**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**Forthe quarterly period ended September 30, 2006.**

**or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**Forthe transition period from                  to                  **

**CommissionFile Number 333-56365**

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**FairPoint Communications, Inc.**

(Exact Name of Registrantas Specified in Its Charter)

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

 

**(704) 344-8150**

(Registrant’s telephonenumber, including area code)

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Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes xNo o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer o            Acceleratedfiler o            Non-acceleratedfiler x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes oNo x

As of November 1,2006, there were 35,113,105 shares of the Registrant’s common stock, par value$0.01 per share, outstanding.

Documents incorporated byreference: **None**

 

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**INDEX**

|                                         | ** ** | ** **                                                                                                                            | ** ** | **Page** |
|-----------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I.  FINANCIAL INFORMATION** |       |                                                                                                                                  |       |
| Item 1.                                 |       | Financial  Statements                                                                                                                 |       | 4        |   |
|                                    |       | Condensed  Consolidated Balance Sheets as of September 30, 2006 and  December 31, 2005                                 |       | 4        |   |
|                                    |       | Condensed  Consolidated Statements of Operations for the three and nine months ended  September 30, 2006and 2005                 |       | 5        |   |
|                                    |       | Condensed  Consolidated Statements of Comprehensive Income for the three and  nine months ended September 30, 2006 and 2005 |       | 6        |   |
|                                    |       | Condensed  Consolidated Statements of Cash Flows for the nine months ended  September 30, 2006 and 2005                          |       | 7        |   |
|                                    |       | Notes  to Condensed Consolidated Financial Statements                                                                                 |       | 8        |   |
| Item 2.                                 |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                           |       | 20       |   |
| Item 3.                                 |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                           |       | 33       |   |
| Item 4.                                 |       | Controls  and Procedures                                                                                                              |       | 34       |   |
| **PART II. OTHER INFORMATION**     |       |                                                                                                                                  |       |
| Item 1.                                 |       | Legal  Proceedings                                                                                                                    |       | 35       |   |
| Item 1A.                                |       | Risk Factors                                                                                                                          |       | 35       |   |
| Item 2.                                 |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                          |       | 35       |   |
| Item 3.                                 |       | Defaults  Upon Senior Securities                                                                                                      |       | 36       |   |
| Item 4.                                 |       | Submission  of Matters to a Vote of Security Holders                                                                                  |       | 36       |   |
| Item 5.                                 |       | Other  Information                                                                                                                    |       | 36       |   |
| Item 6.                                 |       | Exhibits                                                                                                                              |       | 36       |   |
|                                    |       | Signatures                                                                                                                            |       | 37       |   |

 

2

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**PART I—FINANCIALINFORMATION**

**Cautionary NoteRegarding Forward-Looking Statements**

Some statements inthis Quarterly Report are known as “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933, or the Securities Act, and Section 21E ofthe Securities Exchange Act of 1934, or the Exchange Act. Forward-lookingstatements may relate to, among other things:

·       futureperformance generally,

·       ourdividend policy and expectations regarding dividend payments,

·       businessdevelopment activities,

·       futurecapital expenditures,

·       futureinterest expense,

·       distributionsfrom minority investments and passive partnership interests,

·       netoperating loss carry forwards,

·       technologicaldevelopments and changes in the communications industry,

·       financingsources and availability,

·       regulatorysupport payments,

·       theeffects of regulation and competition, and

·       pendinglitigation.

These forward-looking statements include, butare not limited to, statements about our plans, objectives, expectations andintentions and other statements contained in this Quarterly Report that are nothistorical facts. When used in this Quarterly Report, the words “expects,” “anticipates,”“intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressionsare generally intended to identify forward looking statements. Because theseforward-looking statements involve known and unknown risks anduncertainties, there are important factors that could cause actual results,events or developments to differ materially from those expressed or implied bythese forward-looking statements, including our plans, objectives,expectations and intentions and other factors discussed in this QuarterlyReport and in Exhibit 99.1 to our Quarterly Report on Form 10-Qfor the quarter ended March 31, 2006. You should not place undue relianceon such forward-looking statements, which are based on the informationcurrently available to us and speak only as of the date on which this QuarterlyReport was filed with the Securities and Exchange Commission, or the SEC. Weundertake no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.However, your attention is directed to any further disclosures made on relatedsubjects in our subsequent periodic reports filed with the SEC on Forms 10-K,10-Q and 8-K and Schedule 14A.

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**Item 1.**                        FinancialStatements.

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

**FAIRPOINTCOMMUNICATIONS, INC. AND SUBSIDIARIESCondensed Consolidated Balance Sheets**

| ** **                                          | ** ** | **September 30,**               | ** **  | **December 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------|-------------|-----------------------|------------|
| ** **                                          | ** ** | **2006**                             | ** **  | **2005**              | ** ** |
| ** **                                          | ** ** | **(unaudited)**                      | ** **  | ** **            | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)** | ** **  |
| **Assets**                                          | ** ** |                                 | ** **  | ** **            |       |   | ** ** |   |   |
| Current assets:                                     |       |                                 |        |                  |       |   |   |   |   |
| Cash                                                |       |                                 | $           | 4,483                 |       |   |   | $ | 5,083 |   |   |
| Accounts receivable, net                            |       |                                 | 30,894      |                  |       |   | 34,985 |   |   |
| Other                                               |       |                                 | 14,179      |                  |       |   | 9,200 |   |   |
| Deferred income tax, net                            |       |                                 | 21,655      |                  |       |   | 29,190 |   |   |
| Assets of discontinued  operations                  |       |                                 | —      |                  |       |   | 90 |   |   |
| **Total current assets**                            | ** ** |                                 | **71,211**  | ** **            |       |   | **78,548** |   |   |
| Property, plant, and  equipment, net                |       |                                 | 248,513     |                  |       |   | 242,617 |   |   |
| Investments                                         |       |                                 | 11,594      |                  |       |   | 39,808 |   |   |
| Goodwill                                            |       |                                 | 493,945     |                  |       |   | 481,343 |   |   |
| Deferred income tax, net                            |       |                                 | 40,175      |                  |       |   | 47,160 |   |   |
| Deferred charges and  other assets                  |       |                                 | 24,300      |                  |       |   | 18,663 |   |   |
| **Total assets**                                    | ** ** |                                 | **$**       | **889,738**           | ** ** |   |   | **$** | **908,139** |   |   |
| **Liabilities  and Stockholders’ Equity**      | ** ** |                                 | ** **  | ** **            |       |   | ** ** |   |   |
| Current liabilities:                                |       |                                 |        |                  |       |   |   |   |   |
| Accounts payable                                    |       |                                 | $           | 11,824                |       |   |   | $ | 12,030 |   |   |
| Dividends payable                                   |       |                                 | 13,869      |                  |       |   | 13,789 |   |   |
| Current portion of  long-term debt                  |       |                                 | 705         |                  |       |   | 677 |   |   |
| Demand notes payable                                |       |                                 | 312         |                  |       |   | 338 |   |   |
| Accrued interest payable                            |       |                                 | 542         |                  |       |   | 288 |   |   |
| Other accrued liabilities                           |       |                                 | 16,483      |                  |       |   | 20,808 |   |   |
| Liabilities of  discontinued operations             |       |                                 | 1,449       |                  |       |   | 2,495 |   |   |
| **Total current liabilities**                       | ** ** |                                 | **45,184**  | ** **            |       |   | **50,425** |   |   |
| Long-term liabilities:                              |       |                                 |        |                  |       |   |   |   |   |
| Long-term debt, net of  current portion             |       |                                 | 604,037     |                  |       |   | 606,748 |   |   |
| Deferred credits and  other long-term liabilities   |       |                                 | 6,770       |                  |       |   | 4,108 |   |   |
| **Total long-term liabilities**                     | ** ** |                                 | **610,807** | ** **            |       |   | **610,856** |   |   |
| Minority interest                                   |       |                                 | 9           |                  |       |   | 10 |   |   |
| Stockholders’ equity:                          |       |                                 |        |                  |       |   |   |   |   |
| Common stock                                        |       |                                 | 351         |                  |       |   | 350 |   |   |
| Additional paid-in  capital                         |       |                                 | 543,717     |                  |       |   | 590,131 |   |   |
| Unearned compensation                               |       |                                 | —      |                  |       |   | (6,475 | ) |   |
| Accumulated deficit                                 |       |                                 | (315,864    | )                     |       |   | (342,635 | ) |   |
| Accumulated other  comprehensive income, net        |       |                                 | 5,534       |                  |       |   | 5,477 |   |   |
| **Total stockholders’ equity**                 | ** ** |                                 | **233,738** | ** **            |       |   | **246,848** |   |   |
| **Total liabilities and stockholders’ equity** | ** ** |                                 | **$**       | **889,738**           | ** ** |   |   | **$** | **908,139** |   |   |

 

See accompanying notes to condensed consolidated financial statements

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

| ** **                                                   | ** ** | **Three months ended**               | ** ** | **Nine months ended**  | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------|------------|------------------------|------------|
| ** **                                                   | ** ** | **September 30,**               | ** ** | **September 30,** | ** ** |
| ** **                                                   | ** ** | **2006**                             | ** ** | **2005**               | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                   | ** ** | **(Dollars in thousands)** | ** ** |
| Revenues                                                     |       | $                                    | 70,700     |                   | $          | 66,038 |   | $ | 199,687 |   | $ | 192,909 |   |
| Operating expenses:                                          |       |                                 |       |                   |       |   |   |   |   |
| Operating expenses, excluding depreciation and  amortization |       | 40,362                               |       | 38,470                 |       | 112,242 |   | 106,234 |   |
| Depreciation and amortization                                |       | 12,839                               |       | 12,947                 |       | 39,826 |   | 39,063 |   |
| Total operating  expenses                                    |       | 53,201                               |       | 51,417                 |       | 152,068 |   | 145,297 |   |
| Income from  operations                                      |       | 17,499                               |       | 14,621                 |       | 47,619 |   | 47,612 |   |
| Other income (expense):                                      |       |                                 |       |                   |       |   |   |   |   |
| Net gain (loss) on sale of investments and other  assets     |       | 64                                   |       | (15                    | )          | 14,289 |   | (199 | ) |
| Interest and dividend income                                 |       | 211                                  |       | 398                    |       | 3,138 |   | 1,670 |   |
| Interest expense                                             |       | (9,969                               | )          | (10,026                | )          | (29,514 | ) | (36,584 | ) |
| Equity in net earnings of investees                          |       | 1,841                                |       | 2,716                  |       | 8,206 |   | 8,168 |   |
| Other non-operating, net                                     |       | —                               |       | —                 |       | — |   | (87,746 | ) |
| Total other  income (expense)                                |       | (7,853                               | )          | (6,927                 | )          | (3,881 | ) | (114,691 | ) |
| Income (loss)  before income taxes                           |       | 9,646                                |       | 7,694                  |       | 43,738 |   | (67,079 | ) |
| Income tax  (expense) benefit                                |       | (3,668                               | )          | (3,504                 | )          | (16,965 | ) | 87,915 |   |
| Minority interest                                            |       | (1                                   | )          | (1                     | )          | (2 | ) | (2 | ) |
| Net income                                                   |       | $                                    | 5,977      |                   | $          | 4,189 |   | $ | 26,771 |   | $ | 20,834 |   |
| Weighted average  shares outstanding:                        |       |                                 |       |                   |       |   |   |   |   |
| Basic                                                        |       | 34,651                               |       | 34,550                 |       | 34,618 |   | 31,043 |   |
| Diluted                                                      |       | 34,796                               |       | 34,590                 |       | 34,711 |   | 31,085 |   |
| Earnings per  share:                                         |       |                                 |       |                   |       |   |   |   |   |
| Basic                                                        |       | $                                    | 0.17       |                   | $          | 0.12 |   | $ | 0.77 |   | $ | 0.67 |   |
| Diluted                                                      |       | $                                    | 0.17       |                   | $          | 0.12 |   | $ | 0.77 |   | $ | 0.67 |   |

 

 

See accompanying notes to condensed consolidated financial statements

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

| ** **                                                                                                                                                                                                                                                                                                  | ** ** | **Three months ended**     | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                  | ** ** | **September 30,**               | ** ** | **September 30,**          | ** ** |
| ** **                                                                                                                                                                                                                                                                                                  | ** ** | **2006**                             | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                                                                                                                                                                                                                                  | ** ** | **(Dollars in thousands)** | ** ** |
| Net income                                                                                                                                                                                                                                                                                                  |       | $                                    | 5,977      |                            | $          | 4,189 |   | $ | 26,771 |   | $ | 20,834 |   |
| Other comprehensive  income:                                                                                                                                                                                                                                                                                |       |                                 |       |                            |       |   |   |   |   |
| Cash flow hedges:                                                                                                                                                                                                                                                                                           |       |                                 |       |                            |       |   |   |   |   |
| Change in net unrealized gain, net of tax expense of  $(3.4) million and $3.3 million as of the three months ended  September 30, 2006 and 2005, respectively, and net of tax expense of  $0.1 million and $2.2 million for the nine months ended September 30,  2006 and 2005, respectively |       | (5,610                               | )          | 5,465                           |       | 57 |   | 3,699 |   |
| Comprehensive  income                                                                                                                                                                                                                                                                                       |       | $                                    | 367        |                            | $          | 9,654 |   | $ | 26,828 |   | $ | 24,533 |   |

 

 

See accompanying notes to condensed consolidated financial statements.

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

| ** **                                                                                                  | ** ** | **Nine months ended**                                                  | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                                                  | ** ** | **September 30,**                                                           | ** ** |
| ** **                                                                                                  | ** ** | **      2006      ** | ** ** | **      2005         ** | ** ** |
| ** **                                                                                                  | ** ** | **(Dollars in thousands)**                                             | ** ** |
| Cash flows from operating activities:                                                                       |       |                                                                             |       |   |   |   |   |   |   |
| Net income                                                                                                  |       |                                                                             | $          | 26,771 |   |   |   | $ | 20,834 |   |   |
| Adjustments to reconcile net income to net cash  provided by operating activities of continuing operations: |       |                                                                             |       |   |   |   |   |   |   |
| Dividends and accretion  on shares subject to mandatory redemption                                          |       |                                                                             | —     |   |   |   | 2,362 |   |   |
| Loss on preferred stock  subject to mandatory redemption                                                    |       |                                                                             | —     |   |   |   | 9,899 |   |   |
| Deferred income taxes                                                                                       |       |                                                                             | 15,159     |   |   |   | (97,921 | ) |   |
| Amortization of debt  issue costs                                                                           |       |                                                                             | 1,200      |   |   |   | 1,458 |   |   |
| Depreciation and  amortization                                                                              |       |                                                                             | 39,826     |   |   |   | 39,063 |   |   |
| Loss on early retirement  of debt                                                                           |       |                                                                             | —     |   |   |   | 77,847 |   |   |
| Minority interest in  income of subsidiaries                                                                |       |                                                                             | 2          |   |   |   | 2 |   |   |
| Income from equity method  investments                                                                      |       |                                                                             | (8,206     | ) |   |   | (8,168 | ) |   |
| Net (gain) loss on sale  of investments and other assets                                                    |       |                                                                             | (14,289    | ) |   |   | 199 |   |   |
| Other non cash items                                                                                        |       |                                                                             | 1,403      |   |   |   | 1,575 |   |   |
| Changes in assets and liabilities arising from  operations:                                                 |       |                                                                             |       |   |   |   |   |   |   |
| Accounts receivable and  other current assets                                                               |       |                                                                             | 2,838      |   |   |   | (1,551 | ) |   |
| Accounts payable and  accrued expenses                                                                      |       |                                                                             | (4,193     | ) |   |   | (15,090 | ) |   |
| Income taxes                                                                                                |       |                                                                             | (520       | ) |   |   | 8,090 |   |   |
| Other assets/liabilities                                                                                    |       |                                                                             | (996       | ) |   |   | 226 |   |   |
| Total adjustments                                                                                           |       |                                                                             | 32,224     |   |   |   | 17,991 |   |   |
| Net cash provided by  operating activities of continuing operations                                         |       |                                                                             | 58,995     |   |   |   | 38,825 |   |   |
| Cash flows from investing activities of continuing  operations:                                             |       |                                                                             |       |   |   |   |   |   |   |
| Acquisitions of telephone  properties, net of cash acquired                                                 |       |                                                                             | (37,643    | ) |   |   | (25,730 | ) |   |
| Acquisition of  investments                                                                                 |       |                                                                             | —     |   |   |   | (12 | ) |   |
| Net capital additions                                                                                       |       |                                                                             | (25,636    | ) |   |   | (17,905 | ) |   |
| Distributions from  investments                                                                             |       |                                                                             | 7,901      |   |   |   | 7,309 |   |   |
| Net proceeds from sales  of investments and other assets                                                    |       |                                                                             | 43,416     |   |   |   | 175 |   |   |
| Other, net                                                                                                  |       |                                                                             | (183       | ) |   |   | (629 | ) |   |
| Net cash used in  investing activities of continuing operations                                             |       |                                                                             | (12,145    | ) |   |   | (36,792 | ) |   |
| Cash flows from financing  activities of continuing operations:                                             |       |                                                                             |       |   |   |   |   |   |   |
| Net proceeds from  issuance of common stock                                                                 |       |                                                                             | —     |   |   |   | 431,921 |   |   |
| Debt issue and offering  costs                                                                              |       |                                                                             | —     |   |   |   | (9,061 | ) |   |
| Proceeds from issuance of  long-term debt                                                                   |       |                                                                             | 94,450     |   |   |   | 680,709 |   |   |
| Repayments of long-term  debt                                                                               |       |                                                                             | (99,583    | ) |   |   | (883,370 | ) |   |
| Repurchase of preferred  and common stock                                                                   |       |                                                                             | —     |   |   |   | (129,278 | ) |   |
| Payment of fees and  penalties associated with early retirement of long term debt                           |       |                                                                             | —     |   |   |   | (61,037 | ) |   |
| Payment of deferred  transaction fee                                                                        |       |                                                                             | —     |   |   |   | (8,445 | ) |   |
| Proceeds from exercise of  stock options                                                                    |       |                                                                             | 24         |   |   |   | 184 |   |   |
| Dividends paid to common  stockholders                                                                      |       |                                                                             | (41,384    | ) |   |   | (21,533 | ) |   |
| Net cash provided by  (used in) financing activities of continuing operations                               |       |                                                                             | (46,493    | ) |   |   | 90 |   |   |
| Cash flows of  discontinued operations:                                                                     |       |                                                                             |       |   |   |   |   |   |   |
| Operating cash flows, net  used in                                                                          |       |                                                                             | (957       | ) |   |   | (610 | ) |   |
| Net (decrease) increase  in cash                                                                            |       |                                                                             | (600       | ) |   |   | 1,513 |   |   |
| Cash, beginning of  period                                                                                  |       |                                                                             | 5,083      |   |   |   | 3,595 |   |   |
| Cash, end of  period                                                                                        |       |                                                                             | $          | 4,483 |   |   |   | $ | 5,108 |   |   |

 

See accompanying notes to condensed consolidated financial statements

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

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

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

**(2)**          InitialPublic Offering and Other Transactions

***(a)***   General

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

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

***(b)***   Dividends

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

On September 19,2006, the Company declared a dividend totaling $13.9 million, or $0.39781 pershare of common stock, which was paid on October 18, 2006 to holders ofrecord as of October 3, 2006. In 2006, the Company has paid dividendstotaling $41.4 million, or $1.19343 per share of common stock.

**(3)**          IncomeTaxes

The Company’s accounting policy is to report incometax expense for interim reporting periods using an estimated annual effectiveincome tax rate. However, the effects of significant or unusual items are not 

8

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considered in theestimated annual effective tax rate. The tax effect of such events isrecognized in the interim period in which the event occurs.

For the three months ended September 30, 2006, theCompany recorded income tax expense of $3.7 million, resulting in aneffective rate of 38.0% compared to 45.5% for the three months ended September 30,2005.

For the nine months ended September 30, 2006, theCompany recorded income tax expense of $17.0 million, resulting in aneffective rate of 38.8%. The Company’s effective annual tax rate is estimatedto be 38.6% for 2006. For the nine months ended September 30, 2005, theCompany recorded an income tax benefit of $87.9 million. The income tax benefitand effective tax rate for the nine months ended September 30, 2005 wereprimarily impacted by unusual items occurring in 2005. Income tax benefits of$21.9 million were recognized due to the taxable loss for the nine months endedSeptember 30, 2005 which resulted primarily from additional costsassociated with the extinguishment of debt. In addition, subsequent to theinitial public offering, the Company re-evaluated its expectation of futuretaxable income and concluded that its future taxable income would be sufficientto fully utilize the benefits of net operating loss, or NOL, carryforwardsgenerated prior to the initial public offering. Therefore, the Companyrecognized an income tax benefit of $66.0 million from the reversal of thedeferred tax valuation allowance that resulted from this re-evaluation of theCompany’s expectation of generating future taxable income. The income taxbenefit also includes $1.6 million for an adjustment to record the Company’snet deferred tax assets at an expected federal income tax rate of 35%, inanticipation of higher levels of taxable income in subsequent periods.

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

**(4)**          Stock-BasedCompensation

Effective on January 1,2006, the Company adopted the provisions of SFAS 123(R). As a result of thisadoption, amounts previously included in stockholders’ equity as unearnedcompensation are included in additional paid-in capital as of September 30,2006. At September 30, 2006, the Company had $6.9 million of totalunearned compensation cost related to non-vested share-based payment arrangementsgranted under the Company’s four stock-based compensation plans. That cost isexpected to be recognized over a weighted average period of 2.2 years. Thesestock-based compensation plans are described below. Any future shareawards under any of these plans will be made using newly issued shares. Amountsrecognized in the financial statements with respect to these plans are asfollows (in thousands):

| ** **                                                 | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Amounts charged  against income, before income tax benefit |       |                                                 | $          | 752                                                 |       |   |   | $ | 567 |   |   | $ | 2,036 |   | $ | 1,659 |   |
| Amount of related  income tax benefit recognized in income |       |                                                 | 283        |                                                |       |   | 213 |   |   | 766 |   | 624 |   |
| Total net income impact                                    |       |                                                 | $          | 469                                                 |       |   |   | $ | 354 |   |   | $ | 1,270 |   | $ | 1,035 |   |

 

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

In February 1995, the Company adopted theFairPoint Communications, Inc. (formerly MJD Communications, Inc.)1995 Stock Incentive Plan (the 1995 Plan). The 1995 Plan covers officers,directors, and employees of the Company. The Company was allowed to issuequalified or nonqualified stock options to purchase up to 215,410 shares of theCompany’s Class A common stock to employees that would vest equally over 5years from the date of employment of the recipient and are exercisable duringyears 5 through 10. In 1995, the Company granted options to purchase161,596 shares at $1.32 per share. No options have been granted since 1995. Effectivein February 2005, the Company may no longer grant awards under the 1995Plan. As of January 1, 2006, only 18,013 options remained outstanding. Thelife of these options had previously been extended to May 21, 2008. In March 2006the remaining 18,013 options outstanding were exercised. The intrinsic value ofthese options on the date of exercise was $230,000, the cash received was$24,000 and the tax benefit was $87,000.

Thesestock options were granted by the Company prior to becoming a public companyand therefore the Company is accounting for these options under the prospectivemethod under SFAS 123(R). The per share weighted average fair value of stockoptions granted during 1995 was $0.69 on the date of grant using theBlack-Scholes option-pricing model. Input variables used in the modelincluded no expected dividend yield, a risk-free interest rate of 6.41%,and an estimated option life of five years. Because the Company was not publicon the date of the grant, no assumption as to the volatility of the stock pricewas made.

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

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

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

These stock options were granted by the Company priorto becoming a public company and therefore the Company is accounting for theseoptions under the prospective method under SFAS 123(R). The per share weightedaverage fair value of stock options granted under the 1998 Plan was $58.95 onthe date of grant using the Black-Scholes option-pricing model. Inputvariables used in the model included no expected dividend yield, a risk-freeinterest rate of 6.52%, and an estimated option life of 10 years. Because theCompany was not public on the date of the grant, no assumption as to thevolatility of the 

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stock price was made. Asof September 30, 2006 and December 31, 2005, options to purchase832,888 shares of common stock were outstanding with a weighted averageexercise price of $10.80.

The following tablepresents the weighted average price and contractual life information about thevarious 1998 Plan option groups outstanding at September 30, 2006.

| **Options outstanding** | ** ** | **Options exercisable** | ** ** |
|------------------------------|------------|------------------------------|------------|
| ** **                   | ** ** | **Number**                   | ** ** | ** ** | ** ** | **Aggregate** | ** ** | **Number** | ** ** |
| ** **                   | ** ** | **outstanding at**      | ** ** | **Remaining** | ** ** | **Intrinsic** | ** ** | **exercisable at** | ** ** |
| **Exercise**                 | ** ** | **September 30,**       | ** ** | **contractual** | ** ** | **Value** | ** ** | **September 30,** | ** ** |
| **price**                    | ** ** | **2006**                     | ** ** | **life (years)** | ** ** | **(in thousands)** | ** ** | **2006** | ** ** |
|                         | $          | 9.02                         |       |   |   | 756,332 |   |   |   | 1.9 |   |   |   | 6,338 |   |   |   | — |   |   |
|                         | 14.46      |                         |       |   | 29,183 |   |   |   | 2.8 |   |   |   | 86 |   |   |   | — |   |   |
|                         | 36.94      |                         |       |   | 47,373 |   |   |   | 5.3 |   |   |   | — |   |   |   | — |   |   |
|                         |       |                         |       |   | 832,888 |   |   |   |   |   |   |   | 6,424 |   |   |   | — |   |   |

 

The weighted averageremaining contractual life for the options outstanding at September 30,2006 is 2.1 years. The aggregate intrinsic value in the preceding tablerepresents the total pre-tax intrinsic value, based on the closing price of theCompany’s stock of $17.40 on September 30, 2006.

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

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

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

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

As of September 30, 2006 and December 31,2005, there were 229,388 and 240,638 options outstanding under the 2000 Plan,respectively. The options outstanding at September 30, 2006 have aweighted average exercise price of $36.94 and remaining contractual life of 6.0years. As of September 30, 

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2006, 210,499 options witha remaining contractual life of 5.9 years were exercisable with a weightedaverage exercise price of $36.94. Based upon the fair market value of the stockas of September 30, 2006 of $17.40, these options do not have anyintrinsic value.

As of September 30,2006, there were 24,310 stock units outstanding with a weighted average grantdate fair value per share of $32.51. None of these awards were vested as of September 30,2006 or December 31, 2005.

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

In February 2005, the Company adopted theFairPoint Communications, Inc. 2005 Stock Incentive Plan (the 2005 Plan). The2005 Plan provides for the grant of up to 947,441 shares of non-vested stock,stock units and stock options to members of the Company’s board of directorsand certain key members of the Company’s management. Shares granted toemployees under the 2005 Plan vest over periods ranging from three to fouryears and certain of these shares pay current dividends. At September 30,2006, up to 375,343 additional shares of common stock may be issued in thefuture pursuant to awards authorized under the 2005 Plan.

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

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

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

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

| ** **                             | ** ** | ** **      | ** ** | **Weighted**                  | ** ** |
|----------------------------------------|------------|-----------------|------------|-------------------------------|------------|
| ** **                             | ** ** | ** **      | ** ** | **average grant**        | ** ** |
| ** **                             | ** ** | **Shares**      | ** ** | **date fair value** | ** ** |
| ** **                             | ** ** | **outstanding** | ** ** | **per share**            | ** ** |
| Non-vested stock                       |       |            |       |                          |       |   |   |   |   |
| Non-vested at January 1, 2006     |       |            | 470,029    |                          |       |   | $ | 18.13 |   |   |
| Granted                                |       |            | 133,926    |                          |       |   | 15.47 |   |   |
| Vested                                 |       |            | (88,773    | )                             |       |   | 18.17 |   |   |
| Forfeited                              |       |            | (56,369    | )                             |       |   | 18.25 |   |   |
| Non-vested at  September 30, 2006 |       |            | 458,813    |                          |       |   | 17.33 |   |   |
|                                        |            |                 |            |                               |            |  |  |  |  |  |

 

**(5)**          DiscontinuedOperations and Restructure Charges

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

Netliabilities of discontinued competitive communications operations as of September 30,2006 and December 31, 2005 were $1.4 million and $2.4 million,respectively. The remaining restructuring accrual at September 30, 2006was $0.3 million, and is primarily associated with remaining equipment andlease obligations.

**(6)**          InterestRate Swap Agreements

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

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TheCompany uses variable and fixed-rate debt to finance its operations,capital expenditures and acquisitions. The variable-rate debt obligationsexpose the Company to variability in interest payments due to changes ininterest rates. The Company believes it is prudent to limit the variability ofa portion of its interest payments. To meet this objective, the Company entersinto interest rate swap agreements to manage fluctuations in cash flowsresulting from interest rate risk. These swaps change the variable-ratecash flow exposure on the debt obligations to fixed cash flows. Under the termsof the interest rate swaps, the Company pays a variable interest rate plus anadditional payment if the variable rate payment is below a contractual rate, orit receives a payment if the variable rate payment is above the contractualrate. The chart below provides details of each of the Company’s interest rateswap agreements.

| **Effective Date:** | ** ** | ** ** | ** **    | **Notional Amount** | ** ** | **Rate** | ** ** | **Rate, including  applicable margin** | ** ** | **Expiration Date** | ** **              |
|--------------------------|------------|------------|---------------|--------------------------|------------|----------|------------|--------------------------------------------------|------------|--------------------------|-------------------------|
| February 8,  2005   |       | $          | 130.0 Million |                     | 3.76       | %        |       | 5.51                                             | %          |                     | December 31,  2007 |   |
| February 8, 2005    |       | $          | 130.0 Million |                     | 3.98       | %        |       | 5.73                                             | %          |                     | December 31, 2008  |   |
| February 8, 2005    |       | $          | 130.0 Million |                     | 4.11       | %        |       | 5.86                                             | %          |                     | December 31, 2009  |   |
| April 29, 2005      |       | $          | 50.0 Million  |                     | 4.72       | %        |       | 6.47                                             | %          |                     | March 31, 2012     |   |
| June 30, 2005       |       | $          | 50.0 Million  |                     | 4.69       | %        |       | 6.44                                             | %          |                     | March 31, 2011     |   |
| June 30,  2006      |       | $          | 50.0 Million  |                     | 5.36       | %        |       | 7.11                                             | %          |                     | December 31,  2009 |   |

 

As a result of these swap agreements, as of September 30,2006, approximately 90% of the Company’s indebtedness bore interest at fixedrates rather than variable rates. Effective on September 30, 2005, theCompany amended the terms of its credit facility. This amendment reduced theeffective interest rate margins applicable to the Company’s interest rate swapagreements by 0.25% to 1.75%.

These interest rate swapsqualify as cash flow hedges for accounting purposes. The effect of hedgeineffectiveness on net earnings was insignificant for the three and nine monthsended September 30, 2006. At September 30, 2006, the fair marketvalue of these swaps was approximately $8.9 million and has been recorded,net of tax of $3.4 million, as an increase in comprehensive income. Of the$8.9 million, $5.3 million has been included in other current assetsand $3.6 million has been included in other long-term assets.

**(7)**          Investments

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

| ** **                          | ** ** | **June 30,2006** | ** ** | **December 31,2005** | ** ** |
|-------------------------------------|------------|-----------------------|------------|---------------------------|------------|
| Current assets                      |       | $                     | 14,115     |                      |       | $ | 9,812 |   |   |
| Property, plant  and equipment, net |       | 38,453                |       |                      | 37,516     |   |   |
| Total assets                        |       | $                     | 52,568     |                      |       | $ | 47,328 |   |   |
| Total liabilities                   |       | $                     | 1,100      |                      |       | $ | 432 |   |   |
| Partners’ capital              |       | 51,468                |       |                      | 46,896     |   |   |
|                                |       | $                     | 52,568     |                      |       | $ | 47,328 |   |   |

 

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| ** **       | ** ** | **Three months  ended  June 30,** | ** ** | **Nine months  ended  June 30,** | ** ** |
|------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **       | ** ** | **2006**                                    | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues         |       | $                                           | 42,588     |                                       | $          | 43,302 |   | $ | 131,282 |   | $ | 123,946 |   |
| Operating income |       | 32,891                                      |       | 33,565                                     |       | 103,769 |   | 100,922 |   |
| Net income       |       | 33,159                                      |       | 33,782                                     |       | 104,548 |   | 101,511 |   |
|                  |            |                                             |            |                                            |            |  |  |  |  |  |  |  |  |

 

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

On August 4, 2005, the Board of Directors of theRural Telephone Bank, or RTB, approved the liquidation and dissolution of theRTB. As part of such liquidation and dissolution, all RTB loans were to betransferred to the Rural Utilities Service and all shares of the RTB’s Class AStock, Class B Stock and Class C Stock were to be redeemed at parvalue. The Company had no outstanding loans with the RTB but owned 2,477,493 sharesof Class B Stock and 24,380 shares of Class C Stock. This liquidationwas completed in April 2006, and, as a result, the Company receivedproceeds of $26.9 million from the RTB liquidation. The Company recorded a gainon this investment of approximately $4.1 million in the second quarter of 2006.Some portion of the proceeds received from the RTB, while not estimable at thistime, may be subject to review by regulatory authorities who may require us torecord a portion thereof as a regulatory liability. In October 2006, theCompany was notified that the state of Washington opened a docket to review theproceeds received by companies from the RTB in that state. At this time, theCompany can not determine the impact of this review.

On May 1, 2006, theCompany completed the sale of its investment in Southern Illinois CellularCorp., or SICC, from which it received total proceeds of $16.9 million. As partof this sale, the Company received a portion of total proceeds, approximately$2.1 million, in the form of a dividend. In addition to the dividend income of$2.1 million, the Company recorded a gain on this investment of approximately$10.2 million in the second quarter of 2006. Additional proceeds ofapproximately $2.6 million will be held in escrow and the Company will notrecord the gain on this portion of the transaction until the proceeds arereceived.

**(8)**          LongTerm Debt

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

| ** **                                                                                                                        | ** ** | **September 30,  2006** | ** ** | **December 31,2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------|------------|
| ** **                                                                                                                        | ** ** | **(In thousands)**      | ** ** |
| Senior secured  notes (credit facility), variable rates ranging from 7.25% to 9.25% at  September 30, 2006, due 2011 to 2012 |       |                         | $          | 600,090                   |       |   |   | $ | 602,275 |   |   |
| Senior notes,  11.875%, due 2010                                                                                                  |       |                         | 2,050      |                      |       |   | 2,050 |   |   |
| Senior notes to  RTFC, fixed rate, ranging from 8.2% to 9.2%, due 2009 to 2014                                               |       |                         | 2,602      |                      |       |   | 3,100 |   |   |
| Total outstanding long-term debt                                                                                                  |       |                         | 604,742    |                      |       |   | 607,425 |   |   |
| Less current  portion                                                                                                             |       |                         | (705       | )                         |       |   | (677 | ) |   |
| Total long-term  debt, net of current portion                                                                                     |       |                         | $          | 604,037                   |       |   |   | $ | 606,748 |   |   |

 

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Theapproximate aggregate maturities of long-term debt for each of the five yearssubsequent to September 30, 2006 are as follows (in thousands): 

| **Year ending September 30,** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|
| 2007                               |       | $          | 705        |   |
| 2008                               |       | 743        |       |
| 2009                               |       | 307        |       |
| 2010                               |       | 2,208      |       |
| 2011                               |       | 11,758     |       |
| Thereafter                         |       | 589,021    |       |
|                               |       | $          | 604,742    |   |

 

The Company has entered into a credit facilityconsisting of a revolving facility in an aggregate principal amount of up to$100.0 million and a term facility in an aggregate principal amount of$588.5 million. As of September 30, 2006, the Company had borrowedthe entire $588.5 million available under the term facility and had $11.6million outstanding under the revolving facility.

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

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

The credit facility requires certain mandatoryprepayments, including first to prepay outstanding term loans under the creditfacility and, thereafter, to repay loans under the revolving facility and/or toreduce revolving facility commitments with, subject to certain conditions andexceptions, 100% of the net cash proceeds the Company receives from any sale,transfer or other disposition of any assets (subject to certain reinvestmentelection provisions and excluded assets sales), 100% of net casualty insuranceproceeds and 100% of the net cash proceeds the Company receives from theissuance of permitted securities and, at certain times if the Company is notpermitted to pay dividends, with 50% of the increase in the Company’sCumulative Distributable Cash (as defined in the credit facility) during theprior fiscal quarter. Reductions to the revolving commitments under the creditfacility from the foregoing recapture events will not reduce the revolvingcommitments under the credit facility below $50.0 million.

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

The credit facilityrequires that the Company maintain certain financial covenants. The creditfacility contains customary affirmative covenants, including, withoutlimitation, the following tests: a minimum interest coverage ratio equal to orgreater than 3.0:1 and a maximum leverage ratio equal to or less than 5.25:1.The credit facility also contains negative covenants and restrictions,including, among others, with respect to redeeming and repurchasing otherindebtedness, loans and investments, additional indebtedness, liens, capitalexpenditures, changes in the nature of the Company’s business, mergers, 

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acquisitions,asset sales and transactions with the Company’s affiliates. The credit facilityrestricts the Company’s ability to declare and pay dividends on its commonstock as follows:

·       TheCompany may use its cumulative distributable cash to pay dividends,but may not in general pay dividends in excess of the amount of itscumulative distributable cash. “Cumulative distributable cash” is defined inthe credit facility as the amount of “available cash” generated beginning on April 1,2005 through the end of the Company’s most recent fiscal quarter for whichfinancial statements are available and a compliance certificate has beendelivered (a) minus the aggregate amount of dividends paid after July 30,2005 and the aggregate amount of investments made after April 1, 2005using such cash, (b) plus the aggregate amount of distributions receivedfrom such investments (not to exceed the amount originally invested). “Availablecash” is defined in the credit facility as Adjusted EBITDA (a) minus (i) cashinterest expense (adjusted for amortization, swap interest and dividends andaccretion on series A preferred stock), (ii) scheduled principal paymentson indebtedness, (iii) capital expenditures, (iv) investments, (v) cashincome taxes, and (vi) non-cash items excluded from Adjusted EBITDA andpaid in cash and, (b) plus (i) the cash amount of any extraordinarygains and gains realized on asset sales other than in the ordinary course ofbusiness and (ii) cash received on account of non-cash gains and non-cashincome excluded from Adjusted EBITDA. “Adjusted EBITDA” is defined in thecredit facility as Consolidated Net Income (which is defined in the creditfacility and includes distributions from investments) (a) plus thefollowing to the extent deducted from Consolidated Net Income: provision forincome taxes, consolidated interest expense, depreciation, amortization, losseson sales of assets and other extraordinary losses, and certain other non-cashitems, each as defined, (b) minus gains on sales of assets and otherextraordinary gains and all non-cash items increasing Consolidated Net Income.

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

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

The Company may obtain letters of credit under therevolving facility to support obligations of the Company and/or obligations ofits subsidiaries incurred in the ordinary course of business in an aggregateprincipal amount not to exceed $10.0 million and subject to limitations onthe aggregate amount outstanding under the revolving facility. As of September 30,2006, a letter of credit had been issued for $1.4 million.

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

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Thecredit facility contains customary events of default, including but not limitedto, failure to pay principal, interest or other amounts when due, breach ofcovenants or representations, cross-defaults to certain otherindebtedness in excess of specified amounts, judgment defaults in excess ofspecified amounts, certain ERISA defaults, the failure of any guaranty orsecurity document supporting the credit facility and certain events ofbankruptcy and insolvency.

**(9)**          EarningsPer Share

Earnings per share has been computed in accordancewith SFAS No. 128, *Earnings Per Share*.Basic earnings per share is computed by dividing net income by the weightedaverage number of shares of common stock outstanding for the period. Exceptwhen the effect would be anti-dilutive, the diluted earnings per sharecalculation calculated using the treasury stock method includes the impact ofstock units, shares of non-vested common stock and shares that could be issuedunder outstanding stock options. For the three and nine months ended September 30,2006 and September 30, 2005, diluted weighted average shares of commonstock outstanding included 144,760 and 92,881 shares, respectively, associatedwith outstanding stock options and non-vested stock and stock units.

Thenumber of potential shares of common stock excluded from the calculation ofdiluted net income per share, prior to the application of the treasury stockmethod, is as follows (in thousands):

| ** **                                         | ** ** | **Three months  ended  September 30,** | ** ** | **Nine months  ended  September 30,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                         | ** ** | **2005**                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Contingent stock  options                          |       | 833                                              |       | 833                                             |       | 833 |   | 833 |   |
| Shares excluded as  effect would be anti-dilutive: |       |                                             |       |                                            |       |   |   |   |   |
| Stock options                                      |       | 229                                              |       | 242                                             |       | 229 |   | 241 |   |
| Restricted stock                                   |       | 432                                              |       | 452                                             |       | 482 |   | 471 |   |
| Restricted stock units                             |       | 28                                               |       | 30                                              |       | 36 |   | 34 |   |
| Total                                              |       | 1,522                                            |       | 1,557                                           |       | 1,580 |   | 1,579 |   |

 

**(10)**   SubsequentEvent

On October 26, 2006,the Company announced a reorganization of its customer sales and servicesoperations. The reorganization will result in additional charges to income fromoperations of approximately $0.3 million in the fourth quarter of 2006.

**(11)**   Acquisitions

On August 17, 2006, the Company completed the purchaseof Unite Communications Systems, Inc., or Unite, for approximately $11.5million (or $8.9 million net of cash acquired and debt assumed), subject toadjustment. The Company incurred acquisition costs of $40,000. Unite owns ExOpof Missouri, Inc., which is a facilities-based voice, data and videoservice provider located outside of Kansas City, Missouri. Unite servesapproximately 4,200 access lines in Kearney and Platte City, Missouri.

The Unite acquisition has been accounted for using thepurchase method of accounting for business combinations and, accordingly, theacquired assets and liabilities have been recorded at their estimated fairvalues as of the date of acquisition, and its results of operations have beenincluded in the Company’s consolidated financial statements from the date ofacquisition. Based upon the Company’s preliminary purchase price allocation,subject to final determination of the working capital adjustment and finalsettlement of an escrow (for potential contingent liabilities), the excess ofthe purchase price and acquisition costs over the fair value of the netidentifiable assets acquired was approximately $5.7 million. The Companyrecorded an intangible asset related to the acquired company’s customerrelationships of 

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$2.9 million and theremaining $2.8 million has been recognized as goodwill. The estimated usefullife of the $2.9 million intangible asset is 15 years.

On July 26,2006, the Company completed the purchase of the assets of Cass County TelephoneCompany Limited Partnership and LEC Long Distance, Inc., or Cass County,for approximately $33.0 million (or $28.8 million net of liabilities assumed),subject to adjustment. The Company incurred acquisition costs of $0.2 million. CassCounty served approximately 8,600 access line equivalents, as of the date ofacquisition, in Missouri and Kansas. The acquisition of the assets of CassCounty has been accounted for using the purchase method of accounting forbusiness combinations and, accordingly, the acquired assets and liabilitieshave been recorded at their estimated fair values as of the date ofacquisition, and its results of operations have been included in the Company’sconsolidated financial statements from the date of acquisition. Based upon theCompany’s preliminary purchase price allocation, subject to final determinationof the working capital adjustment and final settlement of an escrow (forpotential contingent liabilities), the excess of the purchase price andacquisition costs over the fair value of the net identifiable assets acquiredwas approximately $14.1 million. The Company recorded an intangible assetrelated to the acquired company’s customer relationships of $5.3 million andthe remaining $8.8 million has been recognized as goodwill. The estimateduseful life of the $5.3 million intangible asset is 15 years.

**(12)**   Litigation

On June 6, 2005, a purported class actioncomplaint was filed in the General Court of Justice, Superior Court Division,of the State of North Carolina by Robert Lowinger on behalf of himself and allother similarly situated persons against the Company, the Company’s Chairmanand Chief Executive Officer, certain of the Company’s current and formerdirectors and certain of the Company’s stockholders. The complaint allegesviolations of Sections 11 and 12(a)(2) and liability under Section 15of the Securities Act, and alleges that the Company’s registration statement onForm S-1 (which was declared effective by the SEC on February 3,2005) and the related prospectus dated February 3, 2005, each relating tothe Company’s initial public offering of common stock, contained certainmaterial misstatements and omitted certain material information necessary to beincluded relating to the Company’s broadband products and access line trends.The plaintiff, who has been a plaintiff in several prior securities cases,seeks rescission rights and unspecified damages on behalf of a purported classof purchasers of the common stock “issued pursuant and/or traceable to theCompany’s IPO during the period from February 3, 2005 through March 21,2005”. The Company removed the action to Federal Court. The plaintiff filed amotion to remand the action to the North Carolina State Court, which was deniedby the Federal Magistrate. The plaintiff has objected to and appealed theMagistrate’s decision to the District Court Judge. The Company has contestedthe appeal and filed a Motion to Dismiss the action. The Magistrate, on February 9,2006, issued a Memorandum and a Recommendation to the District Court Judge thatthe Motion to Dismiss be granted and that the complaint be dismissed withprejudice. The plaintiff has filed a Notice of Objection to the Magistrate’sRecommendation. Both the appeal of denial of the Motion to Remand and theMotion to Dismiss are pending before the District Court Judge. The Companybelieves that this action is without merit and intends to continue to defendthe litigation vigorously.

From time to time, the Company is involved inlitigation and regulatory proceedings arising out of its operations. Managementbelieves that the Company is not currently a party to any legal proceedings,the adverse outcome of which, individually or in the aggregate, would have amaterial adverse effect on the Company’s financial position or results ofoperations.

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

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

**Overview**

We are a leading provider of communications servicesin rural communities, offering an array of services, including local and longdistance voice, data, Internet and broadband product offerings. We are one ofthe largest telephone companies in the United States focused on serving ruralcommunities and we are the 14th largest local telephone company, in each casebased on number of access lines. We operate in 18 states with 308,858 accessline equivalents (including voice access lines and high speed data lines, orHSD, which include digital subscriber lines, or DSL, wireless broadband andcable modems) in service as of September 30, 2006.

We were incorporated in February 1991 for thepurpose of acquiring and operating local exchange carriers in rural markets.Since 1993, we have acquired 34 such businesses, 30 of which we continue to ownand operate. Many of our telephone companies have served their respectivecommunities for over 75 years. The majority of the rural communities weserve have fewer than 2,500 access lines. All of our telephone companiesqualify as rural local exchange carriers under the Telecommunications Act of1996, or the Telecommunications Act.

Rural local exchange carriers generally arecharacterized by stable operating results and strong cash flow margins andoperate in supportive regulatory environments. In particular, existing stateand federal regulations permit us to charge rates that enable us to recover ouroperating costs, plus a reasonable rate of return on our invested capital (asdetermined by relevant regulatory authorities). Competition is typicallylimited because rural local exchange carriers primarily serve sparselypopulated rural communities with predominantly residential customers, and thecost of operations and capital investment requirements for new entrants ishigh. As a result, in our markets, while we have experienced some voicecompetition from cable providers, it has been limited and we have experiencedlimited wireline competition. We also are subject to competition from wirelessand various other technologies which may increase in the future. If competitionwere to increase, the originating and terminating access revenues we receive maybe reduced as a result of wireless, voice over internet protocol, or VOIP, orother new technology utilization. We periodically negotiate interconnectionagreements with other telecommunications providers which could ultimatelyresult in increased competition in those markets.

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

During the third quarter of 2006, we completed theconversion of all access lines previously billed on the ICMS platform to theMACC Customer Master platform (approximately 65% of total access lineequivalents). The conversion of the remaining companies is expected to becompleted by early 2007.

Our board of directors has adopted a dividend policywhich reflects our judgment that our stockholders would be better served if wedistributed a substantial portion of the cash generated by our 

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business in excess ofoperating needs, interest and principal payments on our indebtedness, dividendson future senior classes of our capital stock, if any, capital expenditures,taxes and future reserves, if any, as regular quarterly dividend payments tothe holders of our common stock, rather than retained and used for otherpurposes.

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

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

**Revenues**

We derive ourrevenues from:

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

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

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

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

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

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

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

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

| ** **                                  | ** ** | **Revenues**                                         | ** ** | **% of Revenues**                         | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                  | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
| ** **                                  | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Revenue Source**                          | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Local calling  services                     |       | $                                                    | 16,984     |                                                | $          | 16,586 |   | $ | 49,875 |   | $ | 48,185 |   |   | 24 | % |   |   | 25 | % |   |   | 25 | % |   |   | 25 | % |   |
| Universal service  fund-high cost loop |       | 5,116                                                |       | 5,045                                               |       | 14,666 |   | 14,548 |   |   | 7 | % |   |   | 8 | % |   |   | 7 | % |   |   | 8 | % |   |
| Interstate access  revenues                 |       | 19,399                                               |       | 17,697                                              |       | 53,624 |   | 54,660 |   |   | 28 | % |   |   | 27 | % |   |   | 27 | % |   |   | 28 | % |   |
| Intrastate access  revenues                 |       | 10,150                                               |       | 10,227                                              |       | 28,015 |   | 29,844 |   |   | 14 | % |   |   | 15 | % |   |   | 14 | % |   |   | 15 | % |   |
| Long distance  services                     |       | 6,525                                                |       | 5,694                                               |       | 17,553 |   | 15,174 |   |   | 9 | % |   |   | 9 | % |   |   | 9 | % |   |   | 8 | % |   |
| Data and Internet  services                 |       | 7,120                                                |       | 6,230                                               |       | 20,693 |   | 17,759 |   |   | 10 | % |   |   | 9 | % |   |   | 10 | % |   |   | 9 | % |   |
| Other services                              |       | 5,406                                                |       | 4,559                                               |       | 15,261 |   | 12,739 |   |   | 8 | % |   |   | 7 | % |   |   | 8 | % |   |   | 7 | % |   |
| Total                                       |       | $                                                    | 70,700     |                                                | $          | 66,038 |   | $ | 199,687 |   | $ | 192,909 |   |   | 100 | % |   |   | 100 | % |   |   | 100 | % |   |   | 100 | % |   |

 

**Operating Expenses**

Our operatingexpenses are categorized as operating expenses and depreciation andamortization.

·       Operatingexpenses include cash expenses incurred in connection with the operation of ourcentral offices and outside plant facilities and related operations. Inaddition to the operational costs of owning and operating our own facilities,we also purchase long distance services from the regional bell operatingcompanies, large independent telephone companies and third party long distanceproviders. In addition, our operating expenses include expenses relating tosales and marketing, customer service and administration and corporate andpersonnel administration. Also included in operating expenses are non-cashexpenses related to stock based compensation. Stock based compensation consistsof compensation charges incurred in connection with the employee stock options,stock units and non-vested stock granted to our executive officers anddirectors.

·       Depreciation and amortizationincludes depreciation of our communications network and equipment.

**Acquisitions**

We intend tocontinue to pursue selective acquisitions:

·       OnSeptember 13, 2006, the Company and certain subsidiaries entered into anAgreement and Plan of Merger with The Germantown Independent Telephone Company,or GITC. On October 16, 2006, we announced that the shareholders of GITCapproved the merger. The merger consideration is $10.2 million. Thistransaction is expected to close in the fourth quarter of 2006. GITC is asingle exchange rural incumbent local exchange carrier located in the Villageof Germantown, Ohio, serving approximately 4,400 access line equivalents. Werefer to this merger herein as the GITC merger.

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·       OnAugust 17, 2006, we completed the purchase of Unite for approximately$11.5 million (or $8.9 million net of cash acquired and debt assumed), subjectto adjustment. Unite owns ExOp of Missouri, Inc., which is afacilities-based voice, data and video service provider located outside ofKansas City, Missouri. Unite serves approximately 4,200 access lines in Kearneyand Platte City, Missouri, approximately 50 miles north of the Cass Countyservice territory.

·       OnJuly 26, 2006, we completed the purchase of the assets of Cass County, forapproximately $33.0 million (or $28.8 million net of liabilities assumed),subject to adjustment. Cass County served approximately 8,600 access lineequivalents, as of the date of acquisition, in Missouri and Kansas.

·       OnMay 2, 2005, we completed the acquisition of Berkshire TelephoneCorporation, or Berkshire, for a purchase price of approximately$20.3 million (or $16.4 million net of cash acquired). Berkshire is anindependent local exchange carrier that provides voice communication, cable andinternet services to over 7,200 access line equivalents, as of the date ofacquisition, serving five communities in New York State. Berkshire’s communitiesof service are adjacent to those of Taconic Telephone Corp., one of the Company’ssubsidiaries.

·       OnSeptember 1, 2005, we completed the acquisition of BentleyvilleCommunications Corporation, or Bentleyville, for a purchase price ofapproximately $11.0 million (or $9.3 million net of cash acquired).Bentleyville, which had approximately 3,600 access line equivalents as of thedate of acquisition, provides telecommunications, cable and internet servicesto rural areas of Southwestern Pennsylvania which are adjacent to our existingoperations in Pennsylvania.

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

**Results ofOperations**

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

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**Three Months Ended September 30, 2006 Comparedwith Three Months Ended September 30, 2005**

| ** **                                               | ** ** | **Three months ended  September 30,** | ** ** | **Three months ended  September 30,** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                             | ** ** | **% of revenue**                           | ** ** | **2005** | ** ** | **% of revenue** | ** ** |
| ** **                                               | ** ** | **(in thousands)**                              | ** ** |
| Revenues                                                 |       | $                                                    | 70,700     |                                                 |       | 100.0 | % |   | $ | 66,038 |   |   | 100.0 | % |   |
| Operating expenses                                       |       | 40,362                                               |       |                                                 | 57.1       | % |   | 38,470 |   |   | 58.3 | % |   |
| Depreciation and  amortization                           |       | 12,839                                               |       |                                                 | 18.1       | % |   | 12,947 |   |   | 19.6 | % |   |
| Total operating  expenses                                |       | 53,201                                               |       |                                                 | 75.2       | % |   | 51,417 |   |   | 77.9 | % |   |
| Income from  operations                                  |       | 17,499                                               |       |                                                 | 24.8       | % |   | 14,621 |   |   | 22.1 | % |   |
| Net gain (loss) on sale of investments and other  assets |       | 64                                                   |       |                                                 | 0.1        | % |   | (15 | ) |   | (0.0 | )% |   |
| Interest and  dividend income                            |       | 211                                                  |       |                                                 | 0.3        | % |   | 398 |   |   | 0.6 | % |   |
| Interest expense                                         |       | (9,969                                               | )          |                                                 | (14.1      | )% |   | (10,026 | ) |   | (15.2 | )% |   |
| Equity in net  earnings of investees                     |       | 1,841                                                |       |                                                 | 2.6        | % |   | 2,716 |   |   | 4.1 | % |   |
| Total other income (expense)                             |       | (7,853                                               | )          |                                                 | (11.1      | )% |   | (6,927 | ) |   | (10.5 | )% |   |
| Income before income taxes                               |       | 9,646                                                |       |                                                 | 13.7       | % |   | 7,694 |   |   | 11.6 | % |   |
| Income tax  expense                                      |       | (3,668                                               | )          |                                                 | (5.2       | )% |   | (3,504 | ) |   | (5.3 | )% |   |
| Minority interest  in income of subsidiaries             |       | (1                                                   | )          |                                                 | (0.0       | )% |   | (1 | ) |   | (0.0 | )% |   |
| Net income                                               |       | $                                                    | 5,977      |                                                 |       | 8.5 | % |   | $ | 4,189 |   |   | 6.3 | % |   |

 

**Revenues**

*Revenues.**  *Revenues increased$4.7 million to $70.7 million in 2006 compared to $66.0 millionin 2005. Excluding the impact of acquired operations, revenues increased $1.6million compared to the third quarter of 2005. We derived our revenues from thefollowing sources:

*Localcalling services.**  *Localcalling service revenues increased $0.4 million to $17.0 million in 2006compared to $16.6 million in 2005. Excluding the impact of acquired operations,local calling service revenues decreased $0.5 million compared to the thirdquarter of 2005. Voice access lines, including lines acquired, increased 1.2%from the third quarter of 2005. Voice access lines, excluding acquired lines,decreased 3.5% from the third quarter of 2005.

*UniversalService Fund high cost loop.**  *Universal Service Fund high cost loop receiptsincreased $0.1 million to $5.1 million in the third quarter of 2006compared to the third quarter of 2005. Excluding the impact of acquiredoperations, universal service fund revenues decreased $0.2 million compared tothe third quarter of 2005.

*Interstateaccess revenues.**  *Interstateaccess revenues were $19.4 million for the three months ended September 30,2006 compared to $17.7 million for the three months ended September 30,2005. Excluding the impact of acquired companies, interstate access revenuesincreased $0.8 million compared to 2005. This increase is primarily the resultof revenue requirement factors adjusted based on recent cost study filings. Theseoccur periodically in the normal course of business.

*Intrastateaccess revenues.**  *Intrastateaccess revenues decreased $0.1 million to $10.2 million for the threemonths ended September 30, 2006. Excluding the impact of acquiredcompanies, intrastate access revenues decreased $0.4 million compared to 2005. Intrastateaccess revenue declined primarily due to a decrease in access rates and adecrease in minutes of use compared to the third quarter of 2005. Intrastateaccess revenues are expected to continue to decline.

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*Longdistance services.**  *Longdistance services revenues increased $0.8 million from $5.7 millionin 2005 to $6.5 million in 2006. This is attributable to the increase insubscribers and minutes related to bundles and packages sold to our existingcustomers. Interstate long distance penetration as of September 30, 2006was 45.6% of voice access lines as compared to 42.3% as of September 30,2005.

*Dataand Internet services.**  *Dataand Internet services revenues increased $0.9 million to $7.1 millionin 2006 compared to 2005. Excluding the impact of acquired companies, data andInternet revenues increased $0.7 million compared to 2005. This increase is dueprimarily to increases in high speed data customers as we continue to marketour broadband services. Our high speed data subscribers increased from 43,103as of September 30, 2005 to 57,095 as of September 30, 2006 andrepresents a 22.7% penetration of voice access lines.

*Other services.**  *Other services revenues increasedfrom $4.6 million in 2005 to $5.4 million in 2006. Excluding theimpact of acquired companies, other services revenues increased $0.5 millioncompared to 2005. This increase is principally driven by an increase in directoryrevenues in 2006.

**Operating Expenses**

*Operatingexpenses, excluding depreciation and amortization.**  *Operating expenses increased$1.9 million to $40.4 million in 2006 from $38.5 million in 2005.Approximately $1.5 million of this increase is related to operating expenses ofthe companies acquired in the last twelve months. This increase also resultsfrom an increase in expenses related to HSD and long distance services of $1.0million and an increase in employee compensation expenses of $0.6 million,partially offset by a decrease in bad debt expenses of $1.0 million and adecrease in consulting expenses of $0.5 million. Included in operating expensesare non-cash stock based compensation expenses associated with the award ofrestricted stock and restricted units. For the three months ended September 30,2006 and 2005, stock based compensation expenses totaled $0.8 million and $0.6million, respectively.

*Depreciationand amortization.**  *Depreciationand amortization expense decreased $0.1 million to $12.8 million in2006.

*Incomefrom operations.**  *Incomefrom operations increased $2.9 million to $17.5 million in 2006. Thisincrease was driven principally by income from operations of companies acquiredin the last twelve months. In general, income from operations has beendeclining due to the increased percentage of lower margin unregulated revenuesin our total business mix due to HSD and long distance revenue growth, whichoffset declining higher margin regulated revenues. In addition to the increasein unregulated products, we experienced declines in local and intrastaterevenues which have significantly higher margins and we have also experiencedan increase in operating expenses.

*Otherincome (expense).**  *Totalother income (expense) increased $0.9 million to $(7.9) million in 2006. Theprimary driver of this increase in expenses was a reduction in equity in netearnings of investees of $0.9 million. In addition, gains on sale ofinvestments increased $0.1 million, interest and dividend income decreased $0.2million and interest expense decreased $0.1 million to $9.9 millionin 2006.

*Incometax (expense) benefit.**  *Incometax expense of $3.7 million was recorded for the three months ended September 30,2006, resulting in an effective rate of 38.0% as compared to 45.5% as of September 30,2005. Our accounting policy is to report income tax expense for interimreporting periods using an estimated annual effective income tax rate. However,the effects of significant or unusual items are not considered in the estimatedannual effective tax rate. The tax effect of such events is recognized in theinterim period in which the event occurs.

*Netincome.**  *Netincome was $6.0 million for the three months ended September 30, 2006as compared to net income of $4.2 million for the three months ended September 30,2005. The differences between 2006 and 2005 are a result of the factorsdiscussed above.

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**Nine Months Ended September 30, 2006 Comparedwith Nine Months Ended September 30, 2005**

| ** **                                               | ** ** | **Nine months ended September 30,**                          | ** ** | **Nine months ended September 30,**                          | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **      2006      ** | ** ** | **    % of revenue     ** | ** ** | **      2005      ** | ** ** | **    % of revenue     ** | ** ** |
| ** **                                               | ** ** | **(in thousands)**                                                          | ** ** |
| Revenues                                                 |       |                                                                             | $          | 199,687                                                                          |       |   |   | 100.0 | % |   | $ | 192,909 |   |   | 100.0 | % |   |
| Operating expenses                                       |       |                                                                             | 112,242    |                                                                             |       |   | 56.2 | % |   | 106,234 |   |   | 55.1 | % |   |
| Depreciation and  amortization                           |       |                                                                             | 39,826     |                                                                             |       |   | 20.0 | % |   | 39,063 |   |   | 20.2 | % |   |
| Total operating  expenses                                |       |                                                                             | 152,068    |                                                                             |       |   | 76.2 | % |   | 145,297 |   |   | 75.3 | % |   |
| Income from  operations                                  |       |                                                                             | 47,619     |                                                                             |       |   | 23.8 | % |   | 47,612 |   |   | 24.7 | % |   |
| Net gain (loss) on sale of investments and other  assets |       |                                                                             | 14,289     |                                                                             |       |   | 7.2 | % |   | (199 | ) |   | (0.1 | )% |   |
| Interest and  dividend income                            |       |                                                                             | 3,138      |                                                                             |       |   | 1.6 | % |   | 1,670 |   |   | 0.9 | % |   |
| Interest expense                                         |       |                                                                             | (29,514    | )                                                                                |       |   | (14.8 | )% |   | (36,584 | ) |   | (19.0 | )% |   |
| Equity in net  earnings of investees                     |       |                                                                             | 8,206      |                                                                             |       |   | 4.1 | % |   | 8,168 |   |   | 4.2 | % |   |
| Other  non-operating, net                                |       |                                                                             | —     |                                                                             |       |   | — |   |   | (87,746 | ) |   | (45.5 | )% |   |
| Total other  income (expense)                            |       |                                                                             | (3,881     | )                                                                                |       |   | (1.9 | )% |   | (114,691 | ) |   | (59.5 | )% |   |
| Income (loss) before income taxes                        |       |                                                                             | 43,738     |                                                                             |       |   | 21.9 | % |   | (67,079 | ) |   | (34.8 | )% |   |
| Income tax  benefit (expense)                            |       |                                                                             | (16,965    | )                                                                                |       |   | (8.5 | )% |   | 87,915 |   |   | 45.6 | % |   |
| Minority interest  in income of subsidiaries             |       |                                                                             | (2         | )                                                                                |       |   | (0.0 | )% |   | (2 | ) |   | (0.0 | )% |   |
| Net income                                               |       |                                                                             | $          | 26,771                                                                           |       |   |   | 13.4 | % |   | $ | 20,834 |   |   | 10.8 | % |   |

 

**Revenues**

*Revenues.**  *Revenues increased$6.8 million to $199.7 million in 2006 compared to$192.9 million in 2005. Excluding the impact of acquired operations,revenues increased $0.2 million compared to the prior year. We derived ourrevenues from the following sources:

*Localcalling services.**  *Localcalling service revenues increased $1.7 million to $49.9 million in 2006compared to $48.2 million in 2005. Excluding the impact of acquired operations,local calling service revenues increased $0.1 million compared to 2005. Voiceaccess lines, including lines acquired, increased 1.2% from September 30,2005. Voice access lines, excluding acquired lines, decreased 3.5% from September 30,2005.

*UniversalService Fund high cost loop.**  *Universal Service Fund high cost loop receipts increased$0.1 million in the nine months ended September 30, 2006 compared tothe nine months ended September 30, 2005. Excluding the impact of acquiredoperations, universal service fund revenues decreased $0.1 million compared tothe prior year.

*Interstateaccess revenues.**  *Interstateaccess revenues were $53.6 million for the nine months ended September 30,2006 compared to $54.7 million for the nine months ended September 30,2005. Excluding the impact of acquired companies, interstate access revenuesdecreased $2.7 million compared to 2005. The primary drivers of this decreasewere decreases in revenue settlements and adjustments related to prior years. Inthe second quarter of 2005, these revenue settlements and adjustments increasedrevenue by $1.9 million while in the second quarter of 2006, the settlementsand adjustments decreased revenue by approximately $1.0 million. Therefore, thetwo adjustments combined resulted in a decrease in interstate revenues of $2.9million for the nine months ended September 30, 2006 compared to the ninemonths ended September 30, 2005.

*Intrastateaccess revenues.**  *Intrastateaccess revenues decreased $1.8 million to $28.0 million in 2006compared to 2005. Excluding the impact of acquired companies, intrastate accessrevenues decreased $2.9 million compared to 2005. Intrastate accessrevenue declined primarily due to a decrease in access 

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rates and a decrease inminutes of use compared to 2005. The rate decrease is primarily due tointrastate rate reductions implemented in Maine in the second quarter of 2005. Intrastateaccess revenues are expected to continue to decline.

*Longdistance services.**  *Longdistance services revenues increased $2.4 million from $15.2 millionin 2005 to $17.6 million in 2006. Excluding the impact of acquiredoperations, long distance services revenues increased $2.1 million compared tothe nine months ended September 30, 2005. This is attributable to theincrease in subscribers and minutes related to bundles and packages sold to ourexisting customers. Interstate long distance penetration as of September 30,2006 was 45.6% of voice access lines as compared to 42.3% as of September 30,2005.

*Dataand Internet services.**  *Dataand Internet services revenues increased $2.9 million to$20.7 million in 2006 compared to 2005. Excluding the impact of acquiredoperations, data and Internet services revenues increased $2.3 million comparedto the nine months ended September 30, 2005. This increase is dueprimarily to increases in high speed data customers as we continue to marketour broadband services. Our HSD subscribers increased from 43,103 as of September 30,2005 to 57,095 as of September 30, 2006 and represents a 22.7% penetrationof voice access lines.

*Other services.**  *Other services revenues increasedfrom $12.7 million in 2005 to $15.3 million in 2006. Excluding theimpact of acquired companies, other services revenues increased $1.4 millioncompared to 2005. This increase is principally driven by an increase in directoryrevenues in 2006.

**Operating Expenses**

*Operatingexpenses, excluding depreciation and amortization.**  *Operating expenses increased$6.0 million to $112.2 million in 2006 from $106.2 million in2005. Approximately $3.9 million of this increase is related to operatingexpenses of the companies acquired in the last twelve months. This increasealso results from an increase in billing expenses of $1.3 million, an increasein expenses related to HSD and long distance services of $1.3 million, anincrease in employee compensation expenses of $1.1 million, an increase inaudit and tax related expenses of $0.7 million and an increase in operatingtaxes of $0.6 million. These increases were partially offset by a decrease inconsulting expenses of $2.2 million due to expenses incurred in 2005 related toour preparation for compliance under Section 404 of the Sarbanes-Oxley Actand a decrease in bad debt expenses of $1.3 million. Included in operatingexpenses are non-cash stock based compensation expenses associated with theaward of restricted stock and restricted units. For the nine months ended September 30,2006 and 2005, stock based compensation expenses totaled $2.0 million and $1.7million, respectively.

*Depreciationand amortization.**  *Depreciationand amortization expense increased $0.8 million to $39.8 million in2006.

*Incomefrom operations.**  *Incomefrom operations remained flat at $47.6 million in 2006 and 2005. Incomefrom operations of companies acquired in the last twelve months offset declinesrelated to the increased percentage of lower margin unregulated revenues in ourtotal business mix due to HSD and long distance revenue growth, which offsetdeclining higher margin regulated revenues. In addition to the increase inunregulated products, we experienced declines in interstate and intrastaterevenues which have significantly higher margins and we have also experiencedan increase in operating expenses.

*Otherincome (expense).**  *Totalother income (expense) increased $110.8 million to $(3.9) million in 2006compared to the prior year of $(114.7) million. Gains on sale of investmentsincreased $14.5 million primarily due to the sale of our investments in the RTBand SICC. Interest and dividend income increased $1.5 million primarily as aresult of a dividend distribution from SICC associated with the sale. Interestexpense decreased $7.1 million to $29.5 million in 2006, mainlyattributable to the initial public offering and related transactions in 2005which substantially de-leveraged us and provided a decrease in interest 

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expense. In 2005, inconnection with the initial public offering, we repurchased our series Apreferred stock and repaid our old credit facility and repurchased or redeemedsubstantially all of our high yield debt which resulted in significant chargesof $87.7 million due to fees and penalties paid on the repurchase/redemptionand for the write-off of unamortized debt issuance costs.

*Incometax (expense) benefit.**  *Incometax expense of $17.0 million was recorded for the nine months ended September 30,2006, resulting in an effective rate of 38.8%. Exclusive of unusual itemsaffecting the tax rate, our effective annual tax rate was 43.2% as of September 30,2005.

At the time of the initial public offering and relatedtransactions in February 2005, we had NOL carryforwards of $265.3 million.Prior to February 2005, we did not expect to generate sufficient taxableincome in future years to fully utilize these NOL carryforwards and, as aresult, reduced the expected benefit of these NOL carryforwards by $66.0million. Subsequent to the initial public offering and related transactions, were-evaluated our expectation of future taxable income and concluded that ourfuture taxable income would be sufficient to fully utilize the benefits of theNOL carryforwards. As a result of this re-evaluation, we recognized an incometax benefit of $66.0 million for the nine months ended September 30, 2005.Additional income tax benefits of $21.9 million were recognized in the ninemonths ended September 30, 2005 due to the taxable loss which resultedmainly from additional costs associated with the extinguishment of debt. Thesetwo items resulted in a net income tax benefit of $87.9 million for the ninemonths ended September 30, 2005.

Our accounting policy is to report income tax expensefor interim reporting periods using an estimated annual effective income taxrate. However, the effects of significant or unusual items are not consideredin the estimated annual effective tax rate. The tax effect of such events isrecognized in the interim period in which the event occurs. As of December 31,2005, we had $291.9 million of federal and state NOL carryforwards. As aresult, the income tax expense we record is generally greater than the incometaxes actually paid by us.

*Net income.**  *Net income was $26.8 millionfor the nine months ended September 30, 2006 as compared to net income of$20.8 million for the nine months ended September 30, 2005. Thedifferences between 2006 and 2005 are a result of the factors discussed above.

**Liquidity andCapital Resources**

Our short-term and long-term liquidity needs ariseprimarily from: (i) interest payments primarily related to our creditfacility; (ii) capital expenditures; (iii) working capitalrequirements as may be needed to support the growth of our business; (iv) dividendpayments on our common stock; and (v) potential acquisitions. Our board ofdirectors has adopted a dividend policy which reflects our judgment that ourstockholders would be better served if we distributed a substantial portion ofour cash available for distribution to our stockholders instead of retaining itin our business. However, we are not required to pay dividends, and our boardof directors may modify or revoke our dividend policy at any time. Dividendpayments are within the sole discretion of our board of directors and willdepend upon, among other things, our results of operations, our financialcondition, future developments that could differ materially from our currentexpectations, including competitive or technological developments (which could,for example, increase our need for capital expenditures), acquisitionopportunities or other factors.

On September 19, 2006, the Company declared adividend totaling $13.9 million, or $0.39781 per share of common stock, whichwas paid on October 18, 2006 to holders of record as of October 3,2006. In 2006, the Company has paid dividends totaling $41.4 million, or$1.19343 per share of common stock.

We expect to fund our operations, interest expense,capital expenditures and dividend payments on our common stock for the nexttwelve months principally from cash from operations and distributions frominvestments. To fund future acquisitions, we intend to use cash from operationsand borrowings under our 

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credit facility, or,subject to the restrictions in our credit facility, proceeds from the sale ofnon-core assets or to arrange additional funding through the sale of public orprivate debt and/or equity securities, or obtain additional senior bank debt.

For the nine months ended September 30, 2006, netcash provided by operating activities of continuing operations was $59.0million compared to $38.8 million for the nine months ended September 30,2005. The increase in 2006 compared to 2005 is primarily a result of theinitial public offering and related transactions in 2005 which substantiallyde-leveraged us, resulting in a reduction in accrued interest.

Our ability to service our indebtedness depends on ourability to generate cash in the future. We are not required to make anyscheduled principal payments under our credit facility’s term facility prior tomaturity in February 2012. We will need to refinance all or a portion ofour indebtedness on or before maturity. We may not be able to refinance ourindebtedness on commercially reasonable terms or at all. If we were unable torenew or refinance our credit facility, our failure to repay all amounts due onthe maturity date would cause a default under our credit facility. In addition,borrowings under our credit facility bear interest at variable interest rates.

We have entered into various interest rate swapagreements which are detailed in note 6 of the “Notes to Condensed ConsolidatedFinancial Statements” in this Quarterly Report. As a result of these swapagreements, as of September 30, 2006, approximately 90% of ourindebtedness bore interest at fixed rates rather than variable rates. Afterthese interest rate swap agreements expire, our annual debt service obligationson such portion of the term loans will vary from year to year unless we enterinto a new interest rate swap or purchase an interest rate cap or otherinterest rate hedge. To the extent interest rates increase in the future, wemay not be able to enter into new interest rate swaps or to purchase interestrate caps or other interest rate hedges on acceptable terms.

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

As of December 31, 2005 we had $291.9 million offederal and state NOL carryforwards. As a result of the utilization of the netoperating loss carryforwards, we are not paying significant income taxes.

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

Net cash used in investing activities of continuingoperations was $12.1 million for the nine months ended September 30,2006 compared to $36.8 million for the nine months ended September 30,2005. These cash flows primarily reflect net capital expenditures of$25.6 million and $17.9 million for the nine months ended September 30,2006 and 2005, respectively. Offsetting capital expenditures were distributionsfrom investments of $7.9 million and $7.3 million for the nine monthsended September 30, 2006 and 2005, respectively, and proceeds from thesale of investments of $43.4 million and $0.2 million for the nine months endedSeptember 30, 2006 and 2005, respectively. In April, 2006, we receivedproceeds of 

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$26.9 million from theliquidation of our investment in the RTB. In addition, on May 1, 2006, wereceived proceeds of $14.8 million from the sale of our investment in SICC. Thedistributions from investments represent passive ownership interests inpartnership and other investments. We do not control the timing or amount ofdistributions from such investments. In 2006, we also used $37.6 million in cashto acquire telephone properties compared to $25.7 million in 2005.

Net cash used in financing activities of continuingoperations was $46.5 million for the nine months ended September 30,2006. Net cash provided by financing activities of continuing operations was$0.1 million for the nine months ended September 30, 2005. For thenine months ended September 30, 2006, we used cash to pay dividends of$41.4 million and used cash of $5.1 million associated with the net repaymentof long term debt. For the nine months ended September 30, 2005, netproceeds from the issuance of common stock of $431.9 million was used forthe net repayment of long term debt of $202.7 million and the repurchaseof preferred and common stock of $129.3 million. Remaining proceeds wereused to pay fees and penalties associated with the early retirement of longterm debt of $61.0 million, to pay a deferred transaction fee of$8.4 million, to pay debt issuance costs of $8.5 million and to paydividends of $21.5 million.

On July 26, 2006, we completed the purchase ofthe assets of Cass County for approximately $33.0 million (or $28.8million net of liabilities assumed) in cash, subject to adjustment. On August 17,2006, we completed the purchase of Unite for approximately $11.5 million (or$8.9 million net of cash acquired and debt assumed) subject to adjustment. Wefunded these acquisitions from cash on hand and from borrowings under therevolving facility of our credit facility. We intend to fund the GITC mergerfrom cash on hand and from borrowings under the revolving facility of ourcredit facility.

Our annual capital expenditures for our ruraltelephone operations have historically been significant. Because existingregulations allow us to recover our operating and capital costs, plus areasonable return on our invested capital in regulated telephone assets,capital expenditures generally constitute an attractive use of our cash flow.Net capital expenditures were approximately $25.6 million for the ninemonths ended September 30, 2006. We expect total capital expenditures for2006 to be approximately $32.5 to $33.0 million.

Our credit facility consists of a $100.0 millionrevolving facility, of which $87.0 million was available at September 30,2006, that matures in February 2011 and a term facility of$588.5 million, of which $588.5 million was outstanding at September 30,2006, that matures in February 2012. A $1.4 million letter of creditwas also outstanding as of September 30, 2006. On March 11, 2005, April 29,2005 and September 14, 2005, we entered into amendments to our creditfacility. For a summary description of our credit facility, see note 8 of the “Notesto Condensed Consolidated Financial Statements” in this Quarterly Report.

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

**Summary of Contractual Obligations**

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

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

| ** **                          | ** ** | **Payments due by period** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **Total**                                 | ** ** | **Less than   1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                          | ** ** | **(Dollars in thousands)**      | ** ** |
| Contractual obligations:            |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Debt maturing within one year       |       | $                                         | 705        |   |   | $ | 705 |   |   |   | $ | — |   |   | $ | — |   | $ | — |   |
| Long term debt                      |       | 604,037                                   |       |   | — |   |   |   | 1,050 |   |   | 13,966 |   | 589,021 |   |
| Operating leases(1)                 |       | 6,136                                     |       |   | 1,253 |   |   |   | 1,968 |   |   | 942 |   | 1,973 |   |
| Minimum purchase contract           |       | 728                                       |       |   | 555 |   |   |   | 149 |   |   | 24 |   | — |   |
| Total contractual  cash obligations |       | $                                         | 611,606    |   |   | $ | 2,513 |   |   |   | $ | 3,167 |   |   | $ | 14,932 |   | $ | 590,994 |   |

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(1)          Real property leaseobligations of $0.2 million associated with the discontinued operationsdiscussed in note (5) of the “Notes to Condensed ConsolidatedFinancial Statements” in this Quarterly Report are stated in this table attotal contractual amounts. Operating leases from continuing operations of$5.9 million are also included.

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

| ** **                           | ** ** | **Fair Value of Contracts at Period-End** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                           | ** ** | **Total**                                                          | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                           | ** ** | **(Dollars in thousands)**                               | ** ** |
| Source of fair value:                |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Derivative  financial instruments(1) |       | $                                                                  | 8,869      |   |   | 5,248 |   |   |   | 2,972 |   |   |   | 595 |   |   |   | 54 |   |   |
|                                      |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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

**Critical AccountingPolicies**

Our criticalaccounting policies are as follows:

·       Revenuerecognition;

·       Allowancefor doubtful accounts;

·       Accountingfor income taxes; and

·       Valuationof long-lived assets, including goodwill.

***Revenuerecognition.******  ***Certain of our interstate networkaccess and data revenues are based on tariffed access charges filed directlywith the Federal Communications Commission; the remainder of such revenues arederived from revenue sharing arrangements with other local exchange carriersadministered by the National Exchange Carrier Association.

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The Telecommunications Act allows local exchangecarriers to file access tariffs on a streamlined basis and, if certain criteriaare met, deems those tariffs lawful. Tariffs that have been “deemed lawful” ineffect nullify an interexchange carrier’s ability to seek refunds should theearnings from the tariffs ultimately result in earnings above the authorizedrate of return prescribed by the Federal Communications Commission. Certain ofour telephone subsidiaries file interstate tariffs directly with the FederalCommunication Commission using this streamlined filing approach. The settlementperiod related to (i) the 2003 to 2004 monitoring period lapses on September 30,2007 and (ii) the 2005 to 2006 monitoring period lapses on September 30,2009. We will continue to monitor the legal status of any pending or futureproceedings that could impact our entitlement to these funds, and may recognizeas revenue some or all of the over-earnings at the end of the settlement periodor as the legal status becomes more certain.

***Allowance fordoubtful accounts.******  ***In evaluating the collectibilityof our accounts receivable, we assess a number of factors, including a specificcustomer’s or carrier’s ability to meet its financial obligations to us, thelength of time the receivable has been past due and historical collectionexperience. Based on these assessments, we record both specific and generalreserves for uncollectible accounts receivable to reduce the related accountsreceivable to the amount we ultimately expect to collect from customers andcarriers. If circumstances change or economic conditions worsen such that ourpast collection experience is no longer relevant, our estimate of therecoverability of our accounts receivable could be further reduced from thelevels reflected in our accompanying consolidated balance sheet.

***Accounting forincome taxes.******  ***As part of the process of preparingour consolidated financial statements we are required to estimate our incometaxes. This process involves estimating our actual current tax exposure andassessing temporary differences resulting from different treatment of items fortax and accounting purposes as well as estimating an annual effective tax ratefor purposes of allocating income tax expense to interim periods. These differencesresult in deferred tax assets and liabilities, which are included within ourconsolidated balance sheets. We must then assess the likelihood that ourdeferred tax assets will be recovered from future taxable income and to theextent we believe the recovery is not likely, we must establish a valuationallowance. Further, to the extent that we establish a valuation allowance orincrease this allowance in a financial accounting period, we must include a taxprovision, or reduce our tax benefit in our consolidated statement ofoperations. In performing the assessment, management considers the scheduledreversal of deferred tax liabilities, projected future taxable income, and taxplanning strategies. We use our judgment to determine our provision or benefitfor income taxes, deferred tax assets and liabilities and any valuationallowance recorded against our net deferred tax assets.

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

Based on certain assumptions, we had$291.9 million in federal and state NOL carryforwards as of December 31,2005. In February 2005, we completed the initial public offering whichresulted in an “ownership change” within the meaning of the U.S. federal incometax laws addressing net operating loss carryforwards, alternative minimum taxcredits and other similar tax attributes. As a result of such ownership change,there will be specific limitations on our ability to use our NOL carryforwardsand other tax attributes. In order to fully utilize the deferred tax assets,mainly generated by the net operating losses, we will need to generate futuretaxable income of approximately $219 million prior to the expiration of the netoperating loss carry forwards beginning in 2019 to 2025. In addition, as aresult of the offering, we have substantially reduced our aggregate long termdebt and expect a significant reduction in our annual interest expense. Whenconsidered together with our history of producing positive operating resultsand other evidence affecting the recoverability of deferred tax assets, weexpect that future taxable income will more likely than not be sufficient torecover net deferred tax assets.

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

·       significantunderperformance relative to expected historical or projected future operatingresults;

·       significantregulatory changes that would impact future operating revenues;

·       significantnegative industry or economic trends; and

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

Goodwill was $493.9 million at September 30,2006. In addition, we have recorded intangible assets related to the acquiredcompanies’ customer relationships of $12.0 million. These intangible assetswill be amortized over 15 years. The intangible assets are included in DeferredCharges and Other Assets on the Condensed Consolidated Balance Sheet.

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

**New AccountingStandards**

In July 2006, the FASB issued FASB InterpretationNo. (FIN) 48, Accounting for Uncertainty in Income Taxes. FIN 48 requiresapplying a “more likely than not” threshold to the recognition andde-recognition of tax positions. FIN 48 is effective for fiscal years beginningafter December 15, 2006. We have not yet determined the impact of theadoption of this interpretation on our financial position, results ofoperations or cash flows.

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements.” SFAS 157 is definitional and disclosure oriented andaddresses how companies should approach measuring fair value when required by generallyaccepted accounting principles, or GAAP, it does not create or modify anycurrent GAAP requirements to apply fair value accounting. SFAS 157 provides asingle definition for fair value that is to be applied consistently for allaccounting applications, and also generally describes and prioritizes accordingto reliability the methods and inputs used in valuations. The new measurementand disclosure requirements of SFAS 157 are effective for us in the firstquarter 2008. We expect no significant impact from adopting SFAS 157.

In September 2006,the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effectsof Prior Year Misstatements When Quantifying Misstatements in Current YearFinancial Statements” (SAB 108), which provides interpretive guidance onhow the effects of the carryover or reversal of prior year misstatements shouldbe considered in quantifying a current year misstatement. We will be requiredto adopt the provisions of SAB 108 in our financial statements for the fiscalyear ended December 31, 2006. We do not believe that the adoption ofSAB 108 will have a material impact our consolidated financial statements.

**Inflation**

We do not believeinflation has a significant effect on our operations.

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

As of September 30, 2006, approximately 90% ofour indebtedness bore interest at fixed rates or effectively at fixed rates.Our earnings are affected by changes in interest rates as our long-termindebtedness under our credit facility has variable interest rates based oneither the prime rate or LIBOR. 

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If interest rates on ourvariable rate indebtedness (excluding variable rate indebtedness which has itsinterest rate effectively fixed under interest rate swap agreements)outstanding at September 30, 2006 increased by 10%, our interest expensewould have increased, and our income from continuing operations before taxeswould have decreased, by approximately $0.1 million for the nine monthsended September 30, 2006.

We usevariable and fixed-rate debt to finance our operations, capitalexpenditures and acquisitions. The variable-rate debt obligations exposeus to variability in interest payments due to changes in interest rates. Webelieve it is prudent to limit the variability of a portion of our interestpayments. To meet this objective, we enter into interest rate swap agreements tomanage fluctuations in cash flows resulting from interest rate risk. Theseswaps change the variable-rate cash flow exposure on the debt obligationsto fixed cash flows. Under the terms of the interest rate swaps, we pay avariable interest rate plus an additional payment if the variable rate paymentis below a contractual rate, or we receive a payment if the variable ratepayment is above the contractual rate. The chart below provides details of eachof our interest rate swap agreements.

| **Effective Date:** | ** ** | ** ** | ** **    | **Notional Amount** | ** ** | **Rate** | ** ** | **Rate, including  applicable margin** | ** ** | **Expiration Date** | ** **              |
|--------------------------|------------|------------|---------------|--------------------------|------------|----------|------------|--------------------------------------------------|------------|--------------------------|-------------------------|
| February 8,  2005   |       | $          | 130.0 Million |                     | 3.76%      |     |       | 5.51%                                            |       |                     | December 31,  2007 |   |
| February 8,  2005   |       | $          | 130.0 Million |                     | 3.98%      |     |       | 5.73%                                            |       |                     | December 31,  2008 |   |
| February 8,  2005   |       | $          | 130.0 Million |                     | 4.11%      |     |       | 5.86%                                            |       |                     | December 31,  2009 |   |
| April 29,  2005     |       | $          | 50.0 Million  |                     | 4.72%      |     |       | 6.47%                                            |       |                     | March 31,  2012    |   |
| June 30,  2005      |       | $          | 50.0 Million  |                     | 4.69%      |     |       | 6.44%                                            |       |                     | March 31,  2011    |   |
| June 30, 2006       |       | $          | 50.0 Million  |                     | 5.36%      |     |       | 7.11%                                            |       |                     | December 31, 2009  |   |

 

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

**Item 4.**                        Controlsand Procedures.

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

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

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

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**PART II—OTHERINFORMATION**

**Item 1.**                        LegalProceedings.

On June 6, 2005, a purported class actioncomplaint was filed in the General Court of Justice, Superior Court Division,of the State of North Carolina by Robert Lowinger on behalf of himself and allother similarly situated persons against the Company, the Company’s Chairmanand Chief Executive Officer, certain of the Company’s current and formerdirectors and certain of the Company’s stockholders. The complaint allegesviolations of Sections 11 and 12(a)(2) and liability under Section 15of the Securities Act, and alleges that the Company’s registration statement onForm S-1 (which was declared effective by the SEC on February 3,2005) and the related prospectus dated February 3, 2005, each relating tothe Company’s initial public offering of common stock, contained certainmaterial misstatements and omitted certain material information necessary to beincluded relating to the Company’s broadband products and access line trends.The plaintiff, who has been a plaintiff in several prior securities cases,seeks rescission rights and unspecified damages on behalf of a purported classof purchasers of the common stock “issued pursuant and/or traceable to theCompany’s IPO during the period from February 3, 2005 through March 21,2005”. The Company removed the action to Federal Court. The plaintiff filed amotion to remand the action to the North Carolina State Court, which was deniedby the Federal Magistrate. The plaintiff has objected to and appealed theMagistrate’s decision to the District Court Judge. The Company has contestedthe appeal and filed a Motion to Dismiss the action. The Magistrate, on February 9,2006, issued a Memorandum and a Recommendation to the District Court Judge thatthe Motion to Dismiss be granted and that the complaint be dismissed withprejudice. The plaintiff has filed a Notice of Objection to the Magistrate’sRecommendation. Both the appeal of denial of the Motion to Remand and theMotion to Dismiss are pending before the District Court Judge. We believe thatthis action is without merit and intend to continue to defend the litigationvigorously.

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

**Item 1A.**                RiskFactors

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

**Item 2.**                        UnregisteredSales of Equity Securities and Use of Proceeds.

**Unregistered Salesof Equity Securities**

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

**Restrictions onPayment of Dividends**

Under Delaware law, our board of directors may declaredividends only to the extent of our “surplus” (which is defined as total assetsat fair market value minus total liabilities minus statutory capital) or, ifthere is no surplus, out of our net profits for the then current and/orimmediately preceding fiscal year.

Our credit facilityrestricts our ability to declare and pay dividends on our common stock asfollows:

·       Wemay use our cumulative distributable cash to pay dividends, but maynot in general pay dividends in excess of the amount of ourcumulative distributable cash. “Cumulative distributable cash” is defined inour credit facility as the amount of “available cash” generated beginning on April 1,2005 through the end of the Company’s most recent fiscal quarter for whichfinancial 

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statements are availableand a compliance certificate has been delivered (a) minus the aggregateamount of dividends paid after July 30, 2005 and the aggregate amount ofinvestments made after April 1, 2005 using such cash, (b) plus theaggregate amount of distributions received from such investments (not to exceedthe amount originally invested). “Available cash” is defined in our creditfacility as Adjusted EBITDA (a) minus (i) cash interest expense(adjusted for amortization, swap interest and dividends and accretion on seriesA preferred stock), (ii) scheduled principal payments on indebtedness, (iii) capitalexpenditures, (iv) investments, (v) cash income taxes, and (vi) non-cashitems excluded from Adjusted EBITDA and paid in cash and (b) plus (i) thecash amount of any extraordinary gains and gains realized on asset sales otherthan in the ordinary course of business and (ii) cash received on accountof non-cash gains and non-cash income excluded from Adjusted EBITDA. “AdjustedEBITDA” is defined in our credit facility as Consolidated Net Income (which isdefined in the credit facility and includes distributions from investments) (a) plusthe following to the extent deducted from Consolidated Net Income: provisionfor income taxes, consolidated interest expense, depreciation, amortization,losses on sales of assets and other extraordinary losses, and certain othernon-cash items, each as defined, (b) minus gains on sales of assets andother extraordinary gains and all non-cash items increasing Consolidated NetIncome.

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

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

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

**Item 3.**                        DefaultsUpon Senior Securities.

Not applicable.

**Item 4.**                        Submissionof Matters to a Vote of Security Holders.

Not applicable.

**Item 5.**                        OtherInformation.

Our 2007 Annual Meeting ofStockholders, which we refer to as the 2007 Annual Meeting, will be held on June 14,2007, which date is more than 30 days from the date on which the 2006 AnnualMeeting of Stockholders took place. The proxy rules promulgated by theSecurities and Exchange Commission under the Exchange Act require us to informstockholders of such change in date in addition to the new deadline forstockholder proposals in our earliest possible Quarterly Report on Form 10-Q.Accordingly, we hereby notify our stockholders that stockholder proposals forour 2007 Annual Meeting must be submitted to us no later than February 15,2007.

**Item 6.**                        Exhibits.

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

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**SIGNATURES**

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

|                              |   | FAIRPOINT  COMMUNICATIONS, INC. |
|------------------------------|--------|--------------------------------------|
| Date: November 3,  2006 | By:    | /s/ JOHN  P. CROWLEY                 |
|                         |   | Name:                                | John P. Crowley |
|                         |   | Title:                               | *Executive Vice President and Chief Financial  Officer* |

 

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**Exhibit Index**
| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | **Description** |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 2.1         |       | Agreement and Plan of Merger, dated as of  June 18, 2003, by and among FairPoint, MJD Ventures, Inc.,  FairPoint Berkshire Corporation and Berkshire Telephone Corporation.(1)                                                                                                                                                                                                                |
| 2.2         |       | Agreement and Plan of  Merger, dated as of April 22, 2005, by and among FairPoint, MJD  Ventures, Inc., FairPoint Bentleyville Corporation and Bentleyville  Communications Corporation.(2)                                                                                                                                                                                                   |
| 2.3         | ** ** | Asset Purchase  Agreement, dated as of December 14, 2005, by and among FairPoint, Local  Exchange Company LLC, Cass County Telephone Company Limited Partnership and  LEC Long Distance, Inc.(16)                                                                                                                                                                                             |
| 2.4         |       | Stock Purchase  Agreement, dated May 26, 2006, among MJD Services Corp., Kevin M.  Anderson, Ronald C. Reckrodt, Jeffrey S. Ingram, Dennis R. Devoy and Unite  Communications Systems, Inc.(18)                                                                                                                                                                                               |
| 2.5         |       | Agreement and Plan of  Merger, dated September 13, 2006, among FairPoint, MJD  Ventures, Inc., FairPoint Germantown Corporation and The Germantown  Independent Telephone Company.*                                                                                                                                                                                                           |
| 3.1         |       | Eighth Amended and  Restated Certificate of Incorporation of FairPoint.(3)                                                                                                                                                                                                                                                                                                                              |
| 3.2         |       | Amended and Restated By  Laws of FairPoint.(3)                                                                                                                                                                                                                                                                                                                                                          |
| 4.1         |       | Indenture, dated as of  March 6, 2003, by and between FairPoint and The Bank of New York,  relating to FairPoint’s $225,000,000 117¤8%  Senior Notes due 2010.(4)                                                                                                                                                                                                                        |
| 4.2         |       | Supplemental Indenture,  dated as of January 20, 2005, by and between FairPoint and The Bank of  New York, amending the Indenture dated as of March 6, 2003 between  FairPoint and The Bank of New York.(3)                                                                                                                                                                                   |
| 4.3         |       | Form of Initial  Senior Note due 2010.(4)                                                                                                                                                                                                                                                                                                                                                          |
| 4.4         |       | Form of Exchange  Senior Note due 2010.(4)                                                                                                                                                                                                                                                                                                                                                         |
| 10.1        |       | Credit Agreement, dated  as of February 8, 2005, by and among FairPoint, various lending  institutions, Bank of America, N.A., CoBank ACB, General Electric Capital  Corporation and Deutsche Bank Trust Company Americas.(3)                                                                                                                                                                      |
| 10.2        |       | First Amendment to  Credit Agreement, dated as of March 11, 2005, among FairPoint, various  lending institutions, Bank of America, N.A., CoBank ACB, General Electric  Capital Corporation and Deutsche Bank Trust Company Americas.(3)                                                                                                                                                            |
| 10.3        |       | Second Amendment and  Consent to Credit Agreement, dated as of April 29, 2005, among  FairPoint, various lending institutions, Bank of America, N.A., CoBank ACB,  General Electric Capital Corporation and Deutsche Bank Trust Company  Americas.(5)                                                                                                                                              |
| 10.4        |       | Third Amendment to  Credit Agreement, dated as of September 14, 2005, among FairPoint,  various lending institutions, Bank of America, N.A., CoBank ACB, General  Electric Capital Corporation and Deutsche Bank Trust Company Americas.(6)                                                                                                                                                        |
| 10.5        |       | Pledge Agreement, dated  as of February 8, 2005, by FairPoint, ST Enterprises, Ltd., FairPoint  Broadband, Inc., MJD Services Corp., MJD Ventures, Inc., C-R  Communications, Inc., Comerco, Inc., GTC Communications, Inc.,  Ravenswood Communications, Inc., Utilities, Inc., FairPoint Carrier  Services, Inc. and St. Joe Communications, Inc.(3) |
| 10.6        |       | Subsidiary Guaranty,  dated as of February 8, 2005, by FairPoint Broadband, Inc., MJD  Ventures, Inc., MJD Services Corp., ST Enterprises, Ltd. and FairPoint  Carrier Services, Inc.(2)                                                                                                                                                                                            |
| 10.7        |       | Form of Swingline  Note.(3)                                                                                                                                                                                                                                                                                                                                                                        |

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| 10.8  |   | Form of RF Note.(3)                                                                                                                               |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9  |   | Form of B Term  Note.(3)                                                                                                                          |
| 10.10 |   | Amended and Restated Tax  Sharing Agreement, dated as of November 9, 2000, by and among FairPoint  and its Subsidiaries.(7)                       |
| 10.11 |   | Nominating Agreement,  dated as of February 8, 2005.(3)                                                                                           |
| 10.12 |   | Affiliate Registration  Rights Agreement, dated as of February 8, 2005.(3)                                                                        |
| 10.13 |   | Employment Agreement,  dated as of March 17, 2006, by and between FairPoint and Eugene B.  Johnson.(17)                                      |
| 10.14 |   | Employment Agreement,  dated as of January 20, 2000, by and between FairPoint and Walter E.  Leach, Jr.(9)                              |
| 10.15 |   | Letter Agreement, dated  as of December 15, 2003, by and between FairPoint and Walter E.  Leach, Jr.(10)                                     |
| 10.16 |   | Letter Agreement, dated  as of November 11, 2002, by and between FairPoint and Peter G. Nixon.(4)                                                 |
| 10.17 |   | Letter Agreement, dated  as of November 13, 2002, by and between FairPoint and Shirley J.  Linn.(4)                                               |
| 10.18 |   | Letter Agreement, dated  as of May 16, 2005, by and between FairPoint and John P. Crowley.(12)                                                    |
| 10.19 |   | FairPoint 1995 Stock  Option Plan.(13)                                                                                                                 |
| 10.20 |   | FairPoint Amended and  Restated 1998 Stock Incentive Plan.(13)                                                                                         |
| 10.21 |   | FairPoint Amended and  Restated 2000 Employee Stock Incentive Plan.(10)                                                                                |
| 10.22 |   | FairPoint 2005 Stock  Incentive Plan.(3)                                                                                                               |
| 10.23 |   | FairPoint Annual  Incentive Plan.(3)                                                                                                                   |
| 10.24 |   | Form of  February 2005 Restricted Stock Agreement.(8)                                                                                        |
| 10.25 |   | Form of  Non-Director Restricted Stock Agreement.(15)                                                                                             |
| 10.26 |   | Form of Director  Restricted Stock Agreement.(14)                                                                                                 |
| 10.27 |   | Form of Director  Restricted Unit Agreement.(14)                                                                                                  |
| 21    |   | Subsidiaries of  FairPoint.*                                                                                                                           |
| 31.1  |   | Certification as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*                                                             |
| 31.2  |   | Certification as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*                                                             |
| 32.1  |   | Certification required  by 18 United States Code Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.*† |
| 32.2  |   | Certification required  by 18 United States Code Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.*† |
| 99.1  |   | Risk Factors.(17)                                                                                                                                      |

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                 * Filed herewith.

                 † Pursuant to Securities and Exchange CommissionRelease No. 33-8238, this certification will be treated as “accompanying”this Quarterly Report on Form 10-Q and not “filed” as part of suchreport for purposes of Section 18 of the Securities Exchange Act of 1934,or otherwise subject to the liability of Section 18 of the SecuritiesExchange Act of 1934 and this certification will not be deemed to be 

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incorporated by referenceinto any filing under the Securities Act of 1933 or the Securities Exchange Actof 1934, except to the extent that the registrant specifically incorporates itby reference.

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

       (2) Incorporated by reference to the Quarterly Report on Form 10-Qof FairPoint for the quarter ended March 31, 2005.

       (3) Incorporated by reference to the Annual Report on Form 10-Kof FairPoint for the year ended December 31, 2004.

       (4) Incorporated by reference to the Annual Report on Form 10-Kof FairPoint for the year ended December 31, 2002.

       (5) Incorporated by reference to the Current Report on Form 8-Kof FairPoint filed on May 4, 2005.

       (6) Incorporated by reference to the Current Report on Form 8-Kof FairPoint filed on October 3, 2005.

       (7) Incorporated by reference to the Quarterly Report on Form 10-Qof FairPoint for the period ended September 30, 2000.

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

       (9) Incorporated by reference to the Annual Report on Form 10-Kof FairPoint for the year ended December 31, 1999.

(10) Incorporated by reference to the Annual Report on Form 10-Kof FairPoint for the year ended December 31, 2003.

(11) Incorporated by reference to the Annual Report on Form 10-Kof FairPoint for the year ended December 31, 2004.

(12) Incorporated by reference to the Current Report on Form 8-Kof FairPoint filed on May 24, 2005.

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

(14) Incorporated by reference to the Current Report on Form 8-Kof FairPoint filed on June 20, 2005.

(15) Incorporated by reference to the Current Report on Form 8-Kof FairPoint filed on September 23, 2005.

(16) Incorporated by reference to the Annual Report on Form 10-Kof FairPoint for the year ended December 31, 2005.

(17) Incorporated by reference to the Quarterly Report on Form 10-Qof FairPoint for the period ended March 31, 2006.

(18) Incorporated by reference to the Quarterly Report on Form 10-Qof FairPoint for the period ended June 30, 2006.

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