. Additionally, the Company remeasured its management pension plan as of June 30, 2009
to recognize a settlement charge in accordance with SFAS No. 88,Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits. This measurement is based on a 6.64% discount rate.

Prior
to the merger, the Verizon Northern New England business participated in Verizon's benefit plans. Verizon maintained noncontributory defined benefit pension plans for many of its
employees. The post-retirement health care and life insurance plans for the Verizon Northern New England business' retirees and their dependents were both contributory and noncontributory
and included a limit on the Companies' share of cost for recent and future retirees. The Verizon Northern New England business also sponsored defined contribution savings plans to provide
opportunities for eligible employees to save for retirement on a tax-deferred basis. A measurement date of December 31 was used for the pension and post-retirement
health care and life insurance plans.

The
structure of Verizon's benefit plans did not provide for the separate attribution of the related pension and post-retirement assets and obligations at the Verizon
Northern New England business level. Because there was not a separate plan for the Verizon Northern New England business, the annual income and expense related to such assets and obligations were
allocated to the Verizon Northern New England business and are reflected as prepaid pension assets and employee benefit obligations in the balance sheet prior to the merger.

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(9) Employee Benefit Plans (Continued)

After
June 30, 2006, Verizon management employees, including management employees of the Verizon Northern New England business, ceased to earn pension benefits or earn service
towards the company retiree medical subsidy. In addition, new management employees hired after December 31, 2005 were not eligible for pension benefits and managers with less than
13.5 years of service as of June 30, 2006 were not eligible for company-subsidized retiree healthcare or retiree life insurance benefits. Beginning July 1, 2006, Verizon Northern
New England business management employees received an increased company match on their savings plan contributions.

Components
of the net periodic benefit (income) cost related to the Company's pension and post-retirement healthcare plans for the three and six months ended June 30,
2009 are presented below (in thousands).

Three Months ended
June 30, 2009

Six Months ended
June 30, 2009Qualified
Pension

Post-retirement
Health

Qualified
Pension

Post-retirement
HealthService cost

$
2,736

$
3,176

$
5,471

$
6,351Interest cost


3,280


3,284


6,561


6,568Expected return on plan assets


(5,179
)




(10,358
)

Amortization of prior service cost


363


1,073


726


2,146Amortization of actuarial (gain) loss


156


664


311


1,328Settlement loss


887





887


Net periodic benefit cost

$
2,243

$
8,197

$
3,598

$
16,393


In
2009, the Company does not expect to make a contribution to the qualified pension plans, but it does expect to incur $0.6 million in post-retirement healthcare plan
expenditures.

For
the three months and six months ended June 30, 2009, the actual gain on the pension plan assets has been approximately 13.8% and 0.7%, respectively. Net periodic benefit cost
for 2009 assumes a weighted average annualized expected return on plan assets of approximately 8.3%. Should the actual return on plan assets continue to be significantly lower than the expected return
assumption, the net periodic benefit cost may increase in future periods and the Company may be required to contribute additional funds to its pension plans after 2009.

Pension
plan assets at June 30, 2009 include an additional transfer of assets from Verizon, estimated to be between $29.8 and $41.3 million, pending final actuarial
settlement. This estimate reflects an initial estimate of between $38.5 and $50.0 million as of December 31, 2008, reduced by a final asset transfer of $9.0 million on
June 1, 2009 related to the management pension plan, and adjusted for gains and losses since December 31, 2008. For purposes of determining fair value of plan assets at June 30,
2009, the Company has assumed a final transfer of $29.8 million from Verizon for the associate pension plan. The final transfer will be made from Verizon's defined benefit plans' trusts upon
final validation by actuaries and the Company of the census information and related actuarial calculations in accordance with relevant statutory and regulatory guidelines and an employee matters
agreement with Verizon. The assets transferred from the Verizon benefit plans' trusts to the Company's benefit plans' trusts have been invested by the plans' trustee in various equity and fixed income

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(9) Employee Benefit Plans (Continued)

securities.
The final asset transfer will include investment return or loss on the final transfer amount from March 31, 2008 until the date of the final asset transfer equivalent to the rate of
return in the Verizon pension trusts.

The
Company and its subsidiaries sponsor four voluntary 401(k) savings plans that, in the aggregate, cover substantially all eligible Legacy FairPoint employees, and two voluntary 401(k)
savings plans that cover in the aggregate substantially all eligible Northern New England operations employees (collectively, "the 401(k) Plans"). Each 401(k) Plan year, the Company contributes to the
401(k) Plans an amount of matching contributions determined by the Company at its discretion. For the three months ended March 31, 2009, the Company generally matched in the Legacy FairPoint
401(k) plans 100% of each employee's contribution up to 3% of compensation and 50% of additional contributions up to 6% or as otherwise required by the relevant collective bargaining agreement; in the
Northern New England 401(k) management plan an amount equal to 100% of each employee's contribution up to 6% of base compensation; and in the Northern New England 401(k) plan for union associates an
amount equal to 82% of each employee's contribution up to 6% of base compensation.

Effective
for the first full payroll period in April 2009, matching contributions made to the Company's 401(k) plans for certain employees may be made in the form of the Company's common
stock or in cash. Generally, each participant in these plans would receive a dollar-for-dollar match of FairPoint stock or cash up to 5% of the participant's eligible
compensation. For the three months ended June 30, 2009, the foregoing matching contributions were made in the form of cash. Certain participants in the Company's 401(k) plans who are covered by
collective bargaining agreements will continue to have their Company matching contributions determined under the prior formula and made in cash.

Total
Company contributions to all 401(k) Plans were $2.4 million and $2.3 million for the three months ended June 30, 2009 and 2008, respectively, and were
$4.9 million and $5.1 million for the six months ended June 30, 2009 and 2008, respectively. The $2.4 million of Company contributions during the three months ended
June 30, 2009 includes a lump sum contribution of $0.9 million made on July 15 to match certain employee contributions made during the three months ended June 30, 2009.

(10) Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss were as follows (in thousands):

June 30,
2009

December 31,
2008Accumulated other comprehensive loss, net of taxes:Defined benefit pension and post-retirement plans

$
(131,218
)
$
(134,504
)Total accumulated other comprehensive loss

$
(131,218
)
$
(134,504
)


Other
Comprehensive Loss for the six months ended June 30, 2009 includes amortization of defined benefit pension and post-retirement plan related prior service costs
and actuarial gains and losses included in Accumulated Other Comprehensive Loss. Defined benefit pension and post-retirement plan activity during the three months ended March 31,
2008 included $49.5 million (net of $32.8 million taxes) in connection with the merger, which is reflected as a reduction to Accumulated

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(10) Accumulated Other Comprehensive Loss (Continued)

Other
Comprehensive Loss. This amount represents the allocation of previously existing plan assets, obligations and prior service costs to the surviving benefit plans upon merger.

(11) 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 or 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 calculated using the treasury stock method includes the impact of stock units, shares of non-vested common stock and shares that could be issued under outstanding stock
options. The weighted average number of common shares outstanding for all periods presented has been restated to reflect the issuance of 53,760,623 shares to the stockholders of Spinco in connection
with the merger.

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

Three months ended
June 30,

Six months ended
June 30,2009

2008

2009

2008Weighted average number of common shares used for basic earnings per share


89,364


88,725


89,168


62,077Effect of potential dilutive shares





465





406Weighted average number of common shares and potential dilutive shares used for diluted earnings per share


89,364


89,190


89,168


62,483Anti-dilutive shares excluded from the above reconciliation


644


494


882


509


Since
the Company incurred a loss for the three and six months ended June 30, 2009, all potentially dilutive securities are anti-dilutive and are, therefore, excluded
from the determination of diluted earnings per share.

(12) Stockholders' Equity

On March 31, 2008, FairPoint completed the merger, pursuant to which Spinco merged with and into FairPoint, with FairPoint continuing as the surviving corporation for legal
purposes. In order to effect the merger, the Company issued 53,760,623 shares of common stock, par value $.01 per share, to Verizon stockholders for their interest in Spinco. At the time of the
merger, Legacy FairPoint had
35,264,945 shares of common stock outstanding. Upon consummation of the merger, the combined Company had 89,025,568 shares of common stock outstanding. At June 30, 2009, there were 89,496,847
shares of common stock outstanding and 200,000,000 shares of common stock were authorized.

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(13) Transactions with Affiliates

The Verizon Northern New England business' financial statements for periods prior to the merger include the following transactions with Verizon and related subsidiaries:

The
Verizon Northern New England business' operating revenue includes transactions with Verizon for the provision of local telephone services, network access, billing and collection
services, interconnection agreements and the rental of facilities and equipment. These services were reimbursed by Verizon based on tariffed rates, market prices, negotiated contract terms that
approximated market rates, or actual costs incurred by the Verizon Northern New England business.

The
Verizon Northern New England business reimbursed Verizon for specific goods and services it provided to, or arranged for, the Verizon Northern New England business based on tariffed
rates, market prices or negotiated terms that approximated market rates. These goods and services included items such as communications and data processing services, office space, professional fees
and insurance coverage.

The
Verizon Northern New England business also reimbursed Verizon for the Verizon Northern New England business' share of costs incurred by Verizon to provide services on a common basis
to all of its subsidiaries. These costs included allocations for legal, security, treasury, tax and audit services. The allocations were based on actual costs incurred by Verizon and periodic studies
that identified employees or groups of employees who were totally or partially dedicated to performing activities that benefited the Verizon Northern New England business, in activities such as
investor relations, financial planning, marketing services and benefits administration. These allocations were based on actual costs incurred by Verizon, as well as on the size of the Verizon Northern
New England business relative to other Verizon subsidiaries. The Company believes that these cost allocations are reasonable for the services provided. The Company also believes that these cost
allocations are consistent with the nature and approximate amount of the costs that the Verizon Northern New England business would have incurred on a stand-alone basis.

The
Verizon Northern New England business also recognized an allocated portion of interest expense in connection with contractual agreements between the Verizon Companies and Verizon for
the provision of short term financing and cash management services. Verizon issues commercial paper and obtains bank loans to fund the working capital requirements of Verizon's subsidiaries, including
the Verizon Group, and invests funds in temporary investments on their behalf. The Verizon Group also recognized interest expense related to a promissory note held by Verizon.

The
affiliate operating revenue and expense amounts do not include affiliate transactions between Verizon and VLD's, VOL's and VSSI's operations in Maine, New Hampshire
and Vermont. Because the Verizon Northern New England business' operating expenses associated with VLD, VOL and VSSI were determined predominantly through allocations, separate identification of the
affiliate transactions was not readily available.

(14) Fair Value Measurements

SFAS No. 157,Fair Value Measurements(SFAS No. 157) defines fair value, establishes a framework for measuring fair value
and establishes a hierarchy that categorizes and prioritizes the sources to be used to estimate fair value. SFAS No. 157 also expands financial statement disclosures about fair value
measurements. On February 12, 2008, the FASB issued FASB Staff Position (FSP) 157-2, which delays

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(14) Fair Value Measurements (Continued)

the
effective date of SFAS No. 157 for one year for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements
on a recurring basis. The Company elected a partial deferral of SFAS No. 157 under the provisions of FSP 157-2 related to the measurement of fair value used when evaluating
goodwill, investments, other intangible assets and other long-lived assets for impairment and valuing asset retirement obligations and liabilities for exit or disposal activities until
fiscal years beginning after November 15, 2008. As of January 1, 2009, the Company adopted FSP 157-2 which did not have a material impact on the Company's financial
statements. The impact of partially adopting SFAS No. 157 effective January 1, 2008 was not material to the Company's financial statements.

The
following table summarizes the Company's financial assets and liabilities measured at fair value on a recurring basis (at least annually) as of June 30, 2009 (in thousands):

June 30,
2009

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

Significant
Observable Inputs
(Level 2)

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

$
9,741


9,741





Interest rate swap agreements (2)


(62,824
)




(62,824
)

Accrued pension obligation (1)


(49,507
)




(49,507
)

Post-retirement medical obligations (1)


(234,413
)




(234,413
)

Other post-employment benefit obligations (3)


(5,311
)




(5,311
)




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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(15) Commitments and Contingencies

(a) Leases

Future minimum lease payments under capital leases and non-cancelable operating leases as of June 30, 2009 are as
follows (in thousands):

Capital
Leases

Operating
LeasesTwelve months ending June 30:2010

$
3,085

$
11,7352011


2,563


9,2832012


1,841


8,1722013


1,648


6,9342014


1,534


4,999Thereafter


872


8,226Total minimum lease payments

$
11,543

$
49,349Less interest and executory cost


(2,913
)Present value of minimum lease payments


8,630Less current installments


(2,046
)Long term obligations at June 30, 2009

$
6,584


The
Company does not have any leases with contingent rental payments or any leases with contingency renewal, purchase options, or escalation clauses.

(b) Legal Proceedings

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

(c) Service Quality Penalties

The Company is subject to certain service quality requirements in the states of Maine, New Hampshire and Vermont. Failure to meet these
requirements in any of these states may result in penalties being assessed by the respective state regulatory body. As of June 30, 2009, the Company has recognized an estimated liability for
service quality penalties based on historical assessments. However, additional penalties may be assessed as a result of service quality issues related to the systems cutover, which could have a
material adverse effect on the Company's financial position, results of operations and liquidity.

(16) Subsequent Events

The Company has evaluated subsequent events through August 5, 2009, the date that the financial statements were issued.

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(16) Subsequent Events (Continued)

(a) Exchange Offer

On June 24, 2009, the Company launched an offer to exchange (the "exchange offer") all of the outstanding notes for new
131/8% senior notes due 2018 (the "new notes"). Concurrently with the exchange offer, the Company solicited consents (the "consent solicitation") from holders of the notes for certain
amendments to the indenture under which the notes were issued to eliminate or amend substantially all of the restrictive covenants and modify a number of the events of default and certain other
provisions previously contained in the indenture (collectively, the "proposed amendments").

(b) Issuance of New Notes and Payment of Consent Fee

On July 29, 2009 (the "settlement date"), the Company successfully consummated the exchange offer. On the settlement date, the
proposed amendments became operative and $439.6 million in aggregate principal amount of the notes (which amount was equal to approximately 83% of the then outstanding notes) were exchanged for
$439.6 million in aggregate principal amount of the new notes. The new notes will mature on April 2, 2018 and will bear interest at a fixed rate of 131/8%, payable in
cash, except that the new notes will bear interest at a rate of 15% for the period from July 29, 2009 through and including September 30, 2009 (the "initial interest payment period"). In
addition, the Company is permitted to pay the interest payable on the new notes for the initial interest payment period in the form of cash, by capitalizing such interest and adding it to the
principal amount of the new notes or a combination of both cash and such capitalization of interest, at its option. Notwithstanding the foregoing, to the extent the Company pays the interest payable
on the notes on October 1, 2009 in cash, then it will, at its option, be required to either (i) pay interest on the new notes in cash at a rate of 131/8% for the initial
interest payment period or (ii) pay interest on the new notes by capitalizing such interest and adding it to the principal amount of the new notes at a rate of 17% per annum for the initial
interest payment period. The Company currently intends to make the interest payments due on October 1, 2009 on the new notes by capitalizing such interest and adding it to the principal amount
of the new notes.

In
addition, pursuant to the terms of the exchange offer, an additional $18.9 million in aggregate principal amount of new notes was issued to holders who tendered their notes in
the exchange offer as payment for accrued and unpaid interest on the exchanged notes up to, but not including, the settlement date of the exchange offer. In accordance with SFAS No. 6, Classification of Short Term
Obligations Expected to Be Refinanced, the Company has classified the accrued interest on the exchanged notes as of June 30, 2009 of $14.4 million as a
non-current liability on the condensed consolidated balance sheet.

The
indenture governing the new notes, which the Company entered into with U.S. Bank National Association, as trustee, on July 29, 2009 (the "new indenture"), limits, among other
things, the Company's ability to incur additional indebtedness, issue certain preferred stock, repurchase its capital stock or subordinated debt, make certain investments, create certain liens, sell
certain assets or merge or consolidate with or into other companies, incur restrictions on the ability of the Company's subsidiaries to make distributions or transfer assets to the Company and enter
into transactions with affiliates.

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Unaudited) (Continued)

(16) Subsequent Events (Continued)

The
new indenture also restricts the Company's ability to pay dividends on or repurchase its common stock under certain circumstances.

In
connection with the exchange offer and the corresponding consent solicitation, the Company also paid a cash consent fee of $1.6 million in the aggregate to holders of notes who
validly delivered and did not revoke consents in the consent solicitation prior to a specified early consent deadline, which amount was equal to $3.75 in cash per $1,000 aggregate principal amount of
notes exchanged in the exchange offer.

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

The following discussion should be read in conjunction with the financial statements of the Company and the notes thereto. The
following discussion includes certain forward-looking statements. For a discussion of important factors, which could cause actual results to differ materially from the results referred to in the
forward-looking statements, see "Part IItem 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2008,
"Part IIItem 1A. Risk Factors" of our Quarterly Report on Form 10-Q for the quarterly period ending March 31, 2009 and
"Part IIItem 1A. Risk Factors" and "Cautionary Note Concerning Forward-Looking Statements" contained in this Quarterly Report.

Overview

We are a leading provider of communications services in rural and small urban communities, offering an array of services, including
local and long distance voice, data, video and Internet and broadband product offerings. We are one of the largest telephone companies in the United States focused on serving rural and small urban
communities, and are the 7th largest local telephone company in the United States, in each case based on number of access lines as of June 30, 2009. We operate in 18 states with
approximately 1.7 million access line equivalents (including voice access lines and high speed data lines, which include DSL, wireless broadband and cable modem) in service as of
June 30, 2009.

We
were incorporated in Delaware in February 1991 for the purpose of acquiring and operating incumbent telephone companies in rural markets. Many of our telephone companies have served
their respective communities for over 75 years.

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

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

As
our primary source of revenues, access lines are an important element of our business. Over the past several years, communications companies, including FairPoint, have experienced a
decline in access lines due to increased competition, including competition from wireless carriers and cable

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television
operators, the introduction of DSL services (resulting in customers substituting DSL for a second line) and challenging economic conditions. In addition, while we were operating under the
transition services agreement, dated as of January 15, 2007, which we entered into with certain subsidiaries of Verizon in connection with the merger, as amended on March 31, 2008 (the
"transition services agreement"), we had limited ability to change current product offerings. Upon completion of the cutover from the Verizon systems to the new FairPoint systems on January 30,
2009 (the "cutover"), we expected to be able to modify bundles and prices to be more competitive in the marketplace. However, due to certain systems functionality issues (as described herein), we have
had limited ability during the first half of 2009 to make changes to our product offerings. In late June 2009, we began actively marketing and promoting our DSL product for the first time since the
cutover.

From
2007 through January 2009, we were in the process of developing and deploying new systems, processes and personnel to replace those used by Verizon to operate and support our
network and back office functions in the Maine, New Hampshire and Vermont operations we acquired from Verizon. These services were provided by Verizon under the transition services agreement through
January 30, 2009. On January 30, 2009, we began the cutover, and on February 9, 2009, we began operating our new platform of systems independently from the Verizon systems,
processes and personnel. During the period from January 23, 2009 until January 30, 2009, all retail orders were taken manually and following the cutover were entered into the new
systems. From February 2, 2009 through February 9, 2009, we manually processed only emergency orders, although we continued to provide repair and maintenance services to all customers.

Following
the cutover, many of these systems functioned without significant problems, but a number of the key back-office systems, such as order entry, order management and
billing, experienced certain functionality issues. As a result of these systems functionality issues, as well as work force inexperience on the new systems, we experienced increased handle time by
customer service representatives for new orders, reduced levels of order flow-through across the systems, which caused delays in provisioning and installation, and delays in the processing
of bill cycles and collection treatment efforts. These issues impacted customer satisfaction and resulted in large increases in customer call volumes into our customer service centers. While many of
these issues were anticipated, the magnitude of difficulties experienced was beyond our expectations.

We
have since worked diligently to remedy these issues and we now believe that most areas of the business are operating at or near normal levels. The order backlog has been reduced
significantly and order handle times continue to be reduced. Provisioning of new orders has steadily improved and call volumes into the customer service centers have returned to
pre-cutover levels. In addition, certain systems functionality which supports collection efforts has only recently become available. Nevertheless, delays in implementing the collections
software functionality, together with
other cutover issues, have caused an increase in accounts receivable, which has adversely impacted our liquidity.

Because
of these cutover issues, during the three months and six months ended June 30, 2009 we incurred $8.6 million and $28.0 million, respectively, of incremental
expenses in order to operate our business, including third-party contractor costs and internal labor costs in the form of overtime pay. The cutover issues also required significant staff and senior
management attention, diverting their focus from other efforts. We expect to continue to incur a modest amount of incremental costs during the third quarter of 2009 as we fully complete our cutover
restoration efforts.

In
addition to the significant incremental expenses we incurred as a result of these cutover issues, we have been unable to fully implement our operating plan for 2009 and effectively
compete in the marketplace, which we believe is having an adverse effect on our business, financial condition, results of operations and liquidity, as well as our ability to continue to comply with
the financial covenants in our credit agreement.

