**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM10-Q**

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**(MarkOne)**
| **x** |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------|----------------------------------------------------------------------------------------------|

 

**For the quarterly period ended June 30, 2006**

**or**
| **o** |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------|-----------------------------------------------------------------------------------------------|

 

**For the transition period from**                    **to**                    

**Commission file number: 0-16014**

**Adelphia CommunicationsCorporation**

(Exact name of registrant as specified in its charter)

| **Delaware**                                                     |   | **23-2417713**                           |
|------------------------------------------------------------------|--------|------------------------------------------|
| (State or other  jurisdiction of incorporation or  organization) |   | (I.R.S. Employer  Identification Number) |

 

**5619 DTC ParkwayGreenwood Village, CO  80111**

(Address of principal executive offices, including zip code)

**(303) 268-6300**

(Registrant’s telephone number, including area code)

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes  x No  o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one): Large accelerated filer   oAccelerated filer  oNon-accelerated filer  x

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

Number of shares of Class A common stock outstanding as of June30, 2006: 228,692,414

Number of shares of Class B common stock outstanding as of June30, 2006: 25,055,365

 

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**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)Quarterly Report on Form 10-Q for the period ended June 30, 2006**

**Table of Contents**
| PART I.  FINANCIAL INFORMATION |     |
|-------------------------------------|----------|
|                                |     |   |   |
|                                | Item 1.  | Financial Statements |   |
|                                |     | Condensed  Consolidated Balance Sheets as of June 30, 2006 (unaudited) and December 31,  2005 |   |
|                                |     | Condensed  Consolidated Statements of Operations for the three and six months ended June  30, 2006 and 2005 (unaudited) |   |
|                                |     | Condensed  Consolidated Statements of Cash Flows for the six months ended June 30, 2006  and 2005 (unaudited) |   |
|                                |     | Notes  to Condensed Consolidated Financial Statements (unaudited) |   |
|                                | Item 2.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                                | Item 3.  | Quantitative  and Qualitative Disclosures About Market Risk |   |
|                                | Item 4.  | Controls and  Procedures |   |
|                                |     |   |   |
| PART  II.  OTHER INFORMATION   |     |
|                                |     |   |   |
|                                | Item 1.  | Legal Proceedings |   |
|                                | Item 1A. | Risk Factors |   |
|                                | Item 3.  | Defaults Upon  Senior Securities |   |
|                                | Item 6.  | Exhibits |   |
|                                |     |   |   |
| SIGNATURES                          |     |

 

**INTRODUCTORY NOTE**

In this Quarterly Report, the “Company,” “we,” “us” and “our”refer to Adelphia Communications Corporation (“Adelphia”), its consolidatedsubsidiaries and other consolidated entities.

This Quarterly Report on Form 10-Q is for the quarterlyperiod ended June 30, 2006.  ThisQuarterly Report should be read in conjunction with our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2005 (the “2005 Form 10-K”) and allof our other reports, including Current Reports on Form 8-K, filed with orfurnished to the Securities and Exchange Commission (the “SEC”) through thedate of this report.  As disclosed in the2005 Form 10-K, readers should not rely on Adelphia’s periodic and otherreports filed with or furnished to the SEC prior to May 24, 2002.

As further described in Note 2 to the accompanying condensedconsolidated financial statements, on July 31, 2006 (the “Effective Date”),Adelphia completed the sale of assets, which in the aggregate comprisesubstantially all of its U.S. assets (the “Sale Transaction”), to Time WarnerNY Cable LLC (“TW NY”), a subsidiary of Time Warner Cable Inc. (“TWC”), thecable subsidiary of Time Warner Inc., and Comcast Corporation (“Comcast”).  Proceeds from the Sale Transaction totaledapproximately $17.4 billion, consisting of cash in the amount of approximately$12.5 billion and shares of TWC Class A Common Stock with a preliminaryestimated fair value as of the Effective Date of approximately $4.9billion.  Such estimated fair value ofthe TWC Class A Common Stock was determined by the Company based on management’sreview of the underlying factors affecting the valuation of cable companies,taking into account the approximately $4.9 billion valuation agreed with TW NYfor purposes of the TW NY asset purchase agreement, the $4.85 billionvaluation for the July 21, 2006 Second Amended and Restated AgreementConcerning Terms and Conditions of a Modified Chapter 11 Plan (the “PlanAgreement”) agreed to by the Company, the statutory committee of unsecuredcreditors (the “Creditors’ Committee”) and certain creditors and *ad hoc*creditor committees, subject to certain adjustmentsbased on market valuation, updates from its financial advisors and the recentupward movement in the price of publicly traded cable companies’ stocks.

EffectiveJuly 21, 2006, Adelphia entered into the Plan Agreement with the Creditors’Committee and certain creditors and *ad hoc*creditorcommittees.  The Plan Agreement isdesigned to form the basis of an amended plan of reorganization for Adelphiaand certain of its subsidiaries (the “Modified Plan”), which includes aproposed global compromise and settlement of all disputes among the creditors,not all of whom are parties to the Plan Agreement.

2

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Adelphia’s obligations under the Plan Agreement aresubject to the entry by the United States Bankruptcy Court for the SouthernDistrict of New York (the “Bankruptcy Court”) of an order approving adisclosure statement with respect to the Modified Plan and authorizing theDebtors (as defined in Note 1 to the accompanying condensed consolidatedfinancial statements) (other than the JV Debtors (as defined in Note 2 tothe accompanying condensed consolidated financial statements)) to propose theModified Plan as provided in the Plan Agreement.  The Modified Plan contemplated by the PlanAgreement is subject to Bankruptcy Court approval.

ThisQuarterly Report describes the financial results of the Company for thereported periods.  As a result of theSale Transaction, the Company disposed of substantially all of its operatingassets and expects to adopt a liquidation basis of accounting in the thirdquarter of 2006.  Upon adoption of aliquidation basis of accounting, assets will be recorded at their estimatedrealizable amounts and liabilities that will be paid in full will be recordedat the present value of amounts to be paid. Liabilities subject to compromise will be recorded at their face amountsuntil they are settled, at which time they will be adjusted to their settlementamounts.

**CAUTIONARY STATEMENTS**

This Quarterly Report includes forward-lookingstatements.  All statements regardingAdelphia and its consolidated subsidiaries’ expected sources and uses of cash,income tax position, indemnification obligations and any post-closing purchaseprice adjustments related to the Sale Transaction, settlements with the SEC andthe United States Attorney’s Office for the Southern District of New York (the “U.S.Attorney”) and future course of the Company’s pending bankruptcy proceeding areforward-looking statements.  In someinstances, you can identify these forward-looking statements by the presence ofwords such as “anticipate,” “if,” “believe,” “plan,” “estimate,” “expect,” “intend,”“may,” “could,” “should,” “will” and other similar expressions.  Such forward-looking statements areinherently uncertain, and readers must recognize that actual results may differmaterially from our expectations.  We donot undertake a duty to update such forward-looking statements.  You are advised, however, to consult anyfuture disclosures we make on related subjects in our reports filed with orfurnished to the SEC.  Risks,uncertainties and other factors that may cause actual results to differmaterially from those in the forward-looking statements include, but are notlimited to, the following:

·                  whetherand on what timetable a plan of reorganization under Chapter 11 of Title11 (“Chapter 11”) of the United States Code (the “Bankruptcy Code”) will beconfirmed and consummated to mitigate the continued incurrence of costs andfees as a result of the Chapter 11 bankruptcy proceeding and our obligationsunder the Registration Rights and Sale Agreement between Adelphia and TWC (the “RegistrationRights Agreement”) dated as of July 31, 2006;

·                  potentialdilutive impact to our stakeholders related to the substantial claims filedagainst us in the Chapter 11 bankruptcy proceeding;

·                  potentialliability to TW NY or Comcast for certain post-closing purchase priceadjustments;

·                  potentialdecrease in the fair value of the TWC Class A Common Stock we received in theSale Transaction;

·                  continuedemployee attrition after the closing of the Sale Transaction;

·                  ourincome and franchise tax liabilities in connection with the Sale Transactionand consummation of a plan of reorganization could be materially more thanestimated;

·                  theoutcome of significant pending litigation;

·                  riskthat our settlement agreements with U.S. Attorney and the SEC could beoverturned or vacated;

·                  ourability to make payments to the restitution fund required under theNon-Prosecution Agreement (as defined in Note 1 to the accompanyingcondensed consolidated financial statements) with the U.S. Attorney and satisfyour obligations under such agreement and the final judgment in the SEC civilenforcement action;

·                  uncertaintyregarding tax attributes and potential tax liabilities due to our re-evaluationof our historical tax positions; and

·                  potentialtax consequences of certain advances by the Company to members of theJohn J. Rigas Family (the “Rigas Family”) and the Rigas Family Entities(as defined in Note 1 to the accompanying condensed consolidated financialstatements), our settlements with the U.S. Attorney and the

3

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SEC, the acquisition ofthe Forfeited Entities (as defined in Note 1 to the accompanying condensedconsolidated financial statements) and the subsequent sale of the assets ofsuch entities in the Sale Transaction.

Many of these risks, uncertainties and other factors areoutside of the Company’s control. Readers should consider all of these factors carefully in evaluating theforward-looking statements contained in this Quarterly Report.  We discuss these risks, uncertainties andother factors more fully in Part II, Item 1A, “Risk Factors,” in thisQuarterly Report and in other reports filed by us with or furnished by us tothe SEC.

4

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**PART I. FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(amounts in thousands, except share data)**
|                                                                                                                                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                            | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                                                                                                            | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| ASSETS                                                                                                                                |       |              |       |                  |       |
| Current assets:                                                                                                                       |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                            |       | $                 | 734,447    |                  | $          | 389,839 |   |
| Restricted cash                                                                                                                       |       | 3,893             |       | 25,783                |       |
| Accounts  receivable, less allowance for doubtful accounts of $19,908 and $15,912,  respectively                                      |       | 108,094           |       | 119,512               |       |
| Receivable for  securities                                                                                                            |       | 7,167             |       | 10,029                |       |
| Other current  assets                                                                                                                 |       | 89,222            |       | 74,399                |       |
| Total current  assets                                                                                                                 |       | 942,823           |       | 619,562               |       |
|                                                                                                                                  |       |              |       |                  |       |
| Noncurrent  assets:                                                                                                                   |       |              |       |                  |       |
| Restricted cash                                                                                                                       |       | 2,751             |       | 262,393               |       |
| Property and  equipment, net                                                                                                          |       | 4,223,605         |       | 4,334,651             |       |
| Intangible  assets, net (Note 9)                                                                                                      |       | 7,479,647         |       | 7,529,164             |       |
| Other noncurrent  assets, net                                                                                                         |       | 126,741           |       | 128,240               |       |
| Total assets                                                                                                                          |       | $                 | 12,775,567 |                  | $          | 12,874,010 |   |
|                                                                                                                                  |       |              |       |                  |       |
| LIABILITIES AND  STOCKHOLDERS’ DEFICIT                                                                                           |       |              |       |                  |       |
| Current  liabilities:                                                                                                                 |       |              |       |                  |       |
| Accounts payable                                                                                                                      |       | $                 | 115,871    |                  | $          | 130,157 |   |
| Subscriber  advance payments and deposits                                                                                             |       | 34,020            |       | 34,543                |       |
| Accrued  liabilities (Note 9)                                                                                                         |       | 543,672           |       | 551,599               |       |
| Deferred revenue                                                                                                                      |       | 19,115            |       | 21,376                |       |
| Parent and  subsidiary debt (Note 5)                                                                                                  |       | 959,427           |       | 869,184               |       |
| Total current  liabilities                                                                                                            |       | 1,672,105         |       | 1,606,859             |       |
|                                                                                                                                  |       |              |       |                  |       |
| Noncurrent  liabilities:                                                                                                              |       |              |       |                  |       |
| Other  liabilities                                                                                                                    |       | 32,119            |       | 31,929                |       |
| Deferred revenue                                                                                                                      |       | 56,149            |       | 61,065                |       |
| Deferred income  taxes                                                                                                                |       | 904,135           |       | 833,535               |       |
| Total noncurrent  liabilities                                                                                                         |       | 992,403           |       | 926,529               |       |
|                                                                                                                                  |       |              |       |                  |       |
| Liabilities  subject to compromise (Note 2)                                                                                           |       | 18,423,946        |       | 18,415,158            |       |
|                                                                                                                                  |       |              |       |                  |       |
| Total  liabilities                                                                                                                    |       | 21,088,454        |       | 20,948,546            |       |
|                                                                                                                                  |       |              |       |                  |       |
| Commitments and  contingencies (Note 8)                                                                                               |       |              |       |                  |       |
|                                                                                                                                  |       |              |       |                  |       |
| Minority’s  interest in equity of subsidiary                                                                                     |       | 60,201            |       | 71,307                |       |
|                                                                                                                                  |       |              |       |                  |       |
| Stockholders’  deficit:                                                                                                          |       |              |       |                  |       |
| Series preferred  stock                                                                                                               |       | 397               |       | 397                   |       |
| Class A Common  Stock, $.01 par value, 1,200,000,000 shares authorized, 229,787,271 shares  issued and 228,692,414 shares outstanding |       | 2,297             |       | 2,297                 |       |
| Convertible  Class B Common Stock, $.01 par value, 300,000,000 shares authorized,  25,055,365 shares issued and outstanding           |       | 251               |       | 251                   |       |
| Additional  paid-in capital                                                                                                           |       | 12,024,695        |       | 12,071,165            |       |
| Accumulated  other comprehensive loss, net                                                                                            |       | (2,851            | )          | (4,988                | )          |
| Accumulated  deficit                                                                                                                  |       | (20,369,940       | )          | (20,187,028           | )          |
| Treasury stock,  at cost, 1,094,857 shares of Class A Common Stock                                                                    |       | (27,937           | )          | (27,937               | )          |
| Total  stockholders’ deficit                                                                                                     |       | (8,373,088        | )          | (8,145,843            | )          |
| Total liabilities and  stockholders’ deficit                                                                                     |       | $                 | 12,775,567 |                  | $          | 12,874,010 |   |

 

See accompanying notes tothe condensed consolidated financial statements.