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Recent Developments



Primarily as a result of the cutover issues and the other events referenced above, we believed that we were at risk of failing to
comply with the interest coverage ratio maintenance covenant in our credit facility, dated as of March 31, 2008, which we entered into with Spinco and lenders and agents party thereto, as
amended (the "credit facility"), when measured for the period ending June 30, 2009. Given that we believe that our credit facility is a valuable asset and that we may not be able to refinance
the credit facility or obtain new financing on reasonable terms, if at all, in the current lending environment, we initiated preliminary discussions with the administrative agent under our credit
facility regarding a waiver of this potential breach of the interest coverage ratio maintenance covenant for the measurement period ending June 30, 2009. At the time of such discussions, the
administrative agent indicated that such a waiver would require a significant cash fee,
likely result in additional restrictive provisions being placed on us and likely require us to renegotiate certain provisions in our credit facility following expiration of such waiver. We ultimately
elected not to pursue a waiver and instead launched an offer on June 24, 2009 to exchange (the "exchange offer") all of our 131/8% senior notes due 2018 (the "notes") for new
131/8% senior notes due 2018 (the "new notes"). The exchange offer was primarily designed to reduce our cash interest expense for the quarters ending June 30, 2009 and
September 30, 2009 and to help us maintain compliance with the interest coverage ratio maintenance covenant in our credit facility for the measurement period ending June 30, 2009.

Concurrently
with the exchange offer, we solicited consents (the "consent solicitation") from holders of the notes for certain amendments to the indenture under which the notes were
issued, dated as of March 31, 2008, between Spinco and U.S. Bank National Association, as trustee, as amended (the "indenture"), to eliminate or amend substantially all of the restrictive
covenants and modify a number of the events of default and certain other provisions previously contained in the indenture (collectively, the "proposed amendments").

On
July 29, 2009 (the "settlement date"), we successfully consummated the exchange offer. On the settlement date of the exchange offer, the proposed amendments became operative
and $439.6 million in aggregate principal amount of the notes (which amount was equal to approximately 83% of the then outstanding notes) were exchanged for $439.6 million in aggregate
principal amount of the new notes. The new notes will mature on April 2, 2018 and will bear interest at a fixed rate of 131/8%, payable in cash, except that the new notes will
bear interest at a rate of 15% for the period from July 29, 2009 through and including September 30, 2009 (the "initial interest payment period"). In addition, we are permitted to pay
the interest payable on the new notes for the initial interest payment period in the form of cash, by capitalizing such interest and adding it to the principal amount of the new notes or a combination
of both cash and such capitalization of interest, at our option. Notwithstanding the foregoing, to the extent we pay the interest payable on the notes on October 1, 2009 in cash, then we will,
at our option, be required to either (i) pay interest on the new notes in cash at a rate of 131/8% for the initial interest payment period or (ii) pay interest on the new
notes by capitalizing such interest and adding it to the principal amount of the new notes at a rate of 17% per annum for the initial interest payment period. We currently intend to make the interest
payments due on October 1, 2009 on the new notes by capitalizing such interest and adding it to the principal amount of the new notes.

In
addition, pursuant to the terms of the exchange offer, an additional $18.9 million in aggregate principal amount of new notes were issued to holders who tendered their notes in
the exchange offer as payment for accrued and unpaid interest on the exchanged notes up to, but not including, the settlement date. In accordance with SFAS No. 6, Classification of Short Term Obligations Expected to Be
Refinanced, we have classified the accrued interest of $14.4 million on the exchanged
notes as of June 30, 2009 as a non-current liability on the condensed consolidated balance sheet.

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The
indenture governing the new notes, which we entered into with U.S. Bank National Association, as trustee, on July 29, 2009 (the "new indenture"), limits, among other things,
our ability to incur additional indebtedness, issue certain preferred stock, repurchase our capital stock or subordinated debt, make certain investments, create certain liens, sell certain assets or
merge or consolidate with or into other companies, incur restrictions on the ability of our subsidiaries to make distributions or transfer assets to us and enter into transactions with affiliates.

The
new indenture also restricts our ability to pay dividends on or repurchase our common stock under certain circumstances.

In
connection with the exchange offer and the corresponding consent solicitation, we also paid a cash consent fee of $1.6 million in the aggregate to holders of notes who validly
delivered and did not revoke consents in the consent solicitation prior to a specified early consent deadline, which amount was equal to $3.75 in cash per $1,000 aggregate principal amount of notes
exchanged in the exchange offer.



After giving effect to the conversion of a portion of our cash interest expense to non-cash interest expense as a result of
the exchange offer, we were able to maintain compliance with all the financial covenants contained in the credit facility as of June 30, 2009. However, we currently expect that the exchange
offer may not provide a sufficient reduction in our cash interest expense to prevent a breach of the interest coverage ratio maintenance covenant in our credit facility for the measurement period
ending September 30, 2009. In addition, we currently expect that we may be in breach of the leverage ratio maintenance covenant in our credit facility as early as the measurement period ending
September 30, 2009. If we are unable to comply with either the interest coverage ratio maintenance covenant and/or the leverage maintenance covenant, such failure would constitute an event of
default under our credit facility, which would permit the lenders under our credit facility to accelerate the maturity of the loans outstanding thereunder, seek foreclosure upon any collateral
securing such loans and terminate any remaining commitments to lend to us. If the lenders under our credit facility exercised such remedies, we do not believe that we could refinance the credit
facility on reasonable terms, or at all, in the current lending environment.

In
order to address these issues, we are developing a restructuring plan with the assistance of Rothschild Inc. ("Rothschild"), the financial advisor we retained to assist with
our efforts to restructure our capital structure.

As
currently contemplated, the restructuring plan will relate to our outstanding notes and new notes and will be generally designed to (i) reduce our indebtedness and interest
expense, (ii) improve our liquidity and financial and operational flexibility in order to allow us to compete more effectively and generate long term revenue growth and (iii) help us
maintain compliance with the maintenance
covenants in our credit facility. We anticipate that the restructuring plan will include, among other things, an offer to exchange all of our outstanding notes and new notes for shares of our capital
stock. We expect consummation of such a transaction will be highly dilutive to our current stockholders.

In
the event that the restructuring plan is not consummated, including because noteholders fail to support the restructuring plan or we are unable to obtain stockholder approval if
required, we will consider all other restructuring alternatives available to us, which may include the commencement of an in-court resolution under chapter 11 of the U.S. Bankruptcy
Code ("chapter 11"), with or without a pre-arranged plan of reorganization. There can be no assurance that any restructuring arrangement or plan that we pursue will be successful,
or what the terms thereof would be or what, if anything, our existing debt and equity holders would receive in any restructuring, which will depend on our enterprise value, although we believe than
any restructuring would be highly dilutive to our current stockholders. In addition, we can make no assurances with respect to what the value of our debt and equity will be following the consummation
of any restructuring.

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On June 16, 2009, our board of directors announced that it had appointed David L. Hauser to serve as our chairman and chief
executive officer, which appointment became effective on July 1, 2009, and Eugene B. Johnson announced his retirement as our chairman and chief executive officer and his resignation from our
board of directors, which retirement and resignation became effective on June 30, 2009. In addition, effective July 1, 2009, Mr. Hauser no longer serves as a member of any
committee of our board of directors.



On July 24, 2009, we were notified by the New York Stock Exchange (the "NYSE") that we were not in compliance with the NYSE's
continued listing standards (the "non-compliance notice") because the thirty day average market capitalization of our common stock had been less than $75 million (the
"$75 million rule"). Under the NYSE rule, we have 45 calendar days from receipt of the non-compliance notice to respond to the NYSE by submitting a business plan demonstrating our
strategy for regaining compliance with the $75 million rule
within 18 months of receipt of the non-compliance notice (the "plan"). If the NYSE accepts the plan, we will be subject to quarterly monitoring for compliance with the plan. If the
NYSE does not accept the plan, we will be subject to suspension by the NYSE and delisting by the SEC.

We
intend to submit a plan to the NYSE that will enable us to regain compliance with the $75 million rule through the deleveraging of our current capital structure and the
execution of certain growth initiatives in the business and broadband markets in northern New England.

Our
common stock remains listed on the NYSE under the symbol "FRP" but has been assigned a ".BC" indicator by the NYSE to signify that we are not currently in compliance with the NYSE's
continued listing standards. The ".BC" indicator would be removed at such time as we are deemed compliant with the NYSE's continued listing standards.

Basis of Presentation

On March 31, 2008, the merger between Spinco and Legacy FairPoint was completed. In connection with the merger and in accordance
with the terms of the merger agreement, Legacy FairPoint issued 53,760,623 shares of common stock to Verizon stockholders. Prior to the merger, the Verizon Group engaged in a series of restructuring
transactions to effect the transfer of specified assets and liabilities of the Verizon Northern New England business to Spinco and the entities that became Spinco's subsidiaries. Spinco was then spun
off from Verizon immediately prior to the merger. While FairPoint was the surviving entity in the merger, for accounting purposes Spinco is deemed to be the acquirer. As a result, for the six months
ended June 30, 2008, the statement of operations and the financial information derived from the statement of operations in this Quarterly Report reflect the consolidated financial results of
the Company by including the financial results of the Verizon Northern New England business for the three months ended March 31, 2008 and the combined financial results of Spinco and Legacy
FairPoint for the three months ended June 30, 2008. For more information, see note 1 to the "Condensed Consolidated Financial Statements."

We
view our business of providing voice, data and communication services to residential and business customers as one business segment as defined in Statement of Financial Accounting, or
SFAS, No. 131, "Disclosures about Segments of an Enterprise and Related Information."

Revenues

We derive our revenues from:



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

Revenues

% of RevenuesThree months ended June 30,

Six months ended June 30,

Three months ended June 30,

Six months ended June 30,2009

2008

2009

2008

2009

2008

2009

2008Revenue Source:Local calling services

$
126,017

$
149,591

$
255,049

$
281,766


42
%

43
%

42
%

45
%Access


98,515


101,402


195,553


180,420


33
%

30
%

32
%

29
%Long distance services


34,754


49,090


80,129


90,357


11
%

14
%

13
%

14
%Data and Internet services


29,062


30,552


57,467


52,572


10
%

9
%

9
%

8
%Other services


11,263


14,055


23,043


21,989


4
%

4
%

4
%

4
%Total

$
299,611

$
344,690

$
611,241

$
627,104


100
%

100
%

100
%

100
%


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Table of Contents

Operating Expenses

Our operating expenses consist of cost of services and sales, selling, general and administrative expenses, and depreciation and
amortization.



Because
the Verizon Northern New England business had been operating as the local exchange carrier of Verizon in Maine, New Hampshire and Vermont, and not as a standalone
telecommunications provider, the historical operating results of the Verizon Northern New England business for the three months ended March 31, 2008 include approximately $58 million of
expenses for services provided by the Verizon Group, including information systems and information technology, shared assets including office space outside of New England, supplemental customer sales
and service and operations. During January 30, 2009, we operated under the transition services agreement, under which we incurred $15.9 million of expenses. As of January 30,
2009, we began performing these services internally or obtaining them from third-party service providers and not from Verizon.

Acquisitions and Dispositions

On March 31, 2008, we completed the merger with Spinco. The merger of Legacy FairPoint and Spinco was accounted for as a reverse
acquisition of Legacy FairPoint by Spinco under the purchase method of accounting because Verizon's stockholders owned at least a majority of the shares of the combined Company following the merger.
The merger consideration was $316.3 million. Spinco was a wholly-owned subsidiary of Verizon that owned Verizon's local exchange and related business activities in Maine, New Hampshire and
Vermont. Spinco was spun off from Verizon immediately prior to the merger. Spinco served approximately 1,562,000 access line equivalents as of the date of acquisition.

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Results of Operations

Three Months Ended June 30, 2009 Compared with Three Months Ended June 30, 2008

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

2009

% of Revenues

2008

% of RevenuesRevenues

$
299,611


100
%
$
344,690


100
%Operating expensesCost of services and sales


122,707


41


133,900


39Selling, general and administrative


97,986


33


102,290


30Depreciation and amortization


68,629


23


69,741


20Total operating expenses


289,322


97


305,931


89Income from operations


10,289


3


38,759


11Interest expense


(54,809
)

(18
)

(45,123
)

(13
)Gain on derivative instruments


7,233


2


43,123


13Gain on early retirement of debt


7,494


3





Other income (expense)


(58
)




264


Income (loss) before income taxes


(29,851
)

(10
)

37,023


11Income tax (expense) benefit


12,033


4


(13,909
)

(4
)Net income (loss)

$
(17,818
)

(6
)%
$
23,114


7
%


Revenues
decreased $45.1 million to $299.6 million in the second quarter of 2009 compared to 2008. Revenues in each of our revenue categories have been impacted by weakness
in the economy during recent months which has caused a decrease in discretionary consumer spending and resulted in an increase in access line losses and a decrease in usage. Additionally, because of
cutover issues that have prevented us from executing fully on our operating plan for 2009, our revenue has continued to decline. We derive our revenues from the following sources:

Local calling services.Local calling services revenues decreased $23.6 million to $126.0 million during the second quarter of
2009
compared to the same period in 2008. This decrease is primarily due to an 11.2% decline in total voice access lines in service at June 30, 2009 compared to June 30, 2008. The revenue
decline was mainly driven by the effects of competition and technology substitution.

Access.Access revenues decreased $2.9 million to $98.5 million during the second quarter of 2009 compared to the same period
in 2008.
This decrease consisted of a $2.5 million decrease in intrastate access revenues and a $0.4 million decrease in interstate revenues, reflecting the impact of access line loss and
technology substitution.

Long distance services.Long distance services revenues decreased $14.3 million to $34.8 million in the second quarter of
2009 compared
to the same period in 2008. The decrease was primarily attributable to a decrease in the number of subscriber lines in 2009, partially offset by increased revenue from bundled product offerings
designed to retain customers and generate more revenue.

Data and Internet services.Data and Internet services revenues decreased $1.5 million to $29.1 million in the second quarter
of 2009
compared to the same period in 2008. This decrease is primarily due to a slowing in our high speed data subscriber growth, caused by an absence of promotional advertising of our data and Internet
products due to cutover issues.

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Table of Contents

Other services.Other services revenues decreased $2.8 million to $11.3 million in the second quarter of 2009 compared to the
same
period in 2008.



Cost of services and sales.Cost of services and sales decreased $11.2 million to $122.7 million in the second quarter of
2009 compared
to the same period in 2008. The decrease is primarily related to the elimination of costs under the transition services agreement with Verizon, which was terminated on January 30, 2009 (the
"TSA"). The elimination of transition services agreement costs has been partially offset by direct costs incurred by us to operate the Northern New England operations. Costs incurred under the
transition services agreement accounted for $18.9 million of cost of services and sales during the second quarter of 2008.

Selling, general and administrative.Selling, general and administrative expenses decreased $4.3 million to $98.0 million in
the second
quarter of 2009 compared to the same period in 2008. The decrease is primarily related to the elimination of costs under the transition services agreement, which has been partially offset by direct
costs incurred by us to operate the Northern New England operations as well as increased bad debt expense and costs incurred to effect a restructuring of our capital structure. Costs incurred under
the transition services agreement accounted for $30.6 million of selling, general and administrative expense during the second quarter of 2008.

Depreciation and amortization.Depreciation and amortization expense decreased $1.1 million to $68.6 million in the second
quarter of
2009 compared to the same period in 2008. Adjustments of $4.6 million related to the second quarter of 2008 were recorded in the third quarter of 2008. Excluding the impact of these
adjustments, depreciation and amortization expense would have increased $3.5 million, due primarily to increased gross plant asset balances, including capitalized software placed into service
upon termination of the TSA.



Interest expense.Interest expense increased $9.7 million to $54.8 million in the second quarter of 2009 compared to the same
period in
2008. This increase is due to the debt that we incurred subsequent to June 30, 2008. Accrued and unpaid interest on the notes exchanged in the exchange offer through July 28, 2009 was
paid on July 29, 2009 in the form of additional new notes totaling $18.9 million (or $14.4 million for the three months ended June 30, 2009). Interest expense paid in the
form of new notes has been treated as non-cash for purposes of our financial debt covenants.

Gain on derivative instruments.Gain on derivative instruments represents net gains and losses recognized on the change in fair market
value of
interest rate swap derivatives. During the three months ended June 30, 2009, we recognized non-cash gains of $7.2 million related to our derivative financial instruments.

Gain on early retirement of debt.Gain on early retirement of debt represents a $7.5 million gain recognized on the repurchase of
$12.0 million aggregate principal amount of the notes during the three months ended June 30, 2009.

Other income (expense).Other income (expense) includes non-operating gains and losses such as those incurred on sale of equipment.
Other
expense was ($0.1) million in the second quarter of 2009, compared with other income of $0.3 million in the same period in 2008.

Income taxes.The effective income tax rate is the provision for income taxes stated as a percentage of income before the provision for
income taxes.
The effective income tax rate in the second quarter of 2009 and 2008 was 40.3% benefit and 37.6% expense, respectively.

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Net income (loss).Net loss for the three months ended June 30, 2009 was ($17.8) million compared to net income of
$23.1 million for
the same period in 2008. The difference in net income (loss) between 2009 and 2008 is a result of the factors discussed above.

Six Months Ended June 30, 2009 Compared with Six Months Ended June 30, 2008

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

2009

% of
Revenues

2008

% of
RevenuesRevenues

$
611,241


100
%
$
627,104


100
%Operating expensesCost of services and sales


267,854


44


269,737


43Selling, general and administrative


190,398


31


165,406


26Depreciation and amortization


136,496


22


123,666


20Total operating expenses


594,748


97


558,809


89Income from operations


16,493


3


68,295


11Interest expense


(108,288
)

(18
)

(59,645
)

(10
)Gain on derivative instruments


20,131


3


43,123


7Gain on early retirement of debt


12,357


2





Other income


15,857


3


1,250


Income (loss) before income taxes


(43,450
)

(7
)

53,023


8Income tax (expense) benefit


16,855


3


(20,366
)

(3
)Net income (loss)

$
(26,595
)

(4)
%
$
32,657


5
%


Revenues
decreased $15.9 million to $611.2 million in 2009 compared to 2008. The acquisition of Legacy FairPoint contributed $122.9 million and $66.1 million
to total revenues in the six months ended June 30, 2009 and 2008, respectively. Excluding the impact of the merger, combined total revenue would have decreased $72.7 million. Revenues in
each of our revenue categories have been impacted by weakness in the economy during recent months which has caused a decrease in discretionary consumer spending and resulted in an increase in access
line losses and a decrease in usage. Additionally, because of cutover issues that have prevented us from executing fully on our operating plan for 2009, our revenue has continued to decline. We derive
our revenues from the following sources:

Local calling services.Local calling services revenues decreased $26.7 million to $255.0 million during the six months ended
June 30, 2009 compared to the same period in 2008. Legacy FairPoint contributed $36.6 million and $20.9 million to local revenue for the six months ended June 30, 2009 and
2008, respectively. Excluding the impact of the merger, local calling services revenues would have decreased $42.4 million compared to the prior year. This decrease is primarily due to an 11.2%
decline in total voice access lines in service at June 30, 2009 compared to June 30, 2008. The revenue decline was mainly driven by the effects of competition and technology
substitution.

Access.Access revenues increased $15.1 million to $195.6 million during the six months ended June 30, 2009 compared to
the same
period in 2008. Legacy FairPoint contributed $46.3 million and $24.0 million to access revenues for the six months ended June 30, 2009 and 2008, respectively. Excluding the impact
of the merger, access revenues would have decreased by $7.2 million. Of this decrease, $3.4 million was attributable to a decrease in interstate revenues and $3.8 million was
attributable to a decrease in intrastate revenues, reflecting the impact of access line loss and technology substitution.

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Long distance services.Long distance services revenues decreased $10.2 million to $80.1 million in the six months ended
June 30, 2009 compared to the same period in 2008. Legacy FairPoint contributed $13.8 million and $7.6 million to long distance revenues in the six months ended June 30,
2009 and 2008, respectively. Excluding the impact of the merger, long distance revenues would have decreased $16.4 million. The decrease was primarily attributable to a decrease in the number
of subscriber lines in 2009, partially offset by increased revenue from bundled product offerings designed to retain customers and generate more revenue.

Data and Internet services.Data and Internet services revenues increased $4.9 million to $57.5 million in the six months
ended
June 30, 2009 compared to the same period in 2008. Legacy FairPoint contributed $17.9 million and $9.2 million to data and Internet services revenues in the six months ended
June 30, 2009 and 2008, respectively. Excluding the impact of the merger, data and Internet services revenues would have decreased $3.8 million. This decrease is primarily due to a
slowing in our high speed data subscriber growth, caused by an absence of promotional advertising of our data and Internet products due to cutover issues.

Other services.Other services revenues increased $1.1 million to $23.0 million in the six months ended June 30, 2009
compared
to the same period in 2008. Legacy FairPoint contributed $8.3 million and $4.3 million to other services revenues in the six months ended June 30, 2009 and 2008, respectively.
Excluding the impact of the merger, other services revenues would have decreased $2.9 million.



Cost of services and sales.Cost of services and sales decreased $1.9 million to $267.9 million in the six months ended
June 30,
2009 compared to the same period in 2008. Legacy FairPoint contributed $44.9 million and $23.7 million to cost of services and sales expenses in the six months ended June 30, 2009
and 2008, respectively. Also included in cost of services and sales for the six months ended June 30, 2009 and 2008 are $6.1 million and $18.9 million, respectively, of expenses
related to the transition services agreement with Verizon, which was terminated on January 30, 2009. Excluding the impact of the merger and the transition services agreement, cost of services
and sales would have declined $10.3 million. The decline reflects the elimination of costs allocated from Verizon affiliates prior to the closing of the merger, which has more than offset
direct costs incurred by us to operate our Northern New England operations.

Selling, general and administrative.Selling, general and administrative expenses increased $25.0 million to $190.4 million in
the six
months ended June 30, 2009 compared to the same period in 2008. Legacy FairPoint contributed $42.4 million and $16.6 million to selling, general and administrative expenses in the
six months ended June 30, 2009 and 2008, respectively. Included in selling, general and administrative expenses for the six months ended June 30, 2009 and 2008 are $9.8 million
and $30.6 million, respectively, of expenses related to the transition services agreement and $28.0 million and $10.0 million, respectively, of non-recurring cutover
related costs (which we are allowed to add back to adjusted EBITDA under our credit facility). Excluding the impact of the merger and the transition services agreement, selling, general and
administrative expenses would have increased $2.0 million. The increase is primarily due to increases in bad debt expense and other operating expenses, as well as costs incurred to effect a
restructuring of our capital structure.

Depreciation and amortization.Depreciation and amortization expense increased $12.8 million to $136.5 million in the six
months ended
June 30, 2009 compared to the same period in 2008. Legacy FairPoint contributed $19.2 million and $13.8 million to depreciation and amortization expenses in the six months ended
June 30, 2009 and 2008, respectively. Adjustments of $4.6 million related to the second quarter of 2008 were recorded in the third quarter of 2008. Excluding the impact of the merger and
these adjustments, depreciation and amortization expense would have increased $12.0 million, due

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primarily
to increased gross plant asset balances, including capitalized software placed into service upon termination of the TSA. Also contributing to the increase in depreciation and amortization
expense is an increase of $5.6 million in amortization expense on intangible assets acquired in the merger, as no such amortization expense was recognized during the first quarter of 2008,
prior to the merger.



Interest expense.Interest expense increased $48.6 million to $108.3 million in the six months ended June 30, 2009
compared to
the same period in 2008. This increase is due to the debt that we incurred upon and subsequent to the closing of the merger. Accrued and unpaid interest on the notes exchanged in the exchange offer
through July 28, 2009 was paid on July 29, 2009 in the form of additional new notes totaling $18.9 million (or $14.4 million for the six months ended June 30, 2009).
Interest expense paid in the form of new notes has been treated as non-cash for purposes of our financial debt covenants.

Gain on derivative instruments.Gain on derivative instruments represents net gains and losses recognized on the change in fair market
value of
interest rate swap derivatives. During the six months ended June 30, 2009 and 2008, we recognized non-cash gains of $20.1 million and $43.1 million, respectively,
related to our derivative financial instruments.

Gain on early retirement of debt.Gain on early retirement of debt represents $13.2 million net gains recognized on the repurchase
of
$19.9 million aggregate principal amount of the notes during the six
months ended June 30, 2009, partially offset by a loss of $0.8 million attributable to writing off a portion of the unamortized debt issue costs associated with our credit facility.

Other income (expense).Other income (expense) includes non-operating gains and losses such as those incurred on sale of equipment.
Other
income increased $14.6 million to $15.9 million in the six months ended June 30, 2009 compared to the same period in 2008. The increase was primarily attributable to a
one-time gain of $15.0 million recognized in the first quarter of 2009 related to the settlement under the transition agreement.

Income taxes.The effective income tax rate is the provision for income taxes stated as a percentage of income before the provision for
income taxes.
The effective income tax rate in the six months ended June 30, 2009 and 2008 was 38.8% benefit and 38.4% expense, respectively.

Net income (loss).Net loss for the six months ended June 30, 2009 was ($26.6) million compared to net income of $32.7 million
for the
same period in 2008. The difference in net income (loss) between 2009 and 2008 is a result of the factors discussed above.



We do not have any off-balance sheet arrangements.



Our critical accounting policies are as follows:



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

Allowance for Doubtful Accounts.In evaluating the collectability 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 condensed consolidated balance sheet.

Accounting for Pension and Other Post-retirement Benefits.Some of our employees participate in our pension plans and other
post-retirement benefit plans. In the aggregate, the pension plan benefit obligations exceed the fair value of pension plan assets, resulting in expense. Other post-retirement
benefit plans have larger benefit obligations than plan assets, resulting in expense. Significant pension and other post-retirement benefit plan assumptions, including the discount rate
used, the long term rate of return on plan assets, and medical cost trend rates are periodically updated and impact the amount of benefit plan income, expense, assets and obligations.

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

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

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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 $595.1 million at June 30, 2009. We have recorded intangible assets related to the acquired companies' customer relationships and trade names of
$251.7 million as of June 30, 2009. As of June 30, 2009, there was $28.6 million of accumulated amortization recorded. These intangible assets are being amortized over a
weighted average life of approximately 9.7 years. The intangible assets are included in intangible assets on our condensed consolidated balance sheet.

We
are required to perform an impairment review of goodwill as required by SFAS No. 142,Goodwill and Other Intangible Assetsannually or when impairment indicators are noted. Goodwill impairment is determined using a two-step process. Step one compares the estimated fair value of our single wireline reporting
unit (calculated using the market approach and the income approach) to its carrying amount, including goodwill. The market approach compares our fair value, as measured by our market capitalization,
to our carrying amount, which represents our shareholders' equity balance. As of June 30, 2009, shareholders' equity totaled $1.2 million. The income approach compares our fair value, as
measured by discounted expected future cash flows, to our carrying amount. If our carrying amount exceeds our estimated fair value, there is a potential impairment and step two must be performed.

Step
two compares the implied fair value of our goodwill (i.e., our fair value less the fair value of our assets and liabilities, including identifiable intangible assets) to our
goodwill carrying amount. If the carrying amount of our goodwill exceeds the implied fair value of our goodwill, the excess is required to be recorded as an impairment.

We
performed step one of our annual goodwill impairment assessment as of October 1, 2008 and concluded that there was no indication of impairment at that time. In light of our
operating performance during the first half of 2009, which has been impacted by issues associated with the January 30, 2009 systems cutover, we performed another goodwill impairment assessment
as of June 30, 2009. After applying the impairment test at June 30, 2009, it was determined that goodwill was not impaired.

While
no impairment charges resulted from the analysis performed at June 30, 2009, impairment charges may occur in the future due to changes in our performance and future
prospects for our business, the outcome of our debt restructuring efforts, changes in estimated discount rates or other factors.

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

Purchase Accounting.Prior to the adoption of SFAS No. 141R,Business Combinations("SFAS 141R") we recognized the acquisition of companies in accordance with SFAS No. 141,Accounting for Business Combinations("SFAS 141"). The cost of an acquisition was allocated to the

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assets
acquired and liabilities assumed based on their fair values as of the close of the acquisition, with amounts exceeding the fair value being recorded as goodwill. All future business
combinations will be recognized in accordance with SFAS 141R.



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

In
March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities("SFAS 161").
SFAS 161 requires companies with derivative instruments to disclose information that should enable financial statement users to understand how and why a company uses derivative instruments, how
derivative instruments and related hedged items are accounted for under FASB Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" and how derivative instruments and
related hedged items affect a company's financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years beginning after
November 15, 2008. The adoption of SFAS 161 did not have a material impact on our results of operations and financial position.

In
May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles("SFAS 162").
SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of non-governmental entities
that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). SFAS 162 will become effective 60 days following the SEC's approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles." The adoption of SFAS 162 is
not expected to have any impact on our consolidated results of operations and financial position.

In
April 2009, the FASB issued FASB Staff Position ("FSP") No. FAS 107-1 and APB 28-1,Interim Disclosures about Fair Value
of Financial Instruments("FSP FAS 107-1"). FSP FAS 107-1 extends the disclosure requirements of SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments", to interim financial statements of publicly traded companies. FSP FAS 107-1 is effective for interim reporting periods ending after
June 15, 2009. The adoption of FSP FAS 107-1 did not have any impact on our consolidated results of operations and financial position.

In
May 2009, the FASB issued SFAS No. 165,Subsequent Events("SFAS 165"). SFAS 165 establishes principles and
requirements for identifying, recognizing and disclosing subsequent events. SFAS 165 requires that an entity identify the type of subsequent event as either recognized or unrecognized, and
disclose the date through which the entity has evaluated subsequent events. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. The adoption of
SFAS 165 did not have any impact on our consolidated results of operations and financial position.

Inflation

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

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Liquidity and Capital Resources

Our short term and long term liquidity needs arise primarily from: (i) interest and principal payments on our indebtedness;
(ii) capital expenditures, including those mandated by the state regulatory orders approving the merger; (iii) working capital requirements as may be needed to support the growth of our
business; (iv) dividend payments, if any, on our common stock; (v) obligations under our employee benefit plans; and (vi) potential acquisitions.

We
have a highly leveraged capital structure and have essentially fully drawn all borrowings available under our credit facility. In the future, we expect that our primary sources of
liquidity will be cash flow from operations and cash on hand. Because of cutover issues that have prevented us from executing fully on our operating plan for 2009, our revenue has continued to
decline. In addition, cash collections have remained below pre-cutover levels and we have incurred significant incremental costs to operate our Northern New England operations, causing
further stress on our liquidity position.

Cash
and cash equivalents at June 30, 2009 totaled $81.0 million compared to $92.5 million at March 31, 2009, excluding restricted cash of $3.4 million
and $55.2 million, respectively. During the three months ended June 30, 2009, $51.8 million was released from restricted cash, including $50.2 million released
pursuant to a letter dated May 12, 2009 from the NHPUC allowing these funds to be used for general working capital purposes. On April 1, 2009, interest payments totaling
$35.6 million were made to holders of the notes and during the three months ended June 30, 2009, debt service payments of $45.3 million were made pursuant to our credit facility.
At July 31, 2009, cash and cash equivalents was $75.6 million. We expect to make debt service payments under our credit facility totaling approximately $46.1 million during the
three months ending September 30, 2009.

In
addition, as a result of the cutover-related issues and the continuing adverse general economic conditions, prior to June 30, 2009, we believed that we were at risk of failing
to comply with the interest coverage ratio maintenance covenant in our credit facility when measured for the period ending June 30, 2009. Given that we believe that our credit facility is a
valuable asset, which we may not be able to refinance on reasonable terms, if at all, in the current lending environment, we initiated preliminary discussions with the administrative agent under our
credit facility regarding a waiver of this potential breach of the interest coverage ratio maintenance covenant for the measurement period ending June 30, 2009. At the time, the administrative
agent indicated that such a waiver would require a significant cash fee, likely result in additional restrictive provisions being placed on us and likely require us to renegotiate certain provisions
in our credit facility following the expiration of such waiver. We ultimately elected not to enter into such a waiver and instead launched the exchange offer on June 24, 2009, which exchange
offer was primarily designed to reduce our cash interest expense for the quarters ending June 30, 2009 and September 30, 2009 and to help us maintain compliance with the interest
coverage ratio maintenance covenant in our credit facility for the measurement period ending June 30, 2009.

On
July 29, 2009, we successfully consummated the exchange offer. On the settlement date, $439.6 million in aggregate principal amount of the notes (which amount was equal
to approximately 83% of the then outstanding notes) were exchanged for $458.5 million in aggregate principal amount of the new notes (which amount includes new notes issued to tendering
noteholders as payment for accrued and unpaid interest on the exchanged notes up to, but not including, the settlement date of the exchange offer). Interest expense paid in the form of new notes has
been treated as non-cash for purposes of our financial debt covenants and, in accordance with SFAS No. 6,Classification of Short Term Obligations Expected
to Be Refinanced, we have classified the June 30, 2009 balance of $14.4 million accrued interest on the exchanged notes as a non-current liability on
the condensed consolidated balance sheet. In connection with the exchange offer and the corresponding consent solicitation, we also paid a cash consent fee of $1.6 million in the aggregate to
holders of notes who

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validly
delivered and did not revoke consents in the consent solicitation prior to a specified early consent deadline.

After
giving effect to the conversion of a portion of our cash interest expense to non-cash interest expense as a result of the exchange offer, we were able to maintain
compliance with all the financial covenants contained in the credit facility as of June 30, 2009. However, we currently expect that the exchange offer may not provide a sufficient reduction in
our cash interest expense to prevent a breach of the interest coverage ratio maintenance covenant in our credit facility
for the measurement period ending September 30, 2009. In addition, we currently expect that we may be in breach of the leverage ratio maintenance covenant in our credit facility as early as the
measurement period ending September 30, 2009. If we are unable to comply with either the interest coverage ratio maintenance covenant or the leverage maintenance covenant, such failure would
constitute an event of default under our credit facility, which would permit the lenders under our credit facility to accelerate the maturity of the loans outstanding thereunder, seek foreclosure upon
any collateral securing such loans and terminate any remaining commitments to lend to us. If the lenders under our credit facility were to exercise such remedies, we do not believe that we could
refinance the credit facility on reasonable terms, or at all, in the current lending environment.

In
order to address these issues, we are developing a restructuring plan with the assistance of Rothschild. As currently contemplated, the restructuring plan will relate to our
outstanding notes and new notes and will be generally designed to (i) reduce our indebtedness and interest expense, (ii) improve our liquidity and financial and operational flexibility
in order to allow us to compete more effectively and generate long term revenue growth and (iii) help us maintain compliance with the maintenance covenants in our credit facility. We anticipate
that the restructuring plan will contemplate, among other things, an offer to exchange all of our outstanding notes and new notes for shares of our capital stock. We expect consummation of such a
transaction will be highly dilutive to our current stockholders.

In
the event that the restructuring plan is not consummated, including because noteholders fail to support the restructuring plan or we are unable to obtain stockholder approval if
required, we will consider all other restructuring alternatives available to us, which may include the commencement of an in-court resolution under chapter 11, with or without a
pre-arranged plan of reorganization. There can be no assurance that any restructuring arrangement or plan that we pursue will be successful, or what the terms thereof would be or what, if
anything, our existing debt and equity holders would receive in any restructuring, which will depend on our enterprise value, although we believe than any restructuring would be highly dilutive to our
current stockholders. In addition, we can make no assurances with respect to what the value of our debt and equity will be following the consummation of any restructuring.

On
March 4, 2009, our board of directors voted to suspend the quarterly dividend. This action was taken to increase financial flexibility and enable us to begin to focus on
strengthening our capital structure. This action was expected to improve our liquidity by approximately $93 million annually.

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

Subsequent
to the merger, we borrowed the remaining $194.5 million available under the delayed draw term loan. These funds were used for certain capital expenditures and other
expenses associated with the merger.

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On
October 5, 2008, the administrative agent under our credit facility filed for bankruptcy. The administrative agent accounted for thirty percent of the loan commitments under
our revolving credit facility. On January 21, 2009, we entered into an amendment to our credit facility under which, among other things, the administrative agent resigned and was replaced by a
new administrative agent. In addition, the resigning administrative agent's undrawn commitments under our revolving credit facility, totaling $30.0 million, were terminated and are no longer
available to us.

The
revolving credit facility has a swingline subfacility in the amount of $10.0 million and a letter of credit subfacility in the amount of $30.0 million, which allows for
issuances of standby letters of credit for our account. Our credit facility also permits interest rate and currency exchange swaps and similar arrangements that we may enter into with the lenders
under our credit facility and/or their affiliates.

As
of June 30, 2009, we had borrowed $150.0 million under our revolving credit facility and letters of credit had been issued for $17.9 million. Accordingly, as of
June 30, 2009, the remaining amount available under our revolving credit facility is $2.4 million. As of June 30, 2009, we also had pending commitments for additional letters of
credit totaling, $1.5 million.

The
term loan B facility and the delayed draw term loan will mature in March 2015 and the revolving credit facility and the term loan A facility will mature in March 2014. Each of the
term loan A facility, the term loan B facility and the delayed draw term loan are repayable in quarterly installments in the manner set forth in our credit facility.

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

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

Borrowings
under our credit facility bear interest at variable interest rates. We have entered into various interest rate swap agreements which are detailed in note 7 of the notes
to our condensed consolidated financial statements for the six months ended June 30, 2009 included in this Quarterly Report. As a result of these swap agreements, approximately 76% of our
indebtedness effectively bore interest at fixed rates rather than variable rates as of June 30, 2009. After these interest rate swap agreements expire, our annual debt service obligations on
such portion of the term loans will vary from year to year unless we enter into a new interest rate swap or purchase an interest rate cap or other interest rate hedge. To the extent interest rates
increase in the future, we may not be able to enter into new interest rate swaps or to purchase interest rate caps or other interest rate hedges on acceptable terms.

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

Upon
the consummation of the exchange offer and the corresponding consent solicitation, substantially all of the restrictive covenants in the indenture were deleted or eliminated and
certain of the events of default and various other provisions contained therein were modified.

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Pursuant
to the exchange offer, on July 29, 2009, we exchanged $439.6 million in aggregate principal amount of the notes (which amount was equal to approximately 83% of the
then outstanding notes) for $458.5 million in aggregate principal amount of the new notes (which amount includes new notes issued to tendering noteholders as payment for accrued and unpaid
interest on the exchanged notes up to, but not including, the settlement date of the exchange offer). The new notes will mature on April 2, 2018 and will bear interest at a fixed rate of
131/8%, payable in cash, except that the new notes will bear interest at a rate of 15% for the period from July 29, 2009 through and including September 30, 2009. In
addition, we are permitted to pay the interest payable on the new notes for the initial interest payment period in the form of cash, by capitalizing such interest and adding it to the principal amount
of the new notes or a combination of both cash and such capitalization of interest, at our option. Notwithstanding the foregoing, to the extent we pay the interest payable on the notes on
October 1, 2009 in cash, then we will, at our option, be required to either (i) pay interest on the new notes in cash at a rate of 131/8% for the initial interest payment
period or (ii) pay interest on the new notes by capitalizing such interest and adding it to the principal amount of the new notes at a rate of 17% per annum for the initial interest payment
period. We currently intend to make interest payments due on October 1, 2009 on the new notes by capitalizing such interest and adding it to the principal amount of the new notes.

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

The
indenture on the new notes also restricts our ability to pay dividends on or repurchase our common stock under certain circumstances.

During
the three and six months ended June 30, 2009, we repurchased $12.0 million and $19.9 million, respectively, in aggregate principal amount of the notes for an
aggregate purchase price of $4.1 million and $6.3 million, respectively, in cash. In addition, for the three and six months ended June 30, 2009, we repaid $6.3 million of
principal under the term loan A facility of our credit facility and for the three and six months ended June 30, 2009, we repaid $2.8 million and $6.1 million, respectively, of
principal under the term loan B facility of our credit facility. In total, we retired $21.1 million and $32.3 million of outstanding debt during the three and six months ended
June 30, 2009, respectively.

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

Net
cash provided by operating activities was $28.1 million and $50.3 million for the six months ended June 30, 2009 and 2008, respectively.

Net
cash used in investing activities was $89.3 million and $86.6 million for the six months ended June 30, 2009 and 2008, respectively. These cash flows primarily
reflect capital expenditures of $90.5 million and $98.3 million for the six months ended June 30, 2009 and 2008, respectively. Net cash used in investing activities also includes
acquired cash of $11.6 million for the six months ended June 30, 2008.

Net
cash provided by financing activities was $71.8 million and $47.4 million for the six months ended June 30, 2009 and 2008, respectively. For the six months ended
June 30, 2009, net proceeds from

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FairPoint's
issuance of long term debt were $50.0 million, repayment of long term debt was $18.7 million and dividends to stockholders was $23.0 million. Additionally,
$65.1 million was released from restricted cash during the six months ended June 30, 2009.

We
expect our capital expenditures will be approximately $190 million to $210 million in 2009. We anticipate that we will fund these expenditures through cash flows from
operations and cash on hand.

We
expect our contributions to our employee pension plans and post-retirement medical plans will be approximately $0.6 million in 2009.

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

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

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

We
also have the availability of $49.2 million contributed to us by the Verizon Group, and $1.1 million in interest earned thereon, to make capital and operating
expenditures in New Hampshire in addition to those described above for unexpected infrastructure improvements proposed by us and approved by the NHPUC. These funds were reflected on the Company's
March 31, 2009 balance sheet as restricted cash to be used only in accordance with a settlement agreement dated as of January 23, 2008, with certain affiliates of Verizon and the staff
of the NHPUC. During the three months ended

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June 30,
2009, we requested that these funds be made available for general working capital purposes. By letter, dated as of May 12, 2009, the NHPUC approved our request, conditioned upon
our commitment to invest funds on certain NHPUC approved network improvements in New Hampshire on the following schedule: $15 million by the end of 2010, an additional $20 million by the
end of 2011 and an additional $30 million by the end of 2012. This investment commitment is inclusive of the $50 million previously required by the NHPUC.

Additionally,
the orders issued by the state regulatory authorities in Maine, New Hampshire and Vermont in connection with their approval of the merger include a requirement that we pay
the greater of $45 million or 90% of our free cash flow (defined as the cash flow remaining after all operating expenses, interest payments, tax payments, capital expenditures, dividends and
other routine cash expenditures have occurred) annually to reduce the principal amount of our indebtedness, until certain financial ratio tests have been satisfied.

On
January 30, 2009, we entered into the transition agreement with Verizon in connection with the cutover of certain back office systems, as contemplated by the transition
services agreement. The transition services agreement and related agreements had required us to make payments totaling approximately $45.4 million to Verizon in the first quarter of 2009,
including a one-time fee of $34.0 million due at cutover, with the balance related to the purchase of certain internet access hardware. The settlement set forth in the transition
agreement resulted in a $22.7 million improvement in our cash flow for the six months ended June 30, 2009.



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, 2009 and the periods in which payments are due:

Payments Due by PeriodTotal

Less Than
1 Year

13
Years

35
Years

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

$
2,498,710

$
45,000

$
110,375

$
410,100

$
1,933,235Interest payments on long term debt obligations(b)


991,992


205,886


359,069


319,595


107,442Capital lease obligations


11,543


3,085


4,404


3,182


872Operating leases


49,349


11,735


17,455


11,933


8,226Total projected contractual obligations

$
3,551,594

$
265,706

$
491,303

$
744,810

$
2,049,775


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The
following table discloses aggregate information about our derivative financial instruments as of June 30, 2009, including the source of fair value of these instruments and
their maturities.

Fair Value of Contracts at Period EndTotal

Less than
1 year

13
years

35
years

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

$
(62,824
)

(43,438
)

(19,077
)

(309
)




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Item 3.    Quantitative and Qualitative Disclosures about Market Risk.

As of June 30, 2009, approximately 76% of our indebtedness bore interest at fixed rates or effectively at fixed rates. As of
June 30, 2009, we had total debt of $2,488 million, net of discount of $10.1 million, consisting of both fixed rate and variable rate debt with interest rates ranging from 2.938%
to 13.125% per annum, including applicable margins. As of June 30, 2009, the fair value of our debt was approximately $1,056 million, net of discount of $10.1 million. Our term
loan A facility and revolver mature in 2014, our term loan B facility and delayed draw term loan mature in 2015 and the notes mature in 2018.

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

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

Effective Date:

Notional Amount

Rate

Rate, including
applicable margin

Expiration DateFebruary 8, 2005

$130.0 Million

4.11%

6.86%

December 31, 2009April 29, 2005

$50.0 Million

4.72%

7.47%

March 31, 2012June 30, 2005

$50.0 Million

4.69%

7.44%

March 31, 2011June 30, 2006

$50.0 Million

5.36%

8.11%

December 31, 2009December 31, 2007

$65.0 Million

4.91%

7.66%

December 30, 2011December 31, 2007

$75.0 Million

5.46%

8.21%

December 31, 2010December 31, 2008

$100.0 Million

5.02%

7.77%

December 31, 2010December 31, 2009

$150.0 Million

5.65%

8.40%

December 31, 2011June 30, 2008

$100.0 Million

4.99%

7.74%

December 30, 2010June 30, 2008

$100.0 Million

4.95%

7.70%

June 30, 2010June 30, 2008

$100.0 Million

5.45%

8.20%

December 31, 2010June 30, 2008

$100.0 Million

5.30%

8.05%

December 30, 2010June 30, 2008

$100.0 Million

4.50%

7.25%

December 31, 2010June 30, 2008

$100.0 Million

4.50%

7.25%

December 31, 2010December 31, 2010

$300.0 Million

4.49%

7.24%

December 31, 2012June 30, 2008

$250.0 Million

3.25%

6.00%

December 31, 2010


At
June 30, 2009, the fair market value of these swaps is a net liability of approximately $62.8 million, of which $43.4 million has been included in other current
liabilities and $19.4 million has been included in other long term liabilities.

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

We
are also exposed to market risk from changes in the fair value of our pension plan assets. For the six months ended June 30, 2009, the actual gain on the pension plan assets
has been approximately 0.7%. Net periodic benefit cost for 2009 assumes a weighted average annualized expected return on plan assets of approximately 8.3%. Should our actual return on plan assets
continue to be significantly lower than our expected return assumption, our net periodic benefit cost will increase in future periods and we may be required to contribute additional funds to our
pension plans after 2009.

Item 4.    Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

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

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Changes in Internal Controls

In connection with the merger, we have significantly expanded our internal control over financial reporting in order to encompass the
new internal control structure associated with our Northern New England operations. Accordingly, we have developed a significant number of new processes, systems and related controls governing various
aspects of our financial reporting process, particularly relating to our Northern New England operations and the consolidation of our Northern New England operations with Legacy FairPoint's
operations. The processes we have developed include, but are not limited to, information technology, order provisioning, customer billing, payment processing, credit and collections, inventory
management, accounts payable, payroll, human resource administration, tax, general ledger accounting and external reporting.

Although
these changes have been significant, management does not believe that these changes have negatively affected our internal control over financial reporting.

With
the exception of the foregoing, there have been no changes in our internal control over financial reporting during the quarter ended June 30, 2009 that have materially
affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART IIOTHER INFORMATION

Item 1.    Legal Proceedings.

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

We
are subject to certain service quality requirements in the states of Maine, New Hampshire and Vermont. Failure to meet these requirements in any of these states may result in
penalties being assessed by the appropriate state regulatory body. As of June 30, 2009, we have recognized an estimated
liability for service quality penalties based on historical assessments. However, additional penalties may be assessed as a result of service quality issues related to the systems cutover, which could
have a material adverse effect on our financial position, results of operations and liquidity.

Item 1A.    Risk Factors.

The following risk factor is added to the risk factors previously disclosed in "Part IItem 1A. Risk Factors"
of our Annual Report on Form 10-K for the year ended December 31, 2008, as supplemented by "Part IIItem 1A. Risk Factors" of our Quarterly Report
on Form 10-Q for the quarterly period ending March 31, 2009, under the heading "Risks Related to Our Business."

If we are unable to consummate a successful restructuring of our notes, we will consider all other restructuring alternatives available to us, which may include a
chapter 11 proceeding. A chapter 11 proceeding may result in a protracted process which could disrupt our business, divert the attention of our management from the operation of our
business and the implementation of our business plan and may ultimately be unsuccessful.

If we are unable to consummate the restructuring plan we are developing which contemplates an out-of-court
restructuring, any alternative restructuring plan we pursue may include a chapter 11 proceeding. Such a proceeding would likely take substantially longer to consummate and would also require
confirmation by the bankruptcy court and would be subject to contested issues and objections from certain stakeholders, which would result in further delay. A protracted restructuring would disrupt
our business and would divert the attention of our management from the operation of our business and implementation of our business plan.

The
uncertainty surrounding a prolonged restructuring would also have other adverse effects on us. For example, it would also adversely affect:



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Moreover,
the mere filing of a "bankruptcy case," even one pursuant to a pre-arranged plan, would have an adverse effect on our business and operations.

Furthermore,
in order to successfully emerge from a chapter 11 proceeding, we would need to develop, and obtain requisite court and creditor approval of a viable chapter 11
plan of reorganization (the "chapter 11 plan"). If we were unable to obtain creditor acceptance of the chapter 11 plan or court approval of the chapter 11 plan, it is unclear
whether we would be able to reorganize our business and what, if any, distributions to holders of claims against us would ultimately receive with respect to their claims.

There
have been no other material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008 and supplemented
by our Quarterly Report on Form 10-Q for the quarterly period ending March 31, 2009.

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

On July 1, 2009, we awarded David L. Hauser, our chairman and chief executive officer, options to purchase 1,600,000 shares of
our common stock (the "stock options") and 523,810 restricted shares of our common stock (the "restricted shares"), pursuant to an employment agreement we entered into with Mr. Hauser on
June 11, 2009. The stock options were granted at an exercise price of $0.95 and will vest in three annual installments, beginning on July 1, 2010. The restricted stock will vest on
July 1, 2012. The vesting of the stock options and the restricted stock is contingent upon Mr. Hauser's continued employment with us.

We
did not receive any proceeds in connection with the issuance of the stock options and the restricted stock to Mr. Hauser. The stock options and the restricted stock were issued
pursuant to an exemption from registration provided under Section 4(2) of the Securities Act of 1933, as amended.

Item 3.    Defaults Upon Senior Securities.

Not applicable.

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

We held our annual meeting of stockholders on June 3, 2009. As of the record date for the annual meeting, there were 89,496,847
shares of our common stock outstanding. Below is a summary of the proposals voted on at the annual meeting and the outcome of such vote with respect to each proposal.

1.     The
proposal to elect Patricia Garrison-Corbin, Eugene B. Johnson and Robert A. Kennedy to our board of directors to serve as class I directors whose term will
expire in 2012 was approved with Ms. Garrison-Corbin and Messrs. Johnson and Kennedy receiving the following votes:

Votes For

Votes AgainstPatricia Garrison-Corbin


70,496,219


4,489,004Eugene B. Johnson


68,882,569


6,102,654Robert A. Kennedy


70,662,051


4,323,172


David
L. Hauser, Jane E. Newman and Michael R. Tuttle continued as our directors, serving until the 2010 annual meeting, and Claude C. Lilly, Robert S. Lilien and Thomas F. Gilbane, Jr. continued as
our directors, serving until the 2011 annual meeting.

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2.     The
proposal to ratify the appointment of Ernst & Young LLP as our independent registered accounting firm for the fiscal year ending December 31,
2009 was approved with 73,140,240 votes for, 1,478,608 votes against and 366,375 abstentions.

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 5, 2009

By:

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


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Exhibit Index

Exhibit No.

Description2.1

Agreement and Plan of Merger, dated as of January 15, 2007, by and among Verizon Communications Inc., Northern New England Spinco Inc. and FairPoint.(1)2.2

Amendment No. 1 to the Agreement and Plan of Merger, dated as of April 20, 2007, by and among Verizon Communications Inc., Northern New England Spinco Inc. and FairPoint.(1)2.3

Amendment No. 2 to the Agreement and Plan of Merger, dated as of June 28, 2007, by and among Verizon Communications Inc., Northern New England Spinco Inc. and FairPoint.(2)2.4

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

Amendment No. 4 to the Agreement and Plan of Merger, dated as of November 16, 2007, by and among Verizon Communications Inc., Northern New England Spinco Inc. and FairPoint.(4)2.6

Amendment No. 5 to the Agreement and Plan of Merger, dated as of February 25, 2008, by and among Verizon Communications Inc., Northern New England Spinco Inc. and FairPoint.(5)2.7

Distribution Agreement, dated as of January 15, 2007, by and between Verizon Communications Inc. and Northern New England Spinco Inc.(1)2.8

Amendment No. 1 to Distribution Agreement, dated as of March 30, 2007, by and between Verizon Communications Inc. and Northern New England Spinco Inc.(1)2.9

Amendment No. 2 to Distribution Agreement, dated as of June 28, 2007, by and between Verizon Communications Inc. and Northern New England Spinco Inc.(1)2.10

Amendment No. 3 to Distribution Agreement, dated as of July 3, 2007, by and between Verizon Communications Inc. and Northern New England Spinco Inc.(1)2.11

Amendment No. 4 to Distribution Agreement, dated as of February 25, 2008, by and between Verizon Communications Inc. and Northern New England Spinco Inc.(5)2.12

Amendment No. 5 to the Distribution Agreement, dated as of March 31, 2008, by and between Verizon Communications Inc. and Northern New England Spinco Inc.(6)2.13

Transition Services Agreement, dated as of January 15, 2007, by and among Verizon Information Technologies LLC, Northern New England Telephone Operations Inc., Enhanced Communications of Northern New
England Inc. and FairPoint.(1)2.14

Amendment No. 1 to the Transition Services Agreement, dated as of March 31, 2008, by and among FairPoint, Northern New England Telephone Operations LLC, Enhanced Communications of Northern New
England Inc. and Verizon Information Technologies LLC(6)2.15

Master Services Agreement, dated as of January 15, 2007, by and between FairPoint and Capgemini U.S. LLC.(1)2.16

Amendment No. 1 to Master Services Agreement, dated as of July 6, 2007, by and between FairPoint and Capgemini U.S. LLC.(3)2.17

Amendment No. 2 to Master Services Agreement, dated as of February 25, 2008, by and between FairPoint and Capgemini U.S. LLC.(5)2.18

Letter Agreement, dated as of January 17, 2008, by and between FairPoint and Capgemini U.S. LLC.(7)


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Exhibit No.

Description2.19

Amendment to Letter Agreement, dated as of February 28, 2008, by and between FairPoint and Capgemini U.S. LLC.(8)2.20

Employee Matters Agreement, dated as of January 15, 2007, by and among Verizon Communications Inc., Northern New England Spinco Inc. and FairPoint.(1)2.21

Tax Sharing Agreement, dated as of January 15, 2007, by and among FairPoint, Verizon Communications Inc. and Northern New England Spinco Inc.(9)2.22

Partnership Interest Purchase Agreement, dated as of January 15, 2007, by and among Verizon Wireless of the East LP, Cellco Partnership d/b/a Verizon Wireless and Taconic Telephone Corp.(10)2.23

Joinder Agreement, dated as of April 5, 2007, by and among Warwick Valley Telephone Company, Taconic Telephone Corp., Cellco Partnership d/b/a Verizon Wireless and Verizon Wireless of the East LP.(10)2.24

Publishing Agreement, dated as of March 31, 2008, by and between FairPoint and Idearc Media Corp.(6)2.25

Branding Agreement, dated as of March 31, 2008, by and between FairPoint and Idearc Media Corp.(6)2.26

Non-Competition Agreement, dated as of March 31, 2008, by and between FairPoint and Idearc Media Corp.(6)2.27

Listing License Agreement, dated as of March 31, 2008, by and between FairPoint and Idearc Media Corp.(6)2.28

Intellectual Property Agreement, dated as of March 31, 2008, by and between FairPoint and Verizon Communications Inc.(6)2.29

Transition Period Trademark License Agreement, dated as of March 31, 2008, by and between FairPoint and Verizon Communications Inc.(6)2.30

Transition Agreement, dated as of January 30, 2009, by and among Verizon Communications Inc., Verizon New England Inc., Verizon Information Technologies LLC, FairPoint, Northern New England
Telephone Operations LLC, Telephone Operating Company of Vermont LLC and Enhanced Communications of Northern New England Inc.(11)3.1

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

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

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

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

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

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

Indenture, dated as of March 31, 2008, by and between Northern New England Spinco Inc. and U.S. Bank National Association.(6)4.6

First Supplemental Indenture, dated as of March 31, 2008, by and between FairPoint Communications, Inc. and U.S. Bank National Association.(6)


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Exhibit No.

Description4.7

Second Supplemental Indenture, dated as of July 29, 2009, by and between FairPoint Communications, Inc. and U.S. Bank National Association.(14)4.8

Registration Rights Agreement, dated as of March 31, 2008, by and among FairPoint Communications, Inc., Banc of America Securities LLC, Lehman Brothers Inc. and Morgan Stanley & Co.
Incorporated.(6)4.9

Form of 131/8% Senior Note due 2018 (included in Exhibit 4.6).(6)4.10

Indenture, dated as of July 29, 2009, by and between FairPoint Communications, Inc. and U.S. Bank National Association.(14)4.11

Form of 131/8% Senior Note due 2018 (included in Exhibit 4.10).(14)10.1

Credit Agreement, dated as of March 31, 2008, by and among FairPoint, Northern New England Spinco Inc., Bank of America, N.A, as syndication agent, Morgan Stanley Senior Funding, Inc. and Deutsche Bank
Securities Inc., as co-documentation agents, and Lehman Commercial Paper Inc., as administrative agent and lenders party thereto.(6)10.2

Amendment, Waiver, Resignation and Appointment Agreement, dated as of January 21, 2009, by and among FairPoint, lenders party thereto, Lehman Commercial Paper Inc. and Bank of America, N.A.(15)10.3

Subsidiary Guaranty, dated as of March 31, 2008, by and among FairPoint Broadband, Inc., MJD Ventures, Inc., MJD Services Corp., S T Enterprises, Ltd., FairPoint Carrier Services, Inc.,
FairPoint Logistics, Inc. and Lehman Commercial Paper Inc.(6)10.4

Pledge Agreement, dated as of March 31, 2008, by and among FairPoint, MJD Ventures, Inc., MJD Services Corp., S T Enterprises, Ltd., FairPoint Carrier Services, Inc., FairPoint Broadband, Inc.,
 FairPoint Logistics, Inc., Enhanced Communications of Northern New England, Inc., Utilities, Inc., C-R Communications, Inc., Comerco, Inc., GTC Communications, Inc., St. Joe Communications, Inc., Ravenswood
Communications, Inc., Unite Communications Systems, Inc. and Lehman Commercial Paper Inc.(6)10.5

Deposit Agreement, dated as of March 31, 2008, by and among Northern New England Telephone Operations LLC, Telephone Operating Company of Vermont LLC and Lehman Commercial Paper Inc.(6)10.6

Amended and Restated Tax Sharing Agreement, dated as of November 9, 2000, by and among FairPoint and its Subsidiaries.(16)10.7

Amended and Restated Employment Agreement, dated as of April 1, 2008, by and between FairPoint and Eugene B. Johnson.(17)10.8

Employment Agreement, dated as of June 11, 2009, by and between FairPoint and David L. Hauser.*10.9

Registration Rights Letter Agreement, dated as of July 1, 2009, by and between FairPoint and David L. Hauser.*10.10

Change in Control and Severance Agreement, dated as of March 14, 2007, by and between FairPoint and Peter G. Nixon.(18)10.11

Change in Control and Severance Agreement, dated as of March 14, 2007, by and between FairPoint and Shirley J. Linn.(18)10.12

Change in Control and Severance Agreement, dated as of September 3, 2008, by and between FairPoint and Alfred C. Giammarino.(19)10.13

FairPoint Amended and Restated 1998 Stock Incentive Plan.(20)10.14

FairPoint Amended and Restated 2000 Employee Stock Incentive Plan.(21)


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Exhibit No.

Description10.15

FairPoint 2005 Stock Incentive Plan.(11)10.16

FairPoint Communications, Inc. 2008 Annual Incentive Plan.(22)10.17

FairPoint Communications, Inc. 2008 Long Term Incentive Plan.(22)10.18

Nonqualified Deferred Compensation Adoption Agreement.(11)10.19

Nonqualified Deferred Compensation Plan Document.(11)10.20

Form of February 2005 Restricted Stock Agreement.(23)10.21

Form of Director Restricted Stock AgreementFairPoint Communications, Inc. 2005 Stock Incentive Plan.(24)10.22

Form of Director Restricted Unit AgreementFairPoint Communications, Inc. 2005 Stock Incentive Plan.(24)10.23

Form of Non-Director Restricted Stock AgreementFairPoint Communications, Inc. 2005 Stock Incentive Plan.(25)10.24

Form of Non-Director Restricted Stock AgreementFairPoint Communications, Inc. 2008 Long Term Incentive Plan.(19)10.25

Form of Performance Unit Award Agreement 2008-2009 Award (Performance Unit Award, dated as of April 1, 2008, by and between FairPoint and Eugene B. Johnson).(17)10.26

Form of Performance Unit Award Agreement 2008-2010 Award.(22)10.27

Form of Performance Unit Award Agreement 2009-2011 Award.(27)10.28

Form of Director Restricted Unit AgreementFairPoint Communications, Inc. 2008 Long Term Incentive Plan.(17)10.29

FairPoint Communications, Inc. Restricted Stock Award Agreement, dated as of July 1, 2009, by and between FairPoint and David L. Hauser.*10.30

FairPoint Communications, Inc. Non-Qualified Stock Option Award Agreement, dated as of July 1, 2009, by and between FairPoint and David L. Hauser.*10.31

FairPoint Communications, Inc. Performance Unit Award Agreement for Performance Period Beginning July 1, 2009 and Ending December 31, 2010, dated as of July 1, 2009, by and between FairPoint and
David L. Hauser.*10.32

FairPoint Communications, Inc. Performance Unit Award Agreement for Performance Period Beginning July 1, 2009 and Ending December 31, 2011, dated as of July 1, 2009, by and between FairPoint and
David L. Hauser.*10.33

Stipulation filed with the Maine Public Utilities Commission, dated December 12, 2007.(28)10.34

Amended Stipulation filed with the Maine Public Utilities Commission dated December 21, 2007(6)10.35

Stipulation filed with the Vermont Public Service Board, dated January 8, 2008.(29)10.36

Stipulation filed with the New Hampshire Public Utilities Commission, dated January 23, 2008.(7)10.37

Letter Agreement, dated as of March 30, 2008, by and between the Staff of the New Hampshire Public Utilities Commission and Verizon Communications Inc.(6)10.38

Letter, dated as of May 12, 2009, from the Staff of the New Hampshire Public Utilities Commission to FairPoint.*14.1

FairPoint Code of Business Conduct and Ethics.(30)


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Exhibit No.

Description14.2

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

Subsidiaries of FairPoint.(26)31.1

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

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

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

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

Order of the Maine Public Utilities Commission, dated February 1, 2008.(31)99.2

Order of the Vermont Public Service Board, dated February 15, 2008.(32)99.3

Order of the New Hampshire Public Utilities Commission, dated February 25, 2008.(5)


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