5

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**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(amountsin thousands, except share and per share amounts)**

**(unaudited)**
|                                                                                                                                                                                                                                                                           | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                                                                                                                                                                                                      |       |                                                |       |                                              |       |   |   |   |   |
| Revenue                                                                                                                                                                                                                                                                   |       | $                                                   | 1,198,279  |                                              | $          | 1,103,223 |   | $ | 2,348,001 |   | $ | 2,172,225 |   |
|                                                                                                                                                                                                                                                                      |       |                                                |       |                                              |       |   |   |   |   |
| Costs and expenses:                                                                                                                                                                                                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| Direct operating  and programming                                                                                                                                                                                                                                         |       | 704,560                                             |       | 666,258                                           |       | 1,394,473 |   | 1,320,588 |   |
| Selling, general  and administrative                                                                                                                                                                                                                                      |       | 90,164                                              |       | 92,549                                            |       | 177,253 |   | 171,614 |   |
| Investigation,  re-audit and sale transaction costs                                                                                                                                                                                                                       |       | 9,626                                               |       | 18,055                                            |       | 30,232 |   | 38,485 |   |
| Depreciation                                                                                                                                                                                                                                                              |       | 191,780                                             |       | 200,717                                           |       | 379,907 |   | 413,822 |   |
| Amortization                                                                                                                                                                                                                                                              |       | 33,231                                              |       | 39,613                                            |       | 66,531 |   | 74,032 |   |
| Provision for  uncollectible amounts due from the Rigas Family and Rigas Family Entities  (Note 4)                                                                                                                                                                        |       | —                                              |       | 11,338                                            |       | — |   | 13,338 |   |
| Loss (gain) on  disposition of long-lived assets                                                                                                                                                                                                                          |       | (394                                                | )          | 129                                               |       | (1,358 | ) | (5,771 | ) |
| Total costs and  expenses                                                                                                                                                                                                                                                 |       | 1,028,967                                           |       | 1,028,659                                         |       | 2,047,038 |   | 2,026,108 |   |
|                                                                                                                                                                                                                                                                      |       |                                                |       |                                              |       |   |   |   |   |
| Operating income                                                                                                                                                                                                                                                          |       | 169,312                                             |       | 74,564                                            |       | 300,963 |   | 146,117 |   |
|                                                                                                                                                                                                                                                                      |       |                                                |       |                                              |       |   |   |   |   |
| Other income (expense),  net:                                                                                                                                                                                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| Interest  expense, net of amounts capitalized (contractual interest was $371,848 and  $328,757 during the three months ended June 30, 2006 and 2005, respectively;  and $731,852 and $646,563 during the six months ended June 30, 2006 and 2005,  respectively) (Note 2) |       | (219,642                                            | )          | (185,493                                          | )          | (377,295 | ) | (302,735 | ) |
| Other income  (expense), net (Notes 4 and 8)                                                                                                                                                                                                                              |       | (34,436                                             | )          | 459,746                                           |       | (108,066 | ) | 460,939 |   |
| Total other  income (expense), net                                                                                                                                                                                                                                        |       | (254,078                                            | )          | 274,253                                           |       | (485,361 | ) | 158,204 |   |
| Income (loss)  before reorganization income (expenses), income taxes, share of income  (losses) of equity affiliates and minority’s interest                                                                                                                         |       | (84,766                                             | )          | 348,817                                           |       | (184,398 | ) | 304,321 |   |
| Reorganization income  (expenses) due to bankruptcy, net (Note 2)                                                                                                                                                                                                         |       | 84,623                                              |       | (17,516                                           | )          | 62,639 |   | (31,574 | ) |
| Income (loss)  before income taxes, share of income (losses) of equity affiliates and  minority’s interest                                                                                                                                                           |       | (143                                                | )          | 331,301                                           |       | (121,759 | ) | 272,747 |   |
| Income tax expense  (Note 9)                                                                                                                                                                                                                                              |       | (21,418                                             | )          | (40,334                                           | )          | (71,441 | ) | (64,466 | ) |
| Share of income  (losses) of equity affiliates, net                                                                                                                                                                                                                       |       | 92                                                  |       | (882                                              | )          | (818 | ) | (1,368 | ) |
| Minority’s interest in  loss of subsidiary                                                                                                                                                                                                                           |       | 10,173                                              |       | 953                                               |       | 11,106 |   | 1,383 |   |
| Net income  (loss)                                                                                                                                                                                                                                                        |       | (11,296                                             | )          | 291,038                                           |       | (182,912 | ) | 208,296 |   |
| Dividend requirements  applicable to:   Preferred stock (contractual dividends were $30,032 during 

each of the  three months ended June 30, 2006 and 2005, and 

$60,063 during  each of the six months ended June 30, 2006 

and 2005)                                 |       | —                                              |       | —                                            |       | — |   | — |   |
| Beneficial  conversion feature                                                                                                                                                                                                                                            |       | —                                              |       | —                                            |       | — |   | (583 | ) |
|                                                                                                                                                                                                                                                                      |       |                                                |       |                                              |       |   |   |   |   |
| Net income (loss)  applicable to common stockholders                                                                                                                                                                                                                      |       | $                                                   | (11,296    | )                                                 | $          | 291,038 |   | $ | (182,912 | ) | $ | 207,713 |   |

 

See accompanying notes tothe condensed consolidated financial statements.

6

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**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS - continued**

**(amountsin thousands, except share and per share amounts)**

**(unaudited)**
|                                                                      | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                           | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Amounts per  weighted average share of common stock(Note 9):         |       |                                                |       |                                              |       |   |   |   |   |
| Basic net income  (loss) applicable to Class A common stockholders   |       | $                                                   | (0.04      | )                                                 | $          | 1.15 |   | $ | (0.72 | ) | $ | 0.82 |   |
| Diluted net  income (loss) applicable to Class A common stockholders |       | $                                                   | (0.04      | )                                                 | $          | 0.86 |   | $ | (0.72 | ) | $ | 0.61 |   |
|                                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Basic weighted  average shares of Class A Common Stock outstanding   |       | 228,692,414                                         |       | 228,692,414                                       |       | 228,692,414 |   | 228,692,414 |   |
| Diluted weighted  average shares of Class A Common Stock outstanding |       | 228,692,414                                         |       | 303,300,746                                       |       | 228,692,414 |   | 303,300,746 |   |
|                                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Basic net income  (loss) applicable to Class B common stockholders   |       | $                                                   | (0.04      | )                                                 | $          | 1.10 |   | $ | (0.72 | ) | $ | 0.78 |   |
| Diluted net  income (loss) applicable to Class B common stockholders |       | $                                                   | (0.04      | )                                                 | $          | 0.82 |   | $ | (0.72 | ) | $ | 0.58 |   |
|                                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Basic weighted  average shares of Class B Common Stock outstanding   |       | 25,055,365                                          |       | 25,055,365                                        |       | 25,055,365 |   | 25,055,365 |   |
| Diluted weighted  average shares of Class B Common Stock outstanding |       | 25,055,365                                          |       | 37,215,133                                        |       | 25,055,365 |   | 37,215,133 |   |

 

See accompanyingnotes to the condensed consolidated financial statements.

7

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**ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(amounts in thousands)**

**(unaudited)**
|                                                                                           | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| **Operating activities:**                                                                 | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net income (loss)                                                                         |       | $                                                 | (182,912   | ) | $ | 208,296 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Depreciation                                                                              |       | 379,907                                           |       | 413,822 |   |
| Amortization                                                                              |       | 66,531                                            |       | 74,032 |   |
| Provision for  uncollectible amounts due from the Rigas Family and Other Rigas Entities   |       | —                                            |       | 13,338 |   |
| Gain on  disposition of long-lived assets                                                 |       | (1,358                                            | )          | (5,771 | ) |
| Settlement with  the Rigas Family and Rigas Family Entities, net                          |       | —                                            |       | (457,733 | ) |
| Impairment of  receivable for securities                                                  |       | 2,862                                             |       | — |   |
| Amortization/write-off  of deferred financing costs                                       |       | 1,520                                             |       | 54,202 |   |
| Provision for  settlements                                                                |       | 44,915                                            |       | — |   |
| Other noncash  charges, net                                                               |       | 1,424                                             |       | (1,396 | ) |
| Reorganization  (income) expenses due to bankruptcy, net                                  |       | (62,639                                           | )          | 31,574 |   |
| Deferred income  tax expense                                                              |       | 70,600                                            |       | 63,400 |   |
| Share of losses  of equity affiliates, net                                                |       | 818                                               |       | 1,368 |   |
| Minority’s  interest in loss of subsidiary                                           |       | (11,106                                           | )          | (1,383 | ) |
| Change in  operating assets and liabilities                                               |       | 9,205                                             |       | (63,597 | ) |
| Net cash provided by  operating activities before payment of reorganization expenses      |       | 319,767                                           |       | 330,152 |   |
| Reorganization  expenses paid during the period                                           |       | (58,680                                           | )          | (22,786 | ) |
| Net cash provided by  operating activities                                                |       | 261,087                                           |       | 307,366 |   |
|                                                                                      |       |                                              |       |   |   |
| **Investing activities:**                                                                 | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Capital  expenditures for property and equipment                                          |       | (284,621                                          | )          | (338,191 | ) |
| Proceeds from  the sale of long-lived assets and investments                              |       | 1,586                                             |       | 38,243 |   |
| Acquisition of  minority interests                                                        |       | —                                            |       | (21,650 | ) |
| Change in  restricted cash                                                                |       | 281,532                                           |       | (21,929 | ) |
| Other                                                                                     |       | (4,605                                            | )          | (4,814 | ) |
| Net cash used in  investing activities                                                    |       | (6,108                                            | )          | (348,341 | ) |
|                                                                                      |       |                                              |       |   |   |
| **Financing activities:**                                                                 | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Proceeds from  debt                                                                       |       | 1,023,000                                         |       | 766,000 |   |
| Repayments of  debt                                                                       |       | (932,471                                          | )          | (705,296 | ) |
| Payments of  deferred financing costs                                                     |       | (900                                              | )          | (49,440 | ) |
| Net cash provided by  financing activities                                                |       | 89,629                                            |       | 11,264 |   |
| ** **                                                                                | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| **Increase (decrease) in cash and  cash equivalents**                                     |       | 344,608                                           |       | (29,711 | ) |
| **Cash and cash equivalents at  beginning of period**                                     |       | 389,839                                           |       | 338,909 |   |
| **Cash and cash equivalents at end of period**                                            |       | $                                                 | 734,447    |   | $ | 309,198 |   |

 

See accompanying notes tothe condensed consolidated financial statements.

8

----

 

**ADELPHIA COMMUNICATIONSCORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

## **Note 1: Background and Basis of Presentation**

As ofJune 30, 2006, the Company was engaged primarily in the cable televisionbusiness.  On June 25, 2002 (the “PetitionDate”), Adelphia and substantially all of its domestic subsidiaries filedvoluntary petitions to reorganize (the “Chapter 11 Cases”) under Chapter 11 ofthe Bankruptcy Code in the Bankruptcy Court. On June 10, 2002, Century Communications Corporation (“Century”), anindirect wholly owned subsidiary of Adelphia, filed a voluntary petition toreorganize under Chapter 11.  On October6 and November 15, 2005, certain additional subsidiaries of Adelphia also filedvoluntary petitions to reorganize under Chapter 11.  On March 31, 2006, the Forfeited Entities(defined below) and certain other entities filed voluntary petitions toreorganize under Chapter 11.  Thebankruptcy proceedings for Century and the subsequent filers are being jointlyadministered with Adelphia and substantially all of its domestic subsidiaries(the “Debtors”) and are included in the Chapter 11 Cases.  The Debtors are currently operating theirbusinesses as debtors-in-possession under Chapter 11.  On July 31, 2006, Adelphia completed the saleof assets, which in the aggregate comprise substantially all of its U.S.assets, to TW NY and Comcast.  Foradditional information, see Note 2.

In May2002, certain members of the Rigas Family resigned from their positions asdirectors and executive officers of the Company.  In addition, although the Rigas Family ownedAdelphia $0.01 par value Class A common stock (“Class A Common Stock”) andAdelphia $0.01 par value Class B common stock (“Class B Common Stock”) with amajority of the voting power in Adelphia, the Rigas Family was not able toexercise such voting power since the Debtors filed for protection under theBankruptcy Code in June 2002.  Prior toMay 2002, the Company engaged in numerous transactions that directly orindirectly involved members of the Rigas Family and entities in which membersof the Rigas Family directly or indirectly held controlling interests(collectively, the “Rigas Family Entities”). The Rigas Family Entities include certain cable television entitiesformerly owned by the Rigas Family that are subject to co-borrowingarrangements with the Company, including Coudersport Television Cable Co. (“Coudersport”)and Bucktail Broadcasting Corp. (“Bucktail”) (collectively, the “RigasCo-Borrowing Entities”), as well as other Rigas Family entities (the “OtherRigas Entities”).

On March29, 2006, the United States District Court for the Southern District of NewYork (the “District Court”) entered various orders of forfeiture (the “RMEForfeiture Orders”) pursuant to which on March 29, 2006, all right, title andinterest in the Rigas Co-Borrowing Entities (other than Coudersport andBucktail) (the “Forfeited Entities”) held by the Rigas Family and by the RigasFamily Entities prior to the District Court’s order dated June 8, 2005 (the “ForfeitureOrder”) were transferred to certain subsidiaries of the Company free and clearof all liens, claims, encumbrances and adverse interests in accordance with theRME Forfeiture Orders, subject to certain limitations set forth in the RMEForfeiture Orders.  On July 28, 2006, theDistrict Court entered various orders of forfeiture (the “Real Property ForfeitureOrders”) pursuant to which all right, title and interest previously held by theRigas Family and Rigas Family Entities in certain specified real estate andother property were transferred to certain subsidiaries of the Company free andclear of all liens, claims, encumbrances and adverse interests in accordancewith the Real Property Forfeiture Orders, subject to certain limitations setforth in the Real Property Forfeiture Orders. The transfer of all right, title and interest previously held by the RigasFamily and by the Rigas Family Entities in any of the Company’s securities infurtherance of the agreement between the Company and the U.S. Attorney datedApril 25, 2005 (the “Non-Prosecution Agreement”), as further discussed in Note8, is expected to occur in accordance with separate, subsequent courtdocumentation.

The accompanying condensedconsolidated financial statements of the Company have been prepared inaccordance with accounting principles generally accepted in the United States (“GAAP”)for interim financial information and the rules and regulations of theSEC.  Accordingly, certain informationand footnote disclosures typically included in the Company’s financialstatements filed with its Annual Report on Form 10-K have been condensed or omittedfor this Quarterly Report.  In theopinion of management, the accompanying condensed consolidated financialstatements include all adjustments, which consist of only normal recurringadjustments, necessary for a fair presentation of the results for the periodspresented.  These financial statementsshould be read in conjunction with the Company’s 2005 Form 10-K.  Interim results are not necessarilyindicative of results for a full year.

9

----

 

**ADELPHIA COMMUNICATIONSCORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS – Continued**

**(unaudited)**

 

These condensedconsolidated financial statements have been prepared on a going concern basis,which assumes continuity of operations, realization of assets and satisfactionof liabilities in the ordinary course of business, and do not purport to show,reflect or provide for the consequences of the Chapter 11 Cases or the SaleTransaction.  In particular, thesecondensed consolidated financial statements do not purport to show: (i) as toassets, the amount realized upon their sale or their availability to satisfyliabilities; (ii) as to pre-petition liabilities, the amounts at which claimsor contingencies may be settled, or the status and priority thereof; (iii) asto stockholders’ equity accounts, the effect of any changes that may be made inthe capitalization of the Company; or (iv) as to operations, the effect of theSale Transaction.  As a result of theSale Transaction, the Company disposed of substantially all of its operatingassets and expects to adopt a liquidation basis of accounting in the thirdquarter of 2006.  Upon adoption of aliquidation basis of accounting, assets will be recorded at their estimatedrealizable amounts and liabilities that will be paid in full will be recordedat the present value of amounts to be paid. Liabilities subject to compromise will be recorded at their face amountsuntil they are settled, at which time they will be adjusted to their settlementamounts.

Although the Company is operating asa debtor-in-possession in the Chapter 11 Cases, the Company’s ability tocontrol the activities and operations of its subsidiaries that are also Debtorsmay be limited pursuant to the Bankruptcy Code. However, because the bankruptcy proceedings for the Debtors areconsolidated for administrative purposes in the same Bankruptcy Court and willbe overseen by the same judge, the financial statements of Adelphia and itssubsidiaries have been presented on a combined basis, which is consistent withcondensed consolidated financial statements. All inter-entity transactions between Adelphia, its subsidiaries and theRigas Co-Borrowing Entities have been eliminated in consolidation.

**Note 2:  Bankruptcy Proceedings and Sale of Assets ofthe Company**

### *Overview*

On July 11, 2002, the Creditors’Committee was appointed, and on July 31, 2002, a statutory committee of equityholders (the “Equity Committee” and, together with the Creditors’ Committee,the “Committees”) was appointed.  TheCommittees have the right to, among other things, review and object to certainbusiness transactions and may participate in the formulation of the Debtors’plan of reorganization.  Under theBankruptcy Code, the Debtors were provided with specified periods during whichonly the Debtors could propose and file a plan of reorganization (the “ExclusivePeriod”) and solicit acceptances thereto (the “Solicitation Period”).  The Debtors received several extensions ofthe Exclusive Period and the Solicitation Period from the Bankruptcy Court withthe latest extension of the Exclusive Period and the Solicitation Period beingthrough February 17, 2004 and April 20, 2004, respectively.  In early 2004, the Debtors filed a motionrequesting an additional extension of the Exclusive Period and the SolicitationPeriod.  However, in 2004, the EquityCommittee filed a motion to terminate the Exclusive Period and the SolicitationPeriod and other objections were filed regarding the Debtors’ request.  The Bankruptcy Court has extended theExclusive Period and the Solicitation Period until the hearing on the motionsis held and a determination by the Bankruptcy Court is made.  No hearing has been scheduled.  For additional information, see Note 8, “ArahovaMotions.”

### *Confirmationof Plan of Reorganization*

For a plan ofreorganization to be confirmed and become effective, the Debtors (other thanthe JV Debtors, as defined below) must, among other things:

·                  obtain anorder of the Bankruptcy Court approving a disclosure statement as containing “adequateinformation”;

·                  solicitacceptance of such plan of reorganization from the holders of claims and equityinterests in each class that is impaired and not deemed by the Bankruptcy Courtto have rejected such plan;

·                  obtain anorder from the Bankruptcy Court confirming such plan; and

·                  consummatesuch plan.

10

----

 

**ADELPHIA COMMUNICATIONSCORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS – Continued**

**(unaudited)**

 

Before it can issue an orderconfirming a plan of reorganization, the Bankruptcy Court must find that either(i) each class of impaired claims or equity interests has accepted suchplan or (ii) the plan meets the requirements of the Bankruptcy Code to confirmsuch plan over the objections of dissenting classes.  In addition, the Bankruptcy Court must findthat such plan meets certain other requirements specified in the BankruptcyCode.

By order dated November 23, 2005, theBankruptcy Court approved the Debtors’ fourth amended disclosure statement (the“November Disclosure Statement”) as containing “adequate information” pursuantto Section 1125 of the Bankruptcy Code. By December 12, 2005, the Debtors had completed the mailing of theNovember Disclosure Statement and related solicitation materials in connectionwith the Debtors’ fourth amended joint plan of reorganization, as filed withthe Bankruptcy Court on November 21, 2005 (the “November Plan”).  On April 28, 2006, the Bankruptcy Court approvedthe Debtors’ supplement to the November Disclosure Statement (the “DSSupplement”) as containing “adequate information” pursuant to Section 1125of the Bankruptcy Code (the “DS Supplement Order”).  By May 12, 2006, the Debtors had completedthe mailing of the DS Supplement and related solicitation materials inconnection with the Debtors’ modified fourth amended joint plan ofreorganization, filed with the Bankruptcy Court on April 28, 2006 (the “AprilPlan”).

On May 26, 2006, the Debtors filed amotion (the “363 Motion”) with the Bankruptcy Court seeking, among otherthings, approval to proceed with the sale of certain assets to TW NY and thesale of certain other assets to Comcast without first confirming a Chapter 11plan of reorganization (other than with respect to the JV Debtors (as definedbelow)).  A hearing to consider certainamended bid protections proposed in the 363 Motion was held on June 16,2006, and on that date the Bankruptcy Court entered an order approving newprovisions for termination, for the payment of the breakup fee, a reduction inthe purchase price under certain circumstances and reaffirming theeffectiveness of the “no-shop provision” and overruling all objectionsthereto.  On June 28, 2006, theBankruptcy Court entered an order (the “363 Approval Order”) approving thebalance of the 363 Motion.  On June 30,2006, JP Morgan Chase Bank, N.A. (“JPMC”) filed a notice of appeal, appealingentry of the 363 Approval Order to the District Court.  The appeal was subsequently withdrawn as partof a settlement among the Debtors, the Creditors’ Committee and JPMC.

On June 22, 2006,the Debtors filed their Third Modified Fourth Amended Joint Plan ofReorganization (the “JV Plan”) for the Century-TCI Debtors and ParnassosDebtors (collectively, the “JV Debtors”) with the Bankruptcy Court with respectto the Company’s partnerships with Comcast. By June 9, 2006, the Debtors’ service agent had completed the mailing ofa notice describing certain matters relating to the JV Plan.  In response to the Debtors’ plan modificationmotion dated June 2, 2006 (the “Plan Modification Motion”), by order dated June8, 2006, the Bankruptcy Court approved the information in the 363 Motion andthe Plan Modification Motion as containing “adequate information” pursuant toSection 1125 of the Bankruptcy Code. On June 29, 2006, the Bankruptcy Court entered an order (the “JVConfirmation Order”) confirming the JV Plan. Together, the JV Confirmation Order and the 363 Approval Orderauthorized, among other things, consummation of the Sale Transaction.  On July 31, 2006, the JV Plan becameeffective.  Accordingly, from and afterJuly 31, 2006, the Debtors no longer include the JV Debtors.  The Company expects to pay approximately $1.8billion of claims in the third quarter of 2006 in accordance with theJV Plan, of which approximately $1.6 billion relates to pre-petition debtobligations.  The Company paid$1,248,206,000 of such pre-petition debt obligations on the Effective Date.  In connection with the confirmation of the JVPlan, the Company recorded $49,883,000 of additional interest expense forcertain of these allowed claims during the quarter ended June 30, 2006.  Other than pre-petition debt obligationswhich accrue interest at their contractual rate, the JV Plan generally providesfor interest on allowed claims at a rate of 8% from the Petition Date throughJuly 31, 2006.

For the balance ofthe Debtors, the April Plan remains pending. The deadline for the submission of ballots to the balloting agent toaccept or reject the April Plan is September 12, 2006, and in the case ofsecurities held through an intermediary, the deadline for instructions to bereceived by the intermediary is September 7, 2006 or such other date asspecified by the applicable intermediary.

Effective July 21,2006, Adelphia entered into the Plan Agreement with certain representatives ofthe *ad hoc* committee of holders of ACCSenior Notes represented by Hennigan, Bennett & Dorman LLP, the *ad hoc* committee of

11

----

 

**ADELPHIA COMMUNICATIONS CORPORATIONAND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS – Continued**

**(unaudited)**

 

holdersof ACC Senior Notes and Arahova Notes represented by Pachulski Stang ZiehlYoung Jones & Weintraub LLP, the *ad hoc*committeeof Arahova Noteholders, the *ad hoc*committeeof holders of FrontierVision Opco Notes Claims and FrontierVision Holdco NotesClaims, W.R. Huff Asset Management Co., L.L.C., the *ad hoc*committeeof ACC Trade Claimants, the *ad hoc*committeeof Subsidiary Trade Claimants and the Creditors’ Committee.

The Plan Agreementis designed to form the basis of the Modified Plan, which includes a proposedglobal compromise and settlement of all disputes among the creditors, not allof whom are parties to the Plan Agreement. Adelphia’s obligations under the Plan Agreement are subject to the entryby the Bankruptcy Court of an order approving a disclosure statement withrespect to the Modified Plan and authorizing the Debtors to propose theModified Plan as provided in the Plan Agreement.  The Modified Plan contemplated by the PlanAgreement is subject to Bankruptcy Court approval.  The Plan Agreement does not apply to the JVDebtors, whose plan of reorganization became effective on July 31, 2006.

The Plan Agreementreflects a compromise among certain creditor groups under which $1.08 billionin value will be transferred from certain unsecured creditors of variousAdelphia subsidiaries to certain unsecured senior and trade creditors ofAdelphia.  In some cases,  these unsecured creditors will be entitled toreimbursement from contingent sources of value, including the proceeds of alitigation trust to be established under the plan to pursue claims againstthird parties that are alleged to have damaged Adelphia.  The Plan Agreement also contemplates that thecreditors of Adelphia (other than the creditors of the JV Debtors) wouldreceive, in addition to the $1.08 billion described above, the residual saleconsideration after funding all other distributions and reserves and interestsin the litigation trust as described in the Plan Agreement.

The Plan Agreementis conditioned upon the Modified Plan effective date occurring no later thanSeptember 15, 2006.  Conditions tothe Modified Plan effective date would also include material completion of thedistribution of the TWC Class A Common Stock to creditors on the Modified Planeffective date, and the distribution to Adelphia’s creditors on the effectivedate or immediately thereafter of plan consideration of at least $1.08 billion,before deducting a true-up reserve to account for certain fluctuations in thevalue of TWC Class A Common Stock.

### *Sale ofAssets*

 OnJuly 31, 2006, Adelphia completed the sale of assets, which in theaggregate comprise substantially all of its U.S. assets, to TW NY andComcast.  Proceeds from the SaleTransaction totaled approximately $17.4 billion, consisting of cash in theamount of approximately $12.5 billion and shares of TWC Class A Common Stockwith a preliminary estimated fair value as of the Effective Date ofapproximately $4.9 billion.  Suchestimated fair value of the TWC Class A Common Stock was determined by theCompany based on management’s review of the underlying factors affecting thevaluation of cable companies, taking into account the approximately $4.9billion valuation agreed with TW NY for purposes of the TW NY assetpurchase agreement, the $4.85 billion valuation for the Plan Agreement agreedto by the Company, the Creditors’ Committee and certain creditors and *ad hoc*creditor committees, subject to certain adjustmentsbased on market valuation, updates from its financial advisors and the recentupward movement in the price of publicly traded cable companies’ stocks.

The aggregatepurchase price is subject to certain post-closing adjustments.  Upon consummation of the Sale Transaction, aportion of the aggregate purchase price, consisting of approximately $503million of cash and shares of TWC Class A Common Stock with a preliminaryestimated fair value as of the Effective Date of approximately $195 million,was deposited in escrow accounts to secure Adelphia’s indemnificationobligations and any post-closing purchase price adjustments due to the buyersfrom Adelphia pursuant to the asset purchase agreements.  The post-closing adjustments, if any, will bedetermined over the next several months. To the extent such post-closing adjustments are in favor of TW NY orComcast, the amount of the escrow ultimately released to the Company will bereduced.  In the event that thepost-closing purchase price adjustment is in favor of TW NY or Comcast andexceeds the amount of the escrow, the Company is required to pay such excessoutside of the escrow.

Certainfees are due to the Company’s financial advisors upon successful completion of theSale Transaction.  The Company is in theprocess of determining the amount of such fees.

12

----

 

**ADELPHIA COMMUNICATIONSCORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS – Continued**

**(unaudited)**

 

The TWCClass A Common Stock is expected to be listed on The New York StockExchange (the “NYSE”) in connection with an initial registered public offeringof the TWC Class A Common Stock or shortly following the consummation of aplan of reorganization to distribute the proceeds of the Sale Transaction butin any event within two weeks following the consummation of a plan ofreorganization to distribute the proceeds of the Sale Transaction to theCompany’s creditors and stakeholders (other than those of the JV Debtors) or,if not listed on the NYSE within a reasonable period following the initialregistered offering or distribution pursuant to a plan of reorganization, onThe Nasdaq Stock Market (“Nasdaq”).

On the Effective Date, pursuant tothe Registration Rights Agreement, Adelphia agreed to consummate a fullyunderwritten initial public offering of at least 33-1/3% of the TWC Class ACommon Stock issued by TWC in the Sale Transaction (inclusive of theoverallotment option, if any) within three months of TWC preparing thenecessary registration statement and having it declared effective (subject todelays under specified conditions). Pursuant to the Registration Rights Agreement, TWC is required to fileand have a registration statement covering these shares declared effective aspromptly as possible and in any event, no later than January 31, 2007, subjectto certain exceptions.  Adelphia’sobligation to consummate the public offering terminates if Adelphia consummatesa plan of reorganization as a result of which (i) 75% of the TWC Class A CommonStock Adelphia received in the Sale Transaction (excluding TWC Class A CommonStock held in escrow pursuant to the Sale Transaction) is distributed tocreditors and the TWC Class A Common Stock is listed on the NYSE or Nasdaqwithin two weeks or (ii) 90% of the TWC Class A Common Stock Adelphia receivedin the Sale Transaction (excluding TWC Class A Common Stock held in escrowpursuant to the Sale Transaction) is distributed to creditors regardless oflisting status.  After the initial publicoffering, Adelphia will have the right to a demand registration and a finalregistration if the exemption from registration pursuant to Section 1145 of theBankruptcy Code is not available for a distribution of the remaining TWC ClassA Common Stock to the Company’s creditors and stakeholders under a Chapter 11plan of reorganization.  Pursuant to theRegistration Rights Agreement, TWC has the right to elect, in its solediscretion, to not rely on Section 1145 of the Bankruptcy Code and conducta final registration for the distribution of the remaining TWC Class A CommonStock to the Company’s creditors and stakeholders.  Pursuant to the terms of the RegistrationRights Agreement, Adelphia’s ability to distribute the TWC Class A Common Stockmay be subject to lock-up periods following public offerings of TWC Class ACommon Stock.

### *Pre-petitionObligations*

Pre-petition and post-petitionobligations of the Debtors are treated differently under the BankruptcyCode.  Due to the commencement of theChapter 11 Cases and the Debtors’ failure to comply with certain financial andother covenants, the Debtors are in default on substantially all of theirpre-petition debt obligations (other than those that were discharged by the JVPlan).  As a result of the Chapter 11filing, all actions to collect the payment of pre-petition indebtedness aresubject to compromise or other treatment under a plan of reorganization.  Generally, actions to enforce or otherwiseeffect payment of pre-petition liabilities are stayed against the Debtors.  The Bankruptcy Court has approved the Debtors’motions to pay certain pre-petition obligations including, but not limited to,employee wages, salaries, commissions, incentive compensation and other relatedbenefits.  The Debtors have been payingand intend to continue to pay undisputed post-petition claims in the ordinarycourse of business.  In addition, theDebtors may assume or reject pre-petition executory contracts and unexpiredleases with the approval of the Bankruptcy Court.  Any damages resulting from the rejection ofexecutory contracts and unexpired leases are treated as general unsecuredclaims and will be classified as liabilities subject to compromise.  For additional information concerningliabilities subject to compromise, see below.

The ultimate amount of the Debtors’liabilities will be determined during the Debtors’ claims resolutionprocess.  The Bankruptcy Court hasestablished bar dates of January 9, 2004, November 14, 2005, December 20, 2005and May 1, 2006 for filing proofs of claim against the Debtors’ estates.  A bar date is the date by which proofs ofclaim must be filed if a claimant disagrees with how its claim appears on theDebtors’ Schedules of Liabilities. However, under certain limited circumstances, claimants may file proofsof claims after the bar date.  As ofJanuary 9, 2004, approximately 17,000 proofs of claim asserting in excess of$3.20 trillion in claims were filed and, as of July 31, 2006,approximately 19,500 proofs of claim asserting approximately $3.98 trillion inclaims were filed, in each case including duplicative claims, but excluding anyestimated amounts for unliquidated claims. The aggregate amount of claims filed

13

----

 

**ADELPHIA COMMUNICATIONSCORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS – Continued**

**(unaudited)**

with the Bankruptcy Court far exceeds the Debtors’ estimateof ultimate liability.  The Debtorscurrently are in the process of reviewing, analyzing and reconciling thescheduled and filed claims.  The Debtorsexpect that the claims resolution process will take significant time tocomplete following the consummation of a plan of reorganization.  As the amounts of the allowed claims aredetermined, adjustments will be recorded in liabilities subject to compromiseand reorganization income (expenses) due to bankruptcy, net.

The Debtors have filed numerousomnibus objections that address $3.68 trillion of filed claims, consistingprimarily of duplicative claims.  Certainclaims addressed in such objections were either: (i) reduced and allowed; (ii)disallowed and expunged; or (iii) subordinated by orders of the BankruptcyCourt.  Hearings on certain claimsobjections are ongoing.  Certain otherobjections have been adjourned to allow the parties to continue to reconcilesuch claims.  Additional omnibusobjections may be filed as the claims resolution process continues.

### *Debtor-in-Possession(“DIP”) Credit Facility*

In order to provide liquidity followingthe commencement of the Chapter 11 Cases, Adelphia and certain of itssubsidiaries (the “Loan Parties”) entered into a $1,500,000,000debtor-in-possession credit facility (as amended, the “DIP Facility”).  OnMay 10, 2004, the Loan Parties entered into a $1,000,000,000 extendeddebtor-in-possession credit facility (as amended, the “First Extended DIPFacility”), which amended and restated the DIP Facility in its entirety. On February 25, 2005, the Loan Parties entered into a $1,300,000,000 furtherextended debtor-in-possession credit facility (as amended, the “Second ExtendedDIP Facility”), which amended and restated the First Extended DIP Facility inits entirety.  On March 17, 2006, the Loan Parties entered into a$1,300,000,000 further extended debtor-in-possession credit facility (the “ThirdExtended DIP Facility”), which amended and restated the Second Extended DIPFacility in its entirety.   In connectionwith the completion of the Sale Transaction, on the Effective Date, the LoanParties terminated the Third Extended DIP Facility.  In connection with the termination of theThird Extended DIP Facility, the Loan Parties repaid all loans outstandingunder the Third Extended DIP Facility and all accrued and unpaid interestthereon, with such payments totaling approximately $986,000,000.  In addition, in connection with thetermination of the Third Extended DIP Facility the Loan Parties paid allaccrued and unpaid fees of the lenders and agent banks under the Third ExtendedDIP Facility.  In connection with thesepayments, effective as of the Effective Date, the collateral agent under theThird Extended DIP Facility released any and all liens and security interestson the assets that collateralized the obligations under the Third Extended DIPFacility.  As described in Note 8 to theaccompanying condensed consolidated financial statements, the Company hasissued certain letters of credit under the Third Extended DIP Facility.  As a result of the termination of the ThirdExtended DIP Facility, on the Effective Date, the Company collateralizedletters of credit issued under the Third Extended DIP Facility with cash of$87,661,000.  For additional information,see Note 5.

### *ExitFinancing Commitment*

On February 25, 2004, Adelphiaexecuted a commitment letter and certain related documents pursuant to which asyndicate of financial institutions committed to provide to the Debtors up to$8,800,000,000 in exit financing. Following the Bankruptcy Court’s approval on June 30, 2004 of the exitfinancing commitment, the Company paid the exit lenders a nonrefundable fee of$10,000,000 and reimbursed the exit lenders for certain expenses they hadincurred through the date of such approval, including certain legalexpenses.  In light of the agreementswith TW NY and Comcast, on April 25, 2005, the Company informed the exitlenders of its election to terminate the exit financing commitment, whichtermination became effective on May 9, 2005. As a result of the termination, the Company recorded a charge of$58,267,000 during the second quarter of 2005, which represents previouslyunpaid commitment fees of $45,428,000, the nonrefundable fee of $10,000,000 andcertain other expenses.

### *Presentation*

In accordance with Statement ofPosition 90-7, *Financial Reporting by Entities in ReorganizationUnder the Bankruptcy Code*(“SOP 90-7”), all pre-petition liabilitiessubject to compromise have been segregated in the condensed consolidatedbalance sheets and classified as liabilities subject to compromise, at theestimated amount of allowable claims. Liabilities subject to compromise are reported at the amounts expectedto be allowed, even if they may be settled for lesser amounts.  For periods subsequent to the Petition Date,interest expense has been reported only to the extent that

14

----

 

**ADELPHIA COMMUNICATIONSCORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS – Continued**

**(unaudited)**

it is expected to be paid during the Chapter 11proceedings.  In addition, no preferredstock dividends have been accrued subsequent to the Petition Date.  Liabilities not subject to compromise areseparately classified as current or noncurrent. Revenue, expenses, realized gains and losses, and provisions for lossesresulting from reorganization are reported separately as reorganization income(expenses) due to bankruptcy, net.  Cashused for reorganization items is disclosed in the condensed consolidatedstatements of cash flows.

Liabilities subject to compromise consist of thefollowing (amounts in thousands):

|                                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Parent and  subsidiary debt        |       | $                 | 16,140,109 |                  | $          | 16,136,960 |   |
| Accounts payable                   |       | 931,743           |       | 926,794               |       |
| Accrued  liabilities               |       | 1,203,300         |       | 1,202,610             |       |
| Series B  preferred stock          |       | 148,794           |       | 148,794               |       |
| Liabilities  subject to compromise |       | $                 | 18,423,946 |                  | $          | 18,415,158 |   |

 

Followingis a reconciliation of the changes in liabilities subject to compromise for theperiod from December 31, 2005 through June 30, 2006 (amounts inthousands):

| Balance at December 31, 2005                          |   | $        | 18,415,158 |   |
|-------------------------------------------------------|--------|----------|------------|--------|
| Verizon Media  Ventures claims (a)                    |   | 85,959   |       |
| Disallowed  pre-petition accrued interest expense (b) |   | (127,244 | )          |
| Interest on the  JV Plan’s allowed claims (c)    |   | 49,883   |       |
| Debt obligations  associated with the JV Plan (c)     |   | 9,958    |       |
| Chapter 11  filing by the Forfeited Entities          |   | (1,929   | )          |
| Settlements and  other                                |   | (7,839   | )          |
| Balance at June 30,  2006                             |   | $        | 18,423,946 |   |

 

----

(a)          In connection with theacquisition of Verizon Media Ventures, Inc. (“Verizon Media Ventures”),Adelphia issued shares of Class A Common Stock valued at $46,470,000.  Verizon Media Ventures had the option torequire the Company to repurchase such shares, including related interestcharges, in the event that the Company failed to register the shares within aspecified period of time after the acquisition. As a result of the claims reconciliation process, the Company determinedthat, prior to the Petition Date, Verizon Media Ventures had asked the Companyto repurchase the shares.  Accordingly,the Company has revised the classification of the amount of the purchase pricepreviously recorded through equity to liabilities subject to compromise.  In addition, the Company recorded losses of$30,000,000 and $9,000,000 during the three months ended June 30, 2006 and March31, 2006, respectively, associated with claims asserted by Verizon MediaVentures in connection with two separate asset purchase agreements which werenot consummated.  The losses recorded bythe Company for these claims represent the impact of a settlement which hasbeen reached by the parties, subject to definitive documentation.  The Company and Verizon Media Ventures are inthe process of documenting the settlement reached on these claims.

(b)         During the three monthsended June 30, 2006, the Company reversed $127,244,000 of pre-petition interestexpense which had previously been accrued as a result of a May 2006 BankruptcyCourt order which disallowed this interest.

(c)          During the quarter endedJune 30, 2006, the Company recorded $49,883,000 of additional interest expensefor certain allowed claims under the JV Plan. Other than pre-petition debt obligations which accrue interest at theircontractual rate, the JV Plan generally provides for interest on allowed claimsat a rate of 8% from the Petition Date through July 31, 2006.  In connection with the

15

----

 

**ADELPHIA COMMUNICATIONSCORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS – Continued**

**(unaudited)**

confirmation of the JV Plan, the Company also increasedliabilities subject to compromise by $9,958,000 to reflect the allowed claimsfor the JV Debtors’ pre-petition debt obligations.

The amounts presented as liabilitiessubject to compromise may be subject to future adjustments depending onBankruptcy Court actions, completion of the reconciliation process with respectto disputed claims, determinations of the secured status of certain claims, thevalue of any collateral securing such claims or other events. Such adjustmentsmay be material to the amounts reported as liabilities subject to compromise.

As a result of the Chapter 11 Cases,deferred financing fees related to pre-petition debt obligations are no longeramortized.  Accordingly, unamortizeddeferred financing fees of $131,059,000 have been included in liabilitiessubject to compromise as a reduction of the net carrying value of the relatedpre-petition debt.  Similarly,amortization of the deferred issuance costs for the Company’s redeemablepreferred stock was also terminated at the Petition Date.

### *ReorganizationIncome (Expenses) Due to Bankruptcy, net*

Only those fees and other items directly related tothe Chapter 11 filings are included in reorganization income (expenses) due tobankruptcy, net.  These fees and otheritems are adjusted by interest earned during reorganization and income relatedto the settlement of certain liabilities subject to compromise.  Certain reorganization expenses arecontingent upon the approval of a plan of reorganization by the BankruptcyCourt and include cure costs, financing fees and success fees.  The Company is aware of certain success feesthat potentially could be paid upon the Company’s emergence from bankruptcy tothird party financial advisors retained by the Company and the Committees inconnection with the Chapter 11 Cases. Currently, these success fees are estimated to be $6,500,000 in theaggregate and would not be the obligation of either TW NY or Comcast.  None of these fees became payable as a resultof the emergence of the JV Debtors from bankruptcy on July 31, 2006.  In addition, pursuant to their employmentagreements, the Chief Executive Officer (“CEO”) and the Chief Operating Officer(“COO”) of the Company are eligible to receive equity awards of Adelphia stockwith a minimum aggregate fair value of $17,000,000 upon the Debtors’ emergencefrom bankruptcy.  Under the employmentagreements, the value of such equity awards will be determined based on theaverage trading price of the post-emergence common stock of Adelphia during the15 trading days immediately preceding the 90th day following the date ofemergence.  Pursuant to the employmentagreements, these equity awards, which will be subject to vesting and tradingrestrictions, may be increased up to a maximum aggregate value of $25,500,000at the discretion of the board of directors of Adelphia (the “Board”).

On June 9, 2006, the Debtors filed a motion (the “CEO/COOMotion”) with the Bankruptcy Court seeking authority to amend the provisions ofthese employment agreements with the CEO and COO relating to Emergence Awards(a fixed amount Initial Equity Award and a discretionary Emergence Date SpecialAward, each as defined in their respective employment agreement) (the “Amendments”).  On August 8, 2006, the Bankruptcy Courtauthorized the Amendment relating to the COO, which authorized the Company topay the COO $6,800,000 in cash in lieu of the Initial Equity Award and, subjectto the discretion of the Board, up to $3,400,000 in cash in lieu of theEmergence Date Special Award of restricted shares.  In exchange for the Emergence Awards, theCompany’s COO will execute a release of any claims for additional compensationother than such Emergence Awards.  TheCEO/COO Motion was adjourned as to the Company’s CEO until September 12,2006.  If the CEO/COO Motion is approvedas to the relief relating to the Company’s CEO, the Company will be authorizedto pay the CEO $10,200,000 in cash in lieu of the Initial Equity Award and,subject to the discretion of the Board, up to $5,100,000 in cash in lieu of theEmergence Date Special Award of restricted shares, and the CEO will execute arelease of any claims for additional compensation other than such Emergence Awards.

16

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**ADELPHIA COMMUNICATIONSCORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS – Continued**

**(unaudited)**

The following table sets forth certain components ofreorganization income (expenses) due to bankruptcy, net for the indicatedperiods (amounts in thousands):

|                                                          | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                     |       |                                            |       |                                          |       |   |   |   |   |
| Professional  fees                                       | ** ** | $                                               | (38,019    | )                                             | $          | (18,287 | ) | $ | (69,833 | ) | $ | (41,052 | ) |
| Disallowed  pre-petition accrued interest expense        |       | 127,244                                         |       | —                                        |       | 127,244 |   | — |   |
| Debt obligations  associated with the JV Plan            |       | (9,958                                          | )          | —                                        |       | (9,958 | ) | — |   |
| Interest earned  during reorganization                   |       | 6,105                                           |       | 2,377                                         |       | 10,693 |   | 4,548 |   |
| Settlements and  other                                   |       | (749                                            | )          | (1,606                                        | )          | 4,493 |   | 4,930 |   |
| Reorganization  income (expenses) due to bankruptcy, net | ** ** | $                                               | 84,623     |                                          | $          | (17,516 | ) | $ | 62,639 | ** ** | $ | (31,574 | ) |

 

*Investigation,Re-audit and Sale Transaction Costs*

The Company isincurring certain professional fees that, although not directly related to theChapter 11 filing, relate to the investigation of the actions of certainmembers of the Rigas Family who held all of the senior executive positions atAdelphia and constituted five of the nine members of Adelphia’s board ofdirectors, related efforts to comply with applicable laws and regulations andthe Sale Transaction.  These expensesinclude legal fees, employee retention costs, audit fees incurred for the yearsended December 31, 2001 and prior, legal defense costs paid on behalf ofthe Rigas Family and consultant fees. These expenses have been included ininvestigation, re-audit and sale transaction costs in the accompanyingcondensed consolidated statements of operations.

## **Note 3: Variable Interest Entities**

FinancialAccounting Standards Board (“FASB”) Interpretation No. 46, *Consolidationof Variable Interest Entities*(as subsequently revised in December2003*,*“FIN 46-R”) requires variable interestentities, as defined by FIN 46-R, to be consolidated by the primary beneficiaryif certain criteria are met.  EffectiveJanuary 1, 2004, the Company began consolidating the Rigas Co-BorrowingEntities under FIN 46-R.  As describedbelow, the Company ceased to consolidate Coudersport and Bucktail under FIN46-R in the second quarter of 2005. Pursuant to the RME Forfeiture Orders, all right, title and interest inthe Forfeited Entities held by the Rigas Family and Rigas Family Entities priorto the Forfeiture Order were transferred to the Company on March 29, 2006.  The Forfeited Entities do not include Coudersportand Bucktail.  See Note 8 for additionalinformation.  As a result, the ForfeitedEntities became part of Adelphia and its consolidated subsidiaries on March 29,2006 and the provisions of FIN 46-R are no longer applicable to the ForfeitedEntities.

The April 2005agreements approved by the District Court in the SEC civil enforcement action(the “SEC Civil Action”), including: (i) the Non-Prosecution Agreement;(ii) the Adelphia-Rigas Settlement Agreement (defined in Note 8); (iii) theGovernment-Rigas Settlement Agreement (also defined in Note 8); and (iv) thefinal judgment as to Adelphia (collectively, the “Government SettlementAgreements”), provide for, among other things, the forfeiture of certain assetsby the Rigas Family and Rigas Family Entities. As a result of the Forfeiture Order on June 8, 2005, the Company was nolonger the primary beneficiary of Coudersport and Bucktail.  Accordingly, the Company ceased toconsolidate Coudersport and Bucktail under FIN 46-R in the second quarter of2005.

17

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**ADELPHIA COMMUNICATIONSCORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS – Continued**

**(unaudited)**

The consolidation of theRigas Co-Borrowing Entities under FIN 46-R resulted in the following impact tothe Company’s consolidated financial statements for the indicated periods(amounts in thousands):

|                                               | ** ** | **Three months ended March 31,** | ** ** | **Six months  ended June 30,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                    | ** ** | **2006 ***                                      | ** ** | **2005**                                      | ** ** | **2005** | ** ** |
| Revenue                                       |       | $                                                    | 53,459     |                                          | $          | 50,801 |   | $ | 101,706 |   |
| Operating income                              |       | $                                                    | 8,339      |                                          | $          | 7,882 |   | $ | 16,512 |   |
| Other (expense)  income, net                  |       | $                                                    | (644       | )                                             | $          | 32 |   | $ | 433,619 |   |
| Net income applicable  to common stockholders |       | $                                                    | 7,695      |                                          | $          | 7,914 |   | $ | 450,131 |   |

|                        | ** ** | **December 31,  2005** | ** ** |
|------------------------|------------|-----------------------------|------------|
| Current assets         |       | $                           | 3,383      |   |
| Noncurrent  assets     |       | $                           | 612,065    |   |
| Current  liabilities   |       | $                           | 15,602     |   |
| Noncurrent liabilities |       | $                           | 5,660      |   |

 

 

----

*  EffectiveMarch 29, 2006, the Forfeited Entities became part of Adelphia and theprovisions of FIN 46-R are no longer applicable to the Forfeited Entities;thus, FIN 46-R had no impact to the Company’s consolidated financial statementsfor periods subsequent to March 31, 2006.

## **Note 4: Transactions with the Rigas Family and Other Rigas Entities**

Inconnection with the Government Settlement Agreements, all amounts owed betweenAdelphia (including the Rigas Co-Borrowing Entities) and the Rigas Family andOther Rigas Entities will not be collected or paid.  As a result, in June 2005, the Companyderecognized through other income (expense) the $460,256,000 payable by theRigas Co-Borrowing Entities to the Rigas Family and Other Rigas Entities.  This liability, which was recorded by the Companyin connection with the January 1, 2004 consolidation of the Rigas Co-BorrowingEntities, had no legal right of set-off against amounts due to the RigasCo-Borrowing Entities from the Rigas Family and Other Rigas Entities.

OnJune 8, 2005, pursuant to the Forfeiture Order, equity ownership of the RigasCo-Borrowing Entities (other than Coudersport and Bucktail), the debt andequity securities of the Company and certain real estate and other propertywere forfeited by the Rigas Family and the Rigas Family Entities to the UnitedStates.  In conjunction with theForfeiture Order on June 8, 2005, the Company recorded the settlement proceedsat their fair value.  The Companydetermined that the equity interests in the Rigas Co-Borrowing Entities hadnominal value as the liabilities of these entities significantly exceed thefair value of their assets.  On March 29,2006, all right, title and interest in the Forfeited Entities held by the RigasFamily and by the Rigas Family Entities prior to the Forfeiture Order weretransferred to certain subsidiaries of the Company free and clear of all liens,claims, encumbrances and adverse interests in accordance with the RMEForfeiture Orders, subject to certain limitations set forth in the RMEForfeiture Orders.  

OnJuly 28, 2006, the District Court entered the Real Property Forfeiture Orderspursuant to which all right, title and interest previously held by the RigasFamily and the Rigas Family Entities in certain specified real estate and otherproperty were transferred to certain subsidiaries of the Company free and clearof all liens, claims, encumbrances and adverse interests in accordance with theReal Property Forfeiture Orders, subject to certain limitations set forth inthe Real Property Forfeiture Orders.  

Thetransfer of all right, title and interest previously held by the Rigas Familyand by the Rigas Family Entities in any of the Company’s securities infurtherance of the Non-Prosecution Agreement is expected to occur in accordancewith separate, subsequent court documentation.

Also,in connection with the Government Settlement Agreements, the Company agreed topay the Rigas Family an additional $11,500,000 for legal defense costs, whichwas paid by the Company in June 2005. The Government Settlement Agreements release the Company from further obligationto provide funding for legal defense costs for the Rigas Family.

18

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**ADELPHIA COMMUNICATIONSCORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS – Continued**

**(unaudited)**

Asof December 31, 2004, the Company had accrued $2,717,000 of severance for JohnJ. Rigas pursuant to the terms of a May 23, 2002 agreement with John J. Rigas,Timothy J. Rigas, James P. Rigas and Michael J. Rigas.  The Government Settlement Agreements releasethe Company from this severance obligation. Accordingly, the Company derecognized the severance accrual andrecognized the benefit of $2,717,000 in June 2005.

The Company recognized a net benefitfrom the settlement with the Rigas Family and Other Rigas Entities in June 2005and has included such net benefit in other income (expense), net in thecondensed consolidated statements of operations, as follows (amounts inthousands):

| Derecognition of amounts due  to the Rigas Family and Other Rigas Entities from the Rigas Co-Borrowing  Entities |   | $       | 460,256 |   |
|------------------------------------------------------------------------------------------------------------------|--------|---------|---------|--------|
| Derecognition of  amounts due from the Rigas Family and Other Rigas Entities, net*                               |   | (15,405 | )       |
| Estimated fair  value of debt and equity securities and real estate to be conveyed to the  Company               |   | 34,629  |    |
| Deconsolidation  of Coudersport and Bucktail, net (Note 3)                                                       |   | (12,964 | )       |
| Legal defense  costs for the Rigas Family                                                                        |   | (11,500 | )       |
| Derecognition of  severance accrual for John J. Rigas                                                            |   | 2,717   |    |
| Settlement with  the Rigas Family and Other Rigas Entities, net                                                  |   | $       | 457,733 |   |

 

----

*Represents the December 31, 2004 amounts due from the Rigas Family and OtherRigas Entities of $28,743,000, less the provision for uncollectible amounts of$13,338,000 recognized by the Company for the period from January 1, 2005through June 8, 2005 (date of the Forfeiture Order) due to a further decline inthe fair value of the underlying securities.

19

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**ADELPHIA COMMUNICATIONSCORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS – Continued**

**(unaudited)**

## **Note 5: Debt**

The carrying value of the Company’sdebt is summarized below for the indicated periods (amounts in thousands):

|                                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Parent and  subsidiary debt:         |       |              |       |                  |       |
| Secured:                             |       |              |       |                  |       |
| DIP Facilities (a)                   |       | $                 | 954,000    |                  | $          | 851,352 |   |
| Capital lease obligations            |       | 5,427             |       | 17,546                |       |
| Unsecured other subsidiary debt      |       | —            |       | 286                   |       |
| Parent and subsidiary debt           |       | $                 | 959,427    |                  | $          | 869,184 |   |
|                                 |       |              |       |                  |       |
| Liabilities  subject to compromise:  |       |              |       |                  |       |
| Parent debt – unsecured: (b)    |       |              |       |                  |       |
| Senior notes                         |       | $                 | 4,767,565  |                  | $          | 4,767,565 |   |
| Convertible subordinated notes (c)   |       | 1,992,022         |       | 1,992,022             |       |
| Senior debentures                    |       | 129,247           |       | 129,247               |       |
| Pay-in-kind notes                    |       | 31,847            |       | 31,847                |       |
| Total parent debt                    |       | 6,920,681         |       | 6,920,681             |       |
|                                 |       |              |       |                  |       |
| Subsidiary debt:                     |       |              |       |                  |       |
| Secured                              |       |              |       |                  |       |
| Notes payable to banks (d)           |       | 2,240,313         |       | 2,240,313             |       |
| Co-Borrowing Facilities (e)          |       | 4,576,375         |       | 4,576,375             |       |
| Unsecured                            |       |              |       |                  |       |
| Senior notes                         |       | 1,105,538         |       | 1,105,538             |       |
| Senior discount notes                |       | 342,830           |       | 342,830               |       |
| Zero coupon senior discount notes    |       | 755,031           |       | 755,031               |       |
| Senior subordinated notes            |       | 208,976           |       | 208,976               |       |
| Other subsidiary debt                |       | 121,424           |       | 121,424               |       |
| Total subsidiary debt                |       | 9,350,487         |       | 9,350,487             |       |
|                                 |       |              |       |                  |       |
| Deferred financing fees              |       | (131,059          | )          | (134,208              | )          |
| Parent and  subsidiary debt (Note 2) |       | $                 | 16,140,109 |                  | $          | 16,136,960 |   |

 

*(a)  DIP Facilities*

*Third Extended DIP Facility*

On March 17, 2006, the Loan Partiesentered into the $1,300,000,000 Third Extended DIP Facility, which supersededand replaced in its entirety the Second Extended DIP Facility.  The Third Extended DIP Facility was approvedby the Bankruptcy Court on March 16, 2006 and closed on March 17, 2006.

The Third Extended DIP Facility generally was scheduled tomature upon the earlier of August 7, 2006 or the occurrence of certain otherevents, as described in the Third Extended DIP Facility. The Third Extended DIPFacility was comprised of an $800,000,000 revolving Tranche A Loan (including a$500,000,000 letter of credit subfacility) and a $500,000,000 term Tranche BLoan. The Third Extended DIP Facility was secured with a first priority lien onall of the Loan Parties’ unencumbered assets, a priming first priority lien onall assets of the Loan Parties securing their pre-petition bank debt and ajunior lien on all other assets of the Loan Parties. The applicable margin onloans extended under the Third Extended DIP Facility was reduced (when comparedto the Second Extended DIP Facility) to 1.00% per annum in the case ofalternate base rate loans and 2.00% per annum in the case of adjusted Londoninterbank offered rate (“LIBOR”) loans, and the commitment fee with respect tothe unused portion of the Tranche A Loan is 0.50% per annum (which is the samefee that was charged under the Second Extended DIP Facility).

 

20

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**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued**

**(unaudited)**

Inconnection with the closing of the Third Extended DIP Facility, on March 17,2006, the Loan Parties borrowed an aggregate of $916,000,000 thereunder andused all such proceeds and a portion of available cash and cash equivalents torepay all of the indebtedness, including accrued and unpaid interest andcertain fees and expenses, outstanding under the Second Extended DIP Facility.

Fromtime to time, the Loan Parties and the DIP lenders entered into certainamendments to the terms of the DIP facilities. In addition, from time to time, the Loan Parties received waivers toprevent or cure certain defaults or events of defaults under the DIPfacilities.  To the extent applicable,all of the waivers and amendments agreed to between the Loan Parties and theDIP lenders under the previous DIP facilities are effective through thematurity date of the Third Extended DIP Facility.

As ofJune 30, 2006, $454,000,000 under the Tranche A Loan had been drawn and lettersof credit totaling $83,941,000 were issued under the Tranche A Loan, leavingavailability of $262,059,000 under the Tranche A Loan.  Furthermore, as of June 30, 2006, the entire$500,000,000 under the Tranche B Loan was drawn.

Inconnection with the completion of the Sale Transaction, on the Effective Date,the Loan Parties terminated the Third Extended DIP Facility.  In connection with the termination of theThird Extended DIP Facility, the Loan Parties repaid all loans outstandingunder the Third Extended DIP Facility and all accrued and unpaid interestthereon, with such payments totaling approximately $986,000,000.  In addition, in connection with thetermination of the Third Extended DIP Facility the Loan Parties paid allaccrued and unpaid fees of the lenders under the Third Extended DIPFacility.  In connection with thesepayments, effective as of the Effective Date, the collateral agent under the ThirdExtended DIP Facility released any and all liens and security interests on theassets that collateralized the obligations under the Third Extended DIPFacility.  As described in Note 8 to theaccompanying condensed consolidated financial statements, the Company hasissued certain letters of credit under the Third Extended DIP Facility.  As a result of the termination of the ThirdExtended DIP Facility, on the Effective Date, the Company collateralizedletters of credit issued under the Third Extended DIP Facility with cash of$87,661,000.

*(b)  ParentDebt*

All debtof Adelphia is structurally subordinated to the debt of its subsidiaries suchthat the assets of an indebted subsidiary are used to satisfy the applicablesubsidiary debt before being applied to the payment of parent debt.

*(c) Convertible Subordinated Notes*

The convertible subordinated notes include:(i) $1,029,876,000 aggregate principal amount of 6% convertiblesubordinated notes; (ii) $975,000,000 aggregate principal amount of 3.25%convertible subordinated notes; and (iii) unamortized discountsaggregating $12,854,000.  Prior to theForfeiture Order, the Other Rigas Entities held $167,376,000 aggregateprincipal amount of the 6% notes and $400,000,000 aggregate principal amount ofthe 3.25% notes.  The terms of the 6%notes and 3.25% notes provide for the conversion of such notes intoClass A Common Stock (Class B Common Stock in the case of notes held bythe Other Rigas Entities) at the option of the holder any time prior tomaturity at an initial conversion price of $55.49 per share and $43.76 pershare, respectively.

The transfer of all right, title and interest previously heldby the Rigas Family and by the Rigas Family Entities in any of the Company’ssecurities, including the 6% notes and the 3.25% notes, in furtherance of theNon-Prosecution Agreement is expected to occur in accordance with separate,subsequent court documentation.  TheCompany will recognize the benefits of such conveyance when it occurs.  For additional information, see Note 8.

*(d) Notes Payable to Banks*

The Company expects to pay $1,623,000,000 of pre-petitiondebt obligations, plus accrued interest of $10,272,000, of which $1,248,206,000was paid on the Effective Date, to certain banks in the third quarter of 2006in accordance with the JV Plan.

21

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**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued**

**(unaudited)**

*(e) Co-Borrowing Facilities*

The co-borrowing facilities represent the aggregate amountoutstanding pursuant to three separate co-borrowing facilities dated May 6,1999, April 14, 2000 and September 28, 2001 (the “Co-Borrowing Facilities”).  Each co-borrower is jointly and severallyliable for the entire amount of the indebtedness under the applicableCo-Borrowing Facility regardless of whether that co-borrower actually borrowedthat amount under such Co-Borrowing Facility. All amounts outstanding under Co-Borrowing Facilities at June 30, 2006and December 31, 2005 represent pre-petition liabilities that have beenclassified as liabilities subject to compromise in the accompanying condensedconsolidated balance sheets.

### *Other Debt Matters*

Due to the commencement of the Chapter 11 proceedings and theCompany’s failure to comply with certain financial covenants, the Company is indefault on substantially all of its pre-petition debt obligations.  Except as otherwise may be determined by theBankruptcy Court, the automatic stay protection afforded by the Chapter 11proceedings prevents any action from being taken against any of the Debtorswith regard to any of the defaults under the pre-petition debtobligations.  With the exception of theCompany’s capital lease obligations and a portion of other subsidiary debt, allof the pre-petition obligations are classified as liabilities subject tocompromise in the accompanying condensed consolidated balance sheets.  For additional information, see Note 2.

### *Interest Rate Derivative Agreements*

At the Petition Date, all of the Company’s derivativefinancial instruments had been settled or have since been settled except forone fixed rate swap, one variable rate swap and one interest rate collar.  As the settlement of the remaining derivativefinancial instruments will be determined by the Bankruptcy Court, the$3,486,000 fair value of the liability associated with the derivative financialinstruments at the Petition Date has been classified as a liability subject tocompromise in the accompanying condensed consolidated balance sheets.

## **Note 6: Segments**

The Company identifies reportable segments as thoseconsolidated segments that represent 10% or more of the combined revenue, netearnings or loss, or total assets of all of the Company’s operating segments asof and for the period ended on the most recent balance sheet datepresented.  Operating segments that donot meet this threshold are aggregated for segment reporting purposes withinthe “corporate and other” column.  As ofJune 30, 2006, the Company’s only reportable operating segment was its “cable”segment.  The cable segment included theCompany’s cable system operations (including consolidated subsidiaries, equitymethod investments and variable interest entities) that provided thedistribution of analog and digital video programming and high-speed Internet (“HSI”)services to customers, for a monthly fee, through a network of fiber optic andcoaxial cables.  This segment alsoincluded the Company’s media services (advertising sales) business.  The reportable cable segment included fiveoperating regions that have been combined as one reportable segment because allof such regions had similar economic characteristics.

22

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**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued**

**(unaudited)**

Selectedfinancial information concerning the Company’s current operating segments ispresented below for the indicated periods (amounts in thousands):

|                                                 | ** **   | **Cable**    | ** **   | **Corporate  and other** | ** **   | **Eliminations** | ** **   | **Total**    | ** **   |
|-------------------------------------------------|--------------|--------------|--------------|-------------------------------|--------------|------------------|--------------|--------------|--------------|
| *** ***                                    | *** *** | *** *** | *** *** | *** ***                  | *** *** | *** ***     | *** *** | *** *** | *** *** |
| Operating and  Capital Expenditure Data:        |         |         |         |                          |         |             |         |         |         |
| Three months  ended June 30, 2006               |         |         |         |                          |         |             |         |         |         |
| Revenue                                         |         | $            | 1,196,453    |                          | $            | 1,826            |         | $            | —       |   | $ | 1,198,279 |   |
| Operating income (loss)                         |         | 182,701      |         | (13,389                       | )            | —           |         | 169,312      |         |
| Capital expenditures for property and equipment |         | 134,747      |         | 1,046                         |         | —           |         | 135,793      |         |
|                                            |         |         |         |                          |         |             |         |         |         |
| Three months  ended June 30, 2005               |         |         |         |                          |         |             |         |         |         |
| Revenue                                         |         | $            | 1,100,013    |                          | $            | 3,210            |         | $            | —       |   | $ | 1,103,223 |   |
| Operating income (loss)                         |         | 104,641      |         | (30,077                       | )            | —           |         | 74,564       |         |
| Capital expenditures for property and equipment |         | 182,537      |         | 11,400                        |         | —           |         | 193,937      |         |
|                                            |         |         |         |                          |         |             |         |         |         |
| Six months ended  June 30, 2006                 |         |         |         |                          |         |             |         |         |         |
| Revenue                                         |         | $            | 2,344,935    |                          | $            | 3,066            |         | $            | —       |   | $ | 2,348,001 |   |
| Operating income (loss)                         |         | 325,569      |         | (24,606                       | )            | —           |         | 300,963      |         |
| Capital expenditures for property and equipment |         | 280,268      |         | 4,353                         |         | —           |         | 284,621      |         |
|                                            |         |         |         |                          |         |             |         |         |         |
| Six months ended  June 30, 2005                 |         |         |         |                          |         |             |         |         |         |
| Revenue                                         |         | $            | 2,161,943    |                          | $            | 10,282           |         | $            | —       |   | $ | 2,172,225 |   |
| Operating income (loss)                         |         | 183,443      |         | (37,326                       | )            | —           |         | 146,117      |         |
| Capital expenditures for property and equipment |         | 326,791      |         | 11,400                        |         | —           |         | 338,191      |         |
|                                            |         |         |         |                          |         |             |         |         |         |
| Balance Sheet  Information:                     |         |         |         |                          |         |             |         |         |         |
| Total assets                                    |         |         |         |                          |         |             |         |         |         |
| As of June 30, 2006                             |         | $            | 12,436,178   |                          | $            | 3,171,063        |         | $            | (2,831,674   | ) | $ | 12,775,567 |   |
| As of December  31, 2005                        |         | 12,562,225   |         | 3,309,331                     |         | (2,997,546       | )            | 12,874,010   |         |

 

The Company did not derive more than 10% of its revenue fromany one customer during the three months and six months ended June 30, 2006 and2005. The Company’s long-lived assets related to its foreign operations were$7,215,000 and $6,517,000 as of June 30, 2006 and December 31, 2005,respectively.  The Company’s revenuerelated to its foreign operations was $5,550,000 and $4,365,000 during thethree months ended June 30, 2006 and 2005, respectively, and $11,473,000 and$8,656,000 during the six months ended June 30, 2006 and 2005, respectively.The Company’s assets and revenue related to its foreign operations were notsignificant to the Company’s financial position or results of operations,respectively, during any of the periods presented.

23

----

 

**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued**

**(unaudited)**

**Note7:  Comprehensive Income (Loss)**

The Company’s comprehensive income (loss), net of tax, forthe indicated periods was as follows (amounts in thousands):

|                                            | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended   June 30,** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                        | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                       |       |                                            |       |                                                |       |   |   |   |   |
| Net income  (loss)                         |       | $                                               | (11,296    | )                                                   | $          | 291,038 |   | $ | (182,912 | ) | $ | 208,296 |   |
| Other  comprehensive income (loss):        |       |                                            |       |                                                |       |   |   |   |   |
| Foreign currency translation adjustments   |       | (45                                             | )          | (2,536                                              | )          | (2,155 | ) | (7,633 | ) |
| Unrealized gains on securities, net of tax |       | 34                                              |       | 773                                                 |       | 18 |   | 798 |   |
| Other comprehensive loss, net of tax       |       | (11                                             | )          | (1,763                                              | )          | (2,137 | ) | (6,835 | ) |
| Comprehensive income  (loss), net          |       | $                                               | (11,307    | )                                                   | $          | 289,275 |   | $ | (185,049 | ) | $ | 201,461 |   |

 

## **Note 8: Contingencies**

*ReorganizationExpenses due to Bankruptcy and Professional Fees*

TheCompany is aware of certain success fees that potentially could be paid uponthe Company’s emergence from bankruptcy to third party financial advisers retainedby the Company and Committees in connection with the Chapter 11 Cases.  Currently, these success fees are estimatedto be $6,500,000 in the aggregate.  Inaddition, pursuant to their employment agreements, the CEO and the COO of theCompany are eligible to receive equity awards of Adelphia stock with a minimumaggregate fair value of $17,000,000 upon the Debtors’ emergence frombankruptcy.  Under the employmentagreements, the value of such equity awards will be determined based on theaverage trading price of the post-emergence common stock of Adelphia during the15 trading days immediately preceding the 90th day following the date ofemergence.  Pursuant to the employmentagreements, these equity awards, which will be subject to vesting and trading restrictions,may be increased up to a maximum aggregate value of $25,500,000 at thediscretion of the Board.

On June 9, 2006, the Debtors fileda motion (the “CEO/COO Motion”) with the Bankruptcy Court seeking authority toamend the provisions of these employment agreements with the CEO and COOrelating to Emergence Awards (a fixed amount Initial Equity Award and adiscretionary Emergence Date Special Award, each as defined in their respectiveemployment agreement) (the “Amendments”). On August 8, 2006, the Bankruptcy Court authorized the Amendmentrelating to the COO, which authorized the Company to pay the COO $6,800,000 incash in lieu of the Initial Equity Award and, subject to the discretion of theBoard, up to $3,400,000 in cash in lieu of the Emergence Date Special Award ofrestricted shares.  In exchange for theEmergence Awards, the Company’s COO will execute a release of any claims foradditional compensation other than such Emergence Awards.  The CEO/COO Motion was adjourned as to theCompany’s CEO until September 12, 2006. If the CEO/COO Motion is approved as to the relief relating to theCompany’s CEO, the Company will be authorized to pay the CEO $10,200,000 incash in lieu of the Initial Equity Award and, subject to the discretion of theBoard, up to $5,100,000 in cash in lieu of the Emergence Date Special Award ofrestricted shares, and the CEO will execute a release of any claims foradditional compensation other than such Emergence Awards.

24

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**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued**

**(unaudited)**

*Letters of Credit*

TheCompany has issued standby letters of credit for the benefit of franchiseauthorities and other parties, most of which have been issued to anintermediary surety bonding company.  Allsuch letters of credit will expire no later than October 7, 2006.  At June 30, 2006, the aggregate principalamount of letters of credit issued by the Company was $84,831,000, of which$83,941,000 was issued under the Third Extended DIP Facility and $890,000 wascollateralized by cash.  Letters ofcredit issued under the DIP facilities reduce the amount that may be borrowedunder the DIP facilities.  As a result ofthe termination of the Third Extended DIP Facility as described in Notes 2 and5 in the accompanying condensed consolidated financial statements, on theEffective Date, the Company collateralized letters of credit issued under theThird Extended DIP Facility with cash of $87,661,000.

*Litigation Matters*

*General*.  The Company follows Statement of FinancialAccounting Standards (“SFAS”) No. 5, *Accounting for Contingencies*, in determiningits accruals and disclosures with respect to loss contingencies.  Accordingly, estimated losses from loss contingenciesare accrued by a charge to income when information available indicates that itis probable that an asset had been impaired or a liability had been incurredand the amount of the loss can be reasonably estimated.  If a loss contingency is not probable orreasonably estimable, disclosure of the loss contingency is made in thefinancial statements when it is reasonably possible that a loss may beincurred.

*SEC CivilAction and the United States Department of Justice (“DoJ”) Investigation. *On July 24, 2002, the SEC Civil Action was filed against Adelphia, certainmembers of the Rigas Family and others, alleging various securities fraud andimproper books and records claims arising out of actions allegedly taken ordirected by certain members of the Rigas Family who held all of the seniorexecutive positions at Adelphia and constituted five of the nine members ofAdelphia’s board of directors (none of whom remain with the Company).

On December 3, 2003, the SEC fileda proof of claim in the Chapter 11 Cases against Adelphia for, among otherthings, penalties, disgorgement and prejudgment interest in an unspecifiedamount.  The staff of the SEC told theCompany’s advisors that its asserted claims for disgorgement and civilpenalties under various legal theories could amount to billions ofdollars.  On July 14, 2004, the Creditors’Committee initiated an adversary proceeding seeking, in effect, to subordinatethe SEC’s claims based on the SEC Civil Action.

On April 25, 2005, after extensive negotiations with theSEC and the U.S. Attorney, the Company entered into the Non-ProsecutionAgreement pursuant to which the Company agreed, among other things: (i) tocontribute $715,000,000 in value to a fund to be established and administeredby the United States Attorney General and the SEC for the benefit of investorsharmed by the activities of prior management (the “Restitution Fund”); (ii) tocontinue to cooperate with the U.S. Attorney until the later of April 25, 2007,or the date upon which all prosecutions arising out of the conduct described inthe Rigas Criminal Action (as described below) and SEC Civil Action are final;and (iii) not to assert claims against the Rigas Family except for John J.Rigas, Timothy J. Rigas and Michael J. Rigas (together, the “ExcludedParties”), provided that Michael J. Rigas will cease to be an Excluded Party ifall currently pending criminal proceedings against him are resolved without afelony conviction on a charge involving fraud or false statements (other thanfalse statements to the U.S. Attorney or the SEC).  On November 23, 2005, Michael J. Rigas pledguilty to a violation of Title 47, U.S. Code, Section 220(e) for making a falseentry in a Company record (a form required to be filed with the SEC), and onMarch 3, 2006, was sentenced to two years of probation, including ten months ofhome confinement.

As a result of the SaleTransaction, the Company’s contribution to the Restitution Fund will consist of$600,000,000 in cash and stock (with at least $200,000,000 in cash) and 50% ofthe first $230,000,000 of future proceeds, if any, from certain litigationagainst third parties who injured the Company. Unless extended on consent of the U.S. Attorney and the SEC, whichconsent may not be unreasonably withheld, the Company must make these paymentson or before the earlier of: (i) October 15, 2006; (ii) 120 days after confirmation of astand-alone plan of reorganization; or (iii) seven days after the firstdistribution of stock or cash to creditors under any plan of reorganization(the SEC on behalf of itself and the U.S. Attorney has informed the Companythat such distribution under the JV Plan does not create an obligation to makethe restitution payment).  The Companyrecorded charges of $425,000,000 and $175,000,000 during 2004 and 2002,respectively, related to the Non-Prosecution Agreement.

25

----

 

**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued**

**(unaudited)**

TheU.S. Attorney agreed: (i) not to prosecute Adelphia or specifiedsubsidiaries of Adelphia for any conduct (other than criminal tax violations)related to the Rigas Criminal Action (defined below) or the allegationscontained in the SEC Civil Action; (ii) not to use information obtainedthrough the Company’s cooperation with the U.S. Attorney to criminallyprosecute the Company for tax violations; and (iii) to transfer to theCompany all of the Forfeited Entities, certain specified real estate and otherproperty forfeited by the Rigas Family and by the Rigas Family Entities and anysecurities of the Company that were directly or indirectly owned by the RigasFamily and by the Rigas Family Entities prior to forfeiture.  The U.S.Attorney agreed with the Rigas Family not to require forfeiture of Coudersportand Bucktail (which together served approximately 5,000 subscribers (unaudited)as of the date of the Forfeiture Order).  A condition precedent to theCompany’s obligation to make the contribution to the Restitution Fund describedin the preceding paragraph is the Company’s receipt of title to the ForfeitedEntities, certain specified real estate and other property and any securitiesdescribed above forfeited by the Rigas Family and by the Rigas Family Entities,free and clear of all liens, claims, encumbrances or adverse interests. The Forfeited Entities transferred to the Company pursuant to the RMEForfeiture Orders represent the overwhelming majority of the Rigas Co-BorrowingEntities’ subscribers and value.

Also on April 25, 2005, the Companyconsented to the entry of a final judgment in the SEC Civil Action resolvingthe SEC’s claims against the Company. Pursuant to this agreement, the Company will be permanently enjoinedfrom violating various provisions of the federal securities laws, and the SEChas agreed that if the Company makes the $715,000,000 contribution to theRestitution Fund, then the Company will not be required to pay disgorgement ora civil monetary penalty to satisfy the SEC’s claims.

Pursuant to letter agreements withTW NY and Comcast, the U.S. Attorney has agreed, notwithstanding any failure bythe Company to comply with the Non-Prosecution Agreement, that it will notcriminally prosecute any of the joint venture entities or their subsidiariespurchased from the Company by TW NY or Comcast pursuant to the asset purchaseagreements dated April 20, 2005, as amended (the “Purchase Agreements”).  Under such letter agreements, each of TW NYand Comcast have agreed that following the closing of the Sale Transaction theywill cooperate with the relevant governmental authorities’ requests forinformation about the Company’s operations, finances and corporate governancebetween 1997 and confirmation of the Debtors’ plan of reorganization.  The sole and exclusive remedy against TW NYor Comcast for breach of any obligation in the letter agreements is a civilaction for breach of contract seeking specific performance of suchobligations.  In addition, TW NY andComcast entered into letter agreements with the SEC agreeing that upon andafter the closing of the Sale Transaction, TW NY, Comcast and their respectiveaffiliates (including the joint venture entities transferred pursuant to thePurchase Agreements) will not be subject to, or have any obligation under, thefinal judgment consented to by the Company in the SEC Civil Action.

TheNon-Prosecution Agreement was subject to the approval of, and has been approvedby, the Bankruptcy Court.  Adelphia’s consent to the final judgment in theSEC Civil Action was subject to the approval of, and has been approved by, boththe Bankruptcy Court and the District Court. Various parties have challenged and sought appellate review or reconsiderationof the orders of the Bankruptcy Court approving these settlements.  The District Court affirmedthe Bankruptcy Court’s approval of the Non-Prosecution Agreement, Adelphia’sconsent to the final judgment in the SEC Civil Action and the Adelphia-RigasSettlement Agreement (defined below).  OnMarch 24, 2006, various parties appealed the District Court’s order affirmingthe Bankruptcy Court’s approval to the United States Court of Appeals for theSecond Circuit (the “Second Circuit”). Adelphia has moved to dismiss that appeal on the grounds that it ismoot, amounts to an impermissible collateral attack on the 363 Approval Orderand is barred by res judicata.  Theappeal from the District Court’s order affirming the Bankruptcy Court’sapproval and Adelphia’s motion to dismiss that appeal are pending before theSecond Circuit.  The order of theDistrict Court approving Adelphia’s consent to the final judgment in the SECCivil Action has not been appealed.  The appeals of the District Court’sapproval of the Government-Rigas Settlement Agreement (defined below) and thecreation of the Restitution Fund have been denied by the Second Circuit.

*Adelphia’sLawsuit Against the Rigas Family.* On July 24, 2002, Adelphia filed a complaintin the Bankruptcy Court against John J. Rigas, Michael J. Rigas, Timothy J.Rigas, James P. Rigas, James Brown, Michael C. Mulcahey, Peter L. Venetis,Doris Rigas, Ellen Rigas Venetis and the Rigas Family Entities (the “RigasCivil Action”).  This action generallyalleged the defendants misappropriated billions of dollars from the Company inbreach of their fiduciary duties to Adelphia. On November 15, 2002, Adelphia filed an amended complaint against thedefendants that expanded upon the facts alleged in the original complaint andalleged violations of the Racketeering Influenced and Corrupt Organizations (“RICO”)Act, breach of fiduciary duty, securities fraud, fraudulent concealment,fraudulent

26

----

 

**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued**

**(unaudited)**

misrepresentation, conversion, waste of corporateassets, breach of contract, unjust enrichment, fraudulent conveyance,constructive trust, inducing breach of fiduciary duty, and a request for anaccounting (the “Amended Complaint”). The Amended Complaint sought relief in the form of, among other things,treble and punitive damages, disgorgement of monies and securities obtained asa consequence of the Rigas Family’s improper conduct and attorneys’ fees.

OnApril 25, 2005, Adelphia and the Rigas Family entered into a settlementagreement with respect to the Rigas Civil Action (the “Adelphia-RigasSettlement Agreement”), pursuant to which Adelphia agreed, among other things:(i) to pay $11,500,000 to a legal defense fund for the benefit of theRigas Family; (ii) to provide management services to Coudersport andBucktail for an interim period ending no later than December 31, 2005 (“InterimManagement Services”); (iii) to indemnify Coudersport and Bucktail, andthe Rigas Family’s (other than the Excluded Parties’) interest therein, againstclaims asserted by the lenders under the Co-Borrowing Facilities with respectto such indebtedness up to the fair market value of those entities (withoutregard to their obligations with respect to such indebtedness); (iv) toprovide certain members of the Rigas Family with certain indemnities,reimbursements or other protections in connection with certain third partyclaims arising out of Company litigation, and in connection with claims againstcertain members of the Rigas Family by any of the Tele-Media Joint Ventures orCentury/ML Cable Venture (“Century/ML Cable”); and (v) within ten business daysof the date on which the consent order of forfeiture is entered, dismiss theRigas Civil Action, except for claims against the Excluded Parties.  TheRigas Family agreed: (i) to make certain tax elections, under certaincircumstances, with respect to the Forfeited Entities; (ii) to payAdelphia five percent of the gross operating revenue of Coudersport andBucktail for the Interim Management Services; and (iii) to offeremployment to certain Coudersport and Bucktail employees on terms andconditions that, in the aggregate, are no less favorable to such employees(other than any employees who were expressly excluded by written notice toAdelphia received by July 1, 2005) than their terms of employment with theCompany.

Pursuant to the Adelphia-RigasSettlement Agreement, on June 21, 2005, the Company filed a dismissal withprejudice of all claims in this action except against the Excluded Parties.

This settlement was subject to the approval of, and hasbeen approved by, the Bankruptcy Court. Various parties have challenged and sought appellate review orreconsideration of the order of the Bankruptcy Court approving this settlement.  The appeals of the Bankruptcy Court’sapproval remain pending.

*RigasCriminal Action. *Inconnection with an investigation conducted by the DoJ, on July 24, 2002,certain members of the Rigas Family and certain alleged co-conspirators werearrested, and on September 23, 2002, were indicted by a grand jury on chargesincluding fraud, securities fraud, bank fraud and conspiracy to commit fraud(the “Rigas Criminal Action”).  OnNovember 14, 2002, one of the Rigas Family’s alleged co-conspirators, JamesBrown, pleaded guilty to one count each of conspiracy, securities fraud andbank fraud.  On January 10, 2003, anotherof the Rigas Family’s alleged co-conspirators, Timothy Werth, who had not beenarrested with the others on July 24, 2002, pleaded guilty to one count each ofsecurities fraud, conspiracy to commit securities fraud, wire fraud and bankfraud.  The trial in the Rigas CriminalAction began on February 23, 2004 in the District Court.  On July 8, 2004, the jury returned a partialverdict in the Rigas Criminal Action. John J. Rigas and Timothy J. Rigas were each found guilty of conspiracy(one count), bank fraud (two counts), and securities fraud (15 counts) andnot guilty of wire fraud (five counts). Michael J. Mulcahey was acquitted of all 23 counts against him.  The jury found Michael J. Rigas not guilty ofconspiracy and wire fraud, but remained undecided on the securities fraud andbank fraud charges against him.  On July9, 2004, the court declared a mistrial on the remaining charges against MichaelJ. Rigas after the jurors were unable to reach a verdict as to thosecharges.  The bank fraud charges againstMichael J. Rigas have since been dismissed with prejudice.  On March 17, 2005, the District Court deniedthe motion of John J. Rigas and Timothy J. Rigas for a new trial.  On June 20, 2005, John J. Rigas and TimothyJ. Rigas were convicted and sentenced to 15 years and 20 years in prison,respectively.  John J. Rigas and TimothyJ. Rigas have appealed their convictions and sentences and remain free on bailpending resolution of their appeals.  OnNovember 23, 2005, Michael J. Rigas pled guilty to a violation of Title 47,U.S. Code, Section 220(e) for making a false entry in a Company record (a form required to befiled with the SEC), and on March 3, 2006, was sentenced to two years ofprobation, including ten months of home confinement.

Theindictment against the Rigas Family included a request for entry of a moneyjudgment in an amount exceeding $2,500,000,000 and for entry of an order offorfeiture of all interests of the convicted Rigas defendants in the RigasFamily Entities.  On December 10, 2004,the DoJ filed an application for a preliminary order of forfeiture finding JohnJ. Rigas and Timothy J. Rigas jointly and severally liable for personal moneyjudgments in the amount of $2,533,000,000.

27

----

 

**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued**

**(unaudited)**

OnApril 25, 2005, the Rigas Family and the U.S. Attorney entered into a settlementagreement (the “Government-Rigas Settlement Agreement”), pursuant to which theRigas Family agreed to forfeit: (i) all of the Forfeited Entities;(ii) certain specified real estate and other property; and (iii) allsecurities in the Company directly or indirectly owned by the RigasFamily.  The U.S. Attorney agreed:(i) not to seek additional monetary penalties from the Rigas Family,including the request for a money judgment as noted above; (ii) from theproceeds of certain assets forfeited by the Rigas Family, to establish theRestitution Fund for the purpose of providing restitution to holders of theCompany’s publicly traded securities; and (iii) to inform the DistrictCourt of this agreement at the sentencing of John J. Rigas and Timothy J.Rigas.

Pursuantto the Forfeiture Order, all right, title and interest of the Rigas Family andRigas Family Entities in the Forfeited Entities, certain specified real estateand other property and any securities of the Company were forfeited to theUnited States.  On August 19, 2005, theCompany filed a petition with the District Court seeking an order transferringtitle to these assets and securities to the Company.  Since that time,petitions have been filed by three lending banks, each asserting an interest inthe Forfeited Entities for the purpose, according to the petitions, ofprotecting against the contingency that the Bankruptcy Court approval ofcertain settlement agreements is overturned on appeal.  In addition, petitions have been filed by twolocal franchising authorities with respect to two of the Forfeited Entities, bytwo mechanic’s lienholders with respect to two of the forfeited real propertiesand by a school district with respect to one of the forfeited realproperties.  The Company’s petition alsoasserted claims to the forfeited properties on behalf of two entities,Century/ML Cable and Super Cable ALK International, A.A. (Venezuela), in whichthe Company no longer holds an interest. Pursuant to the RME Forfeiture Orders, on March 29, 2006, all right,title and interest in the Forfeited Entities held by the Rigas Family and bythe Rigas Family Entities prior to the Forfeiture Order were transferred tocertain subsidiaries of the Company free and clear of all liens, claims,encumbrances and adverse interests in accordance with the RME ForfeitureOrders, subject to certain limitations set forth in the RME ForfeitureOrders.  On July 28, 2006, the DistrictCourt entered the Real Property Forfeiture Orders pursuant to which all right,title and interest previously held by the Rigas Family and the Rigas FamilyEntities in certain specified real estate and other property were transferredto certain subsidiaries of the Company free and clear of all liens, claims,encumbrances and adverse interests in accordance with the Real PropertyForfeiture Orders, subject to certain limitations set forth in the RealProperty Forfeiture Orders.  The transferof all right, title and interest previously held by the Rigas Family and by theRigas Family Entities in any of the Company’s securities in furtherance of theNon-Prosecution Agreement is expected to occur in accordance with separate,subsequent court documentation.  Thegovernment has requested that its next status report to the District Courtregarding the forfeiture proceedings be submitted on September 12, 2006.

TheCompany was not a defendant in the Rigas Criminal Action, but was underinvestigation by the DoJ regarding matters related to alleged wrongdoing bycertain members of the Rigas Family. Upon approval of the Non-Prosecution Agreement, Adelphia and specifiedsubsidiaries are no longer subject to criminal prosecution (other than forcriminal tax violations) by the U.S. Attorney for any conduct related to theRigas Criminal Action or the allegations contained in the SEC Civil Action, solong as the Company complies with its obligations under the Non-ProsecutionAgreement.

*Securitiesand Derivative Litigation*. Certain of the Debtors and certain former officers, directors andadvisors have been named as defendants in a number of lawsuits allegingviolations of federal and state securities laws and related claims.  These actions generally allege that thedefendants made materially misleading statements understating the Company’sliabilities and exaggerating the Company’s financial results in violation ofsecurities laws.

Inparticular, beginning on April 2, 2002, various groups of plaintiffs filed morethan 30 class action complaints, purportedly on behalf of certain of theCompany’s shareholders and bondholders or classes thereof in federal court inPennsylvania.  Several non-class actionlawsuits were brought on behalf of individuals or small groups of securityholders in federal courts in Pennsylvania, New York, South Carolina and NewJersey, and in state courts in New York, Pennsylvania, California andTexas.  Seven derivative suits were alsofiled in federal and state courts in Pennsylvania, and four derivative suitswere filed in state court in Delaware. On May 6, 2002, a notice and proposed order of dismissal withoutprejudice was filed by the plaintiff in one of these four Delaware derivativeactions.  The remaining three Delawarederivative actions were consolidated on May 22, 2002.  On February 10, 2004, the parties stipulatedand agreed to the dismissal of these consolidated actions with prejudice.

Thecomplaints, which named as defendants the Company, certain former officers anddirectors of the Company and, in some cases, the Company’s former auditors,lawyers, as well as financial institutions who worked with the

28

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**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued**

**(unaudited)**

Company, generally allege that, among other improperstatements and omissions, defendants misled investors regarding the Company’sliabilities and earnings in the Company’s public filings. The majority of theseactions assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 andSEC Rule 10b-5.  Certain bondholder actionsassert claims for violation of Section 11 and/or Section 12(a) (2) of theSecurities Act of 1933.  Certain of thestate court actions allege various state law claims.

OnJuly 23, 2003, the Judicial Panel on Multidistrict Litigation issued an order transferringnumerous civil actions to the District Court for consolidated or coordinatedpre-trial proceedings (the “MDL Proceedings”).

OnSeptember 15, 2003, proposed lead plaintiffs and proposed co-lead counsel inthe consolidated class action were appointed in the MDL Proceedings.  On December 22, 2003, lead plaintiffs filed aconsolidated class action complaint. Motions to dismiss have been filed by various defendants.  Beginning in the spring of 2005, the court inthe MDL Proceedings granted in part various motions to dismiss relating to manyof the actions, while granting leave to replead some claims.  As a result of the filing of the Chapter 11Cases and the protections of the automatic stay, the Company is not named as adefendant in the amended complaint, but is a non-party.  The parties have continued to brief pleadingmotions, and no answer to the consolidated class action complaint, or the otheractions, has been filed.  Theconsolidated class action complaint seeks monetary damages of an unspecifiedamount, rescission and reasonable costs and expenses and such other relief asthe court may deem just and proper.  Theindividual actions against the Company also seek damages of an unspecifiedamount.

On May23, 2006, the lead plaintiffs, the named plaintiffs and the class reached asettlement with Deloitte & Touche LLP (“Deloitte”).  On June 7, 2006, the lead plaintiffs, thenamed plaintiffs and the class reached a settlement with the financialinstitutions.  The District Court enteredan order preliminarily approving the settlements and set a hearing date ofNovember 10, 2006 to consider final approval of the settlements.

Pursuantto Section 362 of the Bankruptcy Code, all of the securities and derivativeclaims that were filed against the Company before the bankruptcy filings areautomatically stayed and not proceeding as to the Company.

TheCompany cannot predict the outcome of these proceedings or estimate thepossible effects on the financial condition or results of operations of theCompany.

*AcquisitionActions.*  After thealleged misconduct of certain members of the Rigas Family was publiclydisclosed, three actions were filed in May and June 2002 against the Company byformer shareholders of companies that the Company acquired, in whole or in part,through stock transactions.  Theseactions allege that the Company improperly induced these former shareholders toenter into these stock transactions through misrepresentations and omissions,and the plaintiffs seek monetary damages and equitable relief throughrescission of the underlying acquisition transactions.

Two ofthese proceedings have been filed with the American Arbitration Associationalleging violations of federal and state securities laws, breaches ofrepresentations and warranties and fraud in the inducement.  One of these proceedings seeks rescission,compensatory damages and pre-judgment relief, and the other seeks specificperformance.  The third action allegesfraud and seeks rescission, damages and attorneys’ fees.  This action was originally filed in aColorado State Court, and subsequently was removed by the Company to the UnitedStates District Court for the District of Colorado.  The Colorado State Court action was closedadministratively on July 16, 2004, subject to reopening if and when theautomatic bankruptcy stay is lifted or for other good cause shown.  These actions have been stayed pursuant tothe automatic stay provisions of Section 362 of the Bankruptcy Code.

TheCompany cannot predict the outcome of these proceedings or estimate thepossible effects on the financial condition or results of operations of theCompany.

*ML MediaLitigation.*  Adelphiaand ML Media Partners, L.P. (“ML Media”) have been involved in a longstandingdispute concerning Century/ML Cable’s management, the buy/sell rights of MLMedia and various other matters.

InMarch 2000, ML Media brought suit against Century, Adelphia and ArahovaCommunications, Inc. (“Arahova”) in the Supreme Court of the State of New York,seeking, among other things: (i) the dissolution of Century/ML Cable and theappointment of a receiver to sell Century/ML Cable’s assets; (ii) if noreceiver was appointed, an order authorizing ML Media to conduct an auction forthe sale of Century/ML Cable’s assets to an

29

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**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued**

**(unaudited)**

unrelated third party and enjoining Adelphia frominterfering with or participating in that process; (iii) an order directing thedefendants to comply with the Century/ML Cable joint venture agreement withrespect to provisions relating to governance matters and the budget process;and (iv) compensatory and punitive damages. The parties negotiated a consent order that imposed various consultativeand reporting requirements on Adelphia and Century as well as restrictions onCentury’s ability to make capital expenditures without ML Media’sapproval.  Adelphia and Century were heldin contempt of that order in early 2001.

Inconnection with the December 13, 2001 settlement of the above dispute,Adelphia, Century/ML Cable, ML Media and Highland Holdings, a generalpartnership then owned and controlled by members of the Rigas Family (“Highland”),entered into a Leveraged Recapitalization Agreement (the “Recap Agreement”),pursuant to which Century/ML Cable agreed to redeem ML Media’s 50% interest inCentury/ML Cable (the “Redemption”) on or before September 30, 2002 for apurchase price between $275,000,000 and $279,800,000 depending on the timing ofthe Redemption, plus interest.  Amongother things, the Recap Agreement provided that: (i) Highland would arrangedebt financing for the Redemption; (ii) Highland, Adelphia and Century wouldjointly and severally guarantee debt service on debt financing for theRedemption on and after the closing of the Redemption; and (iii) Highland andCentury would own 60% and 40% interests, respectively, in the recapitalizedCentury/ML Cable.  Under the terms of theRecap Agreement, Century’s 50% interest in Century/ML Cable was pledged to MLMedia as collateral for the Company’s obligations.

OnSeptember 30, 2002, Century/ML Cable filed a voluntary petition to reorganizeunder Chapter 11 in the Bankruptcy Court. Century/ML Cable was operating its business as a debtor-in-possession.

By anorder of the Bankruptcy Court dated September 17, 2003, Adelphia and Centuryrejected the Recap Agreement, effective as of such date.

Adelphia,Century, Highland, Century/ML Cable and ML Media have been engaged in litigationregarding the enforceability of the Recap Agreement.  On April 15, 2004, the Bankruptcy Courtindicated that it would dismiss all counts of Adelphia’s challenge to theenforceability of the Recap Agreement except for its allegation that ML Mediaaided and abetted a breach of fiduciary duty in connection with the executionof the Recap Agreement.  The BankruptcyCourt also indicated that it would allow Century/ML Cable’s counterclaim toavoid the Recap Agreement as a constructive fraudulent conveyance to proceed.

MLMedia has alleged that it was entitled to elect recovery of either$279,800,000, plus costs and interest in exchange for its interest inCentury/ML Cable, or up to the difference between $279,800,000 and the fairmarket value of its interest in Century/ML Cable, plus costs, interest andrevival of the state court claims described above.

OnJune 3, 2005, Century entered into an interest acquisition agreement with SanJuan Cable, LLC (“San Juan Cable”), Century/ML Cable, Century-ML Cable Corporation(a subsidiary of Century/ML Cable) and ML Media, (the “IAA”), pursuant to whichCentury and ML Media agreed to sell their interests in Century/ML Cable for$520,000,000 (subject to potential purchase price adjustments as defined in theIAA) to San Juan Cable.  OnAugust 9, 2005, Century/ML Cable filed its plan of reorganization (the “Century/MLPlan”) and its related disclosure statement (the “Century/ML DisclosureStatement”) with the Bankruptcy Court. On August 18, 2005, the Bankruptcy Court approved the Century/MLDisclosure Statement.  On September 7,2005, the Bankruptcy Court confirmed the Century/ML Plan, which is designed tosatisfy the conditions of the IAA with San Juan Cable and provides that all third-partyclaims will either be paid in full or assumed by San Juan Cable under the termsset forth in the IAA.  OnOctober 31, 2005, the sale of Century/ML Cable to San Juan Cable (the “Century/MLSale”) was consummated and the Century/ML Plan became effective.  Neither the Century/ML Sale nor theeffectiveness of the Century/ML Plan resolved the pending litigation amongAdelphia, Century, Highland, Century/ML Cable and ML Media.  Upon consummation of the Century/ML Sale, one-half of the net proceeds was placed in anescrow account for the benefit of ML Media (the “ML Media Escrow”) and one-halfof the net proceeds was placed in an escrow account for the benefit of Century(the “Century Escrow”).  Pursuantto the IAA and the Century/ML Plan, Adelphia was granted control overCentury/ML Cable’s counterclaims in the litigation.  Adelphia has since withdrawn Century/ML Cable’scounterclaim to avoid the Recap Agreement as a constructive fraudulentconveyance.  On November 23, 2005,Adelphia and Century filed their first amended answer, affirmative defenses andcounterclaims.  On January 13, 2006, MLMedia replied to Adelphia’s and Century’s amended counterclaims and moved forsummary judgment against Adelphia and Century on both Adelphia’s and Century’s

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**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued**

**(unaudited)**

remaining counterclaims and the issue of Adelphia’sand Century’s liability.  Adelphia andCentury filed their response to ML Media’s summary judgment motion, as well ascross-motions for summary judgment, on March 13, 2006.

Adelphia,Century, ML Media and the post-confirmation bankruptcy estate of Century/MLCable (the “Estate”) entered into a settlement agreement and mutual generalrelease, dated as of May 11, 2006, whichresolves all disputes among the parties (the “Settlement Agreement”).  TheCompany recorded a loss of $64,038,000 related to the Settlement Agreementduring the first quarter of 2006 in other income (expense), net.  On May 22, 2006, the Bankruptcy Courtentered an order approving the Settlement Agreement (the “Approval Order”),which became final on June 2, 2006. Pursuant to the Settlement Agreement, (i) ML Media and Century have released the ML Media Escrow to MLMedia; (ii)  Adelphia and Century are obligated to perform all obligationsof the sellers under the IAA and have the right to exercise substantially allof the rights of sellers under the IAA and to settle all claims against theEstate, (iii) ML Media transferred substantially all of its rights with respectto the IAA and the Estate (including the right to receive ML Media’s portion ofundistributed funds totaling approximately $23,000,000) to a new escrow account(the “New Escrow”), (iv) Adelphia and Century are obligated to indemnifyML Media against certain liabilities and expenses arising out of the IAA;(v)  ML Media on the one hand, and Century and Adelphia on the other hand,will dismiss all pending litigation against each other, and mutual releases arenow effective, (vi) Century made a payment to ML Media from the Century Escrowof $87,117,000 and (vii) the New Escrow and the balance of the CenturyEscrow, totaling $178,400,000 was released to Century.

Basedon current facts, the Company does not anticipate that its obligations withrespect to the IAA will have a material adverse effect on the Company’sfinancial condition or results of operations.

*The XClause Litigation.*  OnDecember 29, 2003, the *ad hoc*committeeof holders of Adelphia’s 6% and 3.25% convertible subordinated notes(collectively, the “Subordinated Notes”), together with the Bank of New York,the indenture trustee for the Subordinated Notes (collectively, the “X ClausePlaintiffs”), commenced an adversary proceeding against Adelphia in theBankruptcy Court. The X Clause Plaintiffs’ complaint sought a judgmentdeclaring that the subordination provisions in the indenturesfor the Subordinated Notes were not applicable to an Adelphia plan ofreorganization in which constituents receive common stock of Adelphia and thatthe Subordinated Notes are entitled to share pari passu in the distribution ofany common stock of Adelphia given to holders of senior notes of Adelphia.

Thebasis for the X Clause Plaintiffs’ claim is a provision in the applicableindentures, commonly known as the “X Clause,” which provides that anydistributions under a plan of reorganization comprised solely of “PermittedJunior Securities” are not subject to the subordination provision of theSubordinated Notes indenture. The X Clause Plaintiffs asserted that, undertheir interpretation of the applicable indentures, a distribution of a singleclass of new common stock of Adelphia would meet the definition of “PermittedJunior Securities” set forth in the indentures, and therefore be exempt fromsubordination.

OnFebruary 6, 2004, Adelphia filed its answer to the complaint, denying all ofits substantive allegations.  Thereafter,both the X Clause Plaintiffs and Adelphia cross-moved for summary judgment withboth parties arguing that their interpretation of the X Clause was correct as amatter of law.  The indenture trustee forthe Adelphia senior notes (the “Senior Notes Trustee”) also intervened in theaction and, like Adelphia, moved for summary judgment arguing that the X ClausePlaintiffs were subordinated to holders of senior notes with respect to anydistribution of common stock under a plan of reorganization.  In addition, the Creditors’ Committee alsomoved to intervene and, thereafter, moved to dismiss the X Clause Plaintiffs’complaint on the grounds, among others, that it did not present a justiciablecase or controversy and therefore was not ripe for adjudication.  In a written decision, dated April 12, 2004,the Bankruptcy Court granted the Creditors’ Committee’s motion to dismisswithout ruling on the merits of the various cross-motions for summaryjudgment.  The Bankruptcy Court’sdismissal of the action was without prejudice to the X Clause Plaintiffs’ rightto bring the action at a later date, if appropriate.

Subsequentto Adelphia entering into the Sale Transaction, the X Clause Plaintiffsasserted that the subordination provisions in the indentures for theSubordinated Notes also are not applicable to an Adelphia plan of reorganizationin which constituents receive TWC Class A Common Stock and that theSubordinated Notes would therefore be entitled to share pari passu in thedistribution of any such TWC Class A Common Stock given to holders of seniornotes of Adelphia.  The Senior Notes Trustee, together with certain otherconstituents, disputed this position.

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**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued**

**(unaudited)**

OnDecember 6, 2005, the X Clause Plaintiffs and the Debtors jointly filed amotion seeking that the Bankruptcy Court establish a pre-confirmation processfor interested parties to litigate the X Clause dispute.  By order dated January 11, 2006, theBankruptcy Court found that the X Clause dispute was ripe for adjudication anddirected interested parties to litigate the dispute prior to plan confirmation(the “X Clause Pre-Confirmation Litigation”). A hearing on the X Clause Pre-Confirmation Litigation was held on March9 and 10, 2006.  On April 6, 2006, theBankruptcy Court ruled that the subordination provisions for the SubordinatedNotes were enforceable in the context of the Debtors’ plan of reorganization.

TheCompany cannot predict the outcome of these proceedings or estimate thepossible effects on the financial condition or results of operations of theCompany.

*VerizonFranchise Transfer Litigation.*  On March 20, 2002, the Company commenced anaction (the “California Cablevision Action”) in the United States District Courtfor the Central District of California, Western Division, seeking, among otherthings, declaratory and injunctive relief precluding the City of Thousand Oaks,California (the “City”) from denying permits on the grounds that the Companyfailed to seek the City’s prior approval of an asset purchase agreement (the “AssetPurchase Agreement”), dated December 17, 2001, between the Company and VerizonMedia Ventures.  Pursuant to the AssetPurchase Agreement, the Company acquired certain Verizon Media Ventures cableequipment and network system assets (the “Verizon Cable Assets”) located in theCity for use in the operation of the Company’s cable business in the City.

OnMarch 25, 2002, the City and Ventura County (the “County”) commenced an action(the “Thousand Oaks Action”) against the Company and Verizon Media Ventures inCalifornia State Court alleging that Verizon Media Ventures’ entry into theAsset Purchase Agreement and conveyance of the Verizon Cable Assets constituteda breach of Verizon Media Ventures’ cable franchises and that the Company’sparticipation in the transaction amounted to actionable tortious interferencewith those franchises.  The City and theCounty sought injunctive relief to halt the sale and transfer of the VerizonCable Assets pursuant to the Asset Purchase Agreement and to compel the Companyto treat the Verizon Cable Assets as a separate cable system.

OnMarch 27, 2002, the Company and Verizon Media Ventures removed the ThousandOaks Action to the United States District Court for the Central District ofCalifornia, where it was consolidated with the California Cablevision Action.

OnApril 12, 2002, the district court conducted a hearing on the City’s and County’sapplication for a preliminary injunction and, on April 15, 2002, the districtcourt issued a temporary restraining order in part, pending entry of a furtherorder.  On May 14, 2002, the districtcourt issued a preliminary injunction and entered findings of fact andconclusions of law in support thereof (the “May 14, 2002 Order”).  The May 14, 2002 Order, among other things:(i) enjoined the Company from integrating the Company’s and Verizon MediaVentures’ system assets serving subscribers in the City and the County; (ii)required the Company to return “ownership” of the Verizon Cable Assets toVerizon Media Ventures except that the Company was permitted to continue to “manage”the assets as Verizon Media Ventures’ agent to the extent necessary to avoiddisruption in services until Verizon Media Ventures chose to reenter the marketor sell the assets; (iii) prohibited the Company from eliminating anyprogramming options that had previously been selected by Verizon Media Venturesor from raising the rates charged by Verizon Media Ventures; and (iv) requiredthe Company and Verizon Media Ventures to grant the City and/or the Countyaccess to system records, contracts, personnel and facilities for the purposeof conducting an inspection of the then-current “state of the Verizon MediaVentures and the Company systems” in the City and the County.  The Company appealed the May 14, 2002 Orderand, on April 1, 2003, the U.S. Court of Appeals for the Ninth Circuit reversedthe May 14, 2002 Order, thus removing any restrictions that had been imposed bythe district court against the Company’s integration of the Verizon CableAssets and remanded the actions back to the district court for furtherproceedings.

InSeptember 2003, the City began refusing to grant the Company’s constructionpermit requests, claiming that the Company could not integrate the acquiredVerizon Cable Assets with the Company’s existing cable system assets becausethe City had not approved the transaction between the Company and Verizon MediaVentures, as allegedly required under the City’s cable ordinance.

Accordingly,on October 2, 2003, the Company filed a motion for a preliminary injunction inthe district court seeking to enjoin the City from refusing to grant theCompany’s construction permit requests. On November 3, 2003,

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**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued**

**(unaudited)**

the district court granted the Company’s motion for apreliminary injunction, finding that the Company had demonstrated “a stronglikelihood of success on the merits.” Thereafter, the parties agreed to informally stay the litigation pendingnegotiations between the Company and the City for the Company’s renewal of itscable franchise, with the intent that such negotiations would also lead to asettlement of the pending litigation. However, on September 16, 2004, at the City’s request, the court setcertain procedural dates, including a trial date of July 12, 2005, whicheffectively re-opened the case to active litigation.  Subsequently, the July 12, 2005 trial datewas vacated pursuant to a stipulation and order.  On July 11, 2005, the district court referredthe matter to a United States magistrate judge for settlement discussions.  A settlement conference was held on October20, 2005, before the magistrate judge. After further negotiations, the Companyreached agreement on the terms of settlements with both the City and County,subject to approval of such settlement agreements by the Bankruptcy Court. OnFebruary 21, 2006, the Bankruptcy Court approved a settlement between theCompany and the City that resolves the pending litigation and all pastfranchise non-compliance issues.  OnMarch 27, 2006, the Bankruptcy Court approved a settlement between the Companyand the County that resolves the pending litigation and all past franchisenon-compliance issues.  Pursuant to thesesettlements, the parties filed a stipulation that dismissed with prejudice allclaims brought by the City and County against Adelphia (as well as the claimsbrought by Adelphia against the City), and the City and County have consentedto the transfer of the Verizon Cable Assets in connection with the SaleTransaction.

*DibbernAdversary Proceeding.* On or about August 30, 2002, Gerald Dibbern, individually andpurportedly on behalf of a class of similarly situated subscribers nationwide,commenced an adversary proceeding in the Bankruptcy Court against Adelphiaasserting claims for violation of the Pennsylvania Consumer Protection Law,breach of contract, fraud, unjust enrichment, constructive trust, and anaccounting.  This complaint alleges thatAdelphia charged, and continues to charge, subscribers for cable set-top boxequipment, including set-top boxes and remote controls, that is unnecessary forsubscribers that receive only basic cable service and have cable-readytelevisions.  The complaint furtheralleges that Adelphia failed to adequately notify affected subscribers thatthey no longer needed to rent this equipment. The complaint seeks a number of remedies including treble money damagesunder the Pennsylvania Consumer Protection Law, declaratory and injunctiverelief, imposition of a constructive trust on Adelphia’s assets, and punitivedamages, together with costs and attorneys’ fees.

On orabout December 13, 2002, Adelphia moved to dismiss the adversary proceeding onseveral bases, including that the complaint fails to state a claim for whichrelief can be granted and that the matters alleged therein should be resolvedin the claims process.  The BankruptcyCourt granted Adelphia’s motion to dismiss and dismissed the adversaryproceeding on May 3, 2005.  In theBankruptcy Court, Mr. Dibbern has also objected to the provisional disallowanceof his proofs of claim, which comprised a portion of the Bankruptcy Court’s May3, 2005 order.  Mr. Dibbern appealed theMay 3, 2005 order dismissing his adversary proceeding to the DistrictCourt.  In an August 30, 2005 decision,the District Court affirmed the dismissal of Mr. Dibbern’s claims for violationof the Pennsylvania Consumer Protection Law, a constructive trust and anaccounting, but reversed the dismissal of Mr. Dibbern’s breach of contract,fraud and unjust enrichment claims. These three claims will proceed in the Bankruptcy Court.  Adelphia filed its answer on October 14, 2005and discovery commenced.  On March 15,2006, the Debtors moved the Bankruptcy Court for an order staying discovery inseveral adversary proceedings, including the Dibbern adversary proceeding.  On March 16, 2006, the Bankruptcy Courtgranted the order staying discovery in the Dibbern adversary proceeding.

OnJanuary 9, 2006, the Debtors filed a Notice of Estimation of Disputed Claimsseeking to place a maximum allowed amount of $500,000 on the claims filed byDibbern.  On January 17, 2006, the Debtorsfiled their tenth omnibus claims objection to certain claims, including claimsfiled by Dibbern totaling more than $7.9 billion (including duplicativeclaims).  Through the objections, theDebtors sought to disallow and expunge each of the Dibbern claims.  On February 7, 2006, Dibbern filed anobjection to the Notice of Estimation of Disputed Claims.  On February 23, 2006, Dibbern responded tothe Debtors’ objections and requested that the Bankruptcy Court require theDebtors to establish additional reserves for Dibbern’s claims or to reclassifythe claims as claims against the operating companies.  On April 21, 2006, the Debtors filed a motionestablishing supplemental procedures for estimating certain disputed claims,including Dibbern’s claims.  Dibbernobjected to the Debtors’ motion on April 27, 2006.  On May 4, 2006, the Bankruptcy Court enteredan order granting the motion establishing supplemental procedures forestimating certain disputed claims, and on May 9, 2006, the Debtors filed anestimation notice seeking to estimate the claims filed by Dibbern for purposesof plan feasibility and reserves only.  TheDebtors and Dibbern then entered into a stipulation and agreed order on May 25,2006 to cap Dibbern’s claims at $15,000,000 for purposes of plan feasibilityand reserves only.

33

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**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued**

**(unaudited)**

The Company has not recorded any loss contingenciesassociated with Dibbern’s claims.  TheBankruptcy Court signed the stipulation and agreed order on July 19, 2006.

TheCompany cannot predict the outcome of these proceedings or estimate thepossible effects on the financial condition or results of operations of the Company.

*Creditors’Committee Lawsuit Against Pre-Petition Banks.*  Pursuant to the Bankruptcy Court orderapproving the DIP Facility (the “Final DIP Order”), the Company made certainacknowledgments (the “Acknowledgments”) with respect to the extent of its indebtednessunder the pre-petition credit facilities, as well as the validity and extent ofthe liens and claims of the lenders under such facilities.  However, given the circumstances surroundingthe filing of the Chapter 11 Cases, the Final DIP Order preserved the Debtors’right to prosecute, among other things, avoidance actions and claims againstthe pre-petition lenders and to bring litigation against the pre-petitionlenders based on any wrongful conduct. The Final DIP Order also provided that any official committee appointedin the Chapter 11 Cases would have the right to request that it be grantedstanding by the Bankruptcy Court to challenge the Acknowledgments and to bringclaims belonging to the Company and its estates against the pre-petition lenders.

Pursuantto a stipulation dated July 2, 2003, among the Debtors, the Creditors’Committee and the Equity Committee, the parties agreed, subject to approval bythe Bankruptcy Court, that the Creditors’ Committee would have derivativestanding to file and prosecute claims against the pre-petition lenders, onbehalf of the Debtors, and granted the Equity Committee leave to seek tointervene in any such action.  Thisstipulation also preserves the Company’s ability to compromise and settle theclaims against the pre-petition lenders. By motion dated July 6, 2003, the Creditors’ Committee moved forBankruptcy Court approval of this stipulation and simultaneously filed acomplaint (the “Bank Complaint”) against the agents and lenders under certainpre-petition credit facilities, and related entities, asserting, among otherthings, that these entities knew of, and participated in, the alleged improperactions by certain members of the Rigas Family and Rigas Family Entities (the “Pre-petitionLender Litigation”).  The Debtors arenominal plaintiffs in this action.

TheBank Complaint contains 52 claims for relief to redress the claimed wrongs andabuses committed by the agents, lenders and other entities.  The Bank Complaint seeks to, among otherthings: (i) recover as fraudulent transfers the principal and interest paid bythe Company to the defendants; (ii) avoid as fraudulent obligations the Company’sobligations, if any, to repay the defendants; (iii) recover damages forbreaches of fiduciary duties to the Company and for aiding and abetting fraudand breaches of fiduciary duties by the Rigas Family; (iv) equitably disallow,subordinate or recharacterize each of the defendants’ claims in the Chapter 11Cases; (v) avoid and recover certain allegedly preferential transfers made tocertain defendants; and (vi) recover damages for violations of the Bank HoldingCompany Act.  Numerous motions seeking todefeat the Pre-petition Lender Litigation were filed by the defendants and theBankruptcy Court held a hearing on such issues. The Equity Committee filed a motion seeking authority to bring anintervenor complaint (the “Intervenor Complaint”) against the defendantsseeking to, among other things, assert additional contract claims against theinvestment banking affiliates of the agent banks and claims under the RICO Actagainst various defendants (the “Additional Claims”).

OnOctober 3 and November 7, 2003, certain of the defendants filed both objectionsto approval of the stipulation and motions to dismiss the bulk of the claimsfor relief contained in the Bank Complaint and the Intervenor Complaint.  The Bankruptcy Court heard oral argument onthese objections and motions on December 20 and 21, 2004.  In a memorandum decision dated August 30,2005, the Bankruptcy Court granted the motion of the Creditors’ Committee forstanding to prosecute the claims asserted by the Creditors’ Committee.  The Bankruptcy Court also granted a separatemotion of the Equity Committee to file and prosecute the Additional Claims onbehalf of the Debtors.  The motions todismiss are still pending.  Subsequent toissuance of this decision, several defendants filed, among other things,motions to transfer the Pre-petition Lender Litigation from the BankruptcyCourt to the District Court.  By orderdated February 9, 2006, the Pre-petition Lender Litigation was transferred tothe District Court, except with respect to the pending motions to dismiss.

TheCompany cannot predict the outcome of these proceedings or estimate thepossible effects on the financial condition or results of operations of theCompany.

*DevonMobile Claim.*  Pursuantto the Agreement of Limited Partnership of Devon Mobile Communications, L.P., aDelaware limited partnership (“Devon Mobile”), dated as of November 3, 1995,the Company owned a 49.9%

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**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued**

**(unaudited)**

limited partnership interest in Devon Mobile, which,through its subsidiaries, held licenses to operate regional wireless telephonebusinesses in several states.  DevonMobile had certain business and contractual relationships with the Company andwith former subsidiaries or divisions of the Company that were spun off asTelCove, Inc. in January 2002.

Inlate May 2002, the Company notified Devon G.P., Inc. (“Devon G.P.”), thegeneral partner of Devon Mobile, that it would likely terminate certaindiscretionary operational funding to Devon Mobile.  On August 19, 2002, Devon Mobile and certainof its subsidiaries filed voluntary petitions for relief under Chapter 11 ofthe Bankruptcy Code with the United States Bankruptcy Court for the District ofDelaware (the “Devon Mobile Bankruptcy Court”).

OnJanuary 17, 2003, the Company filed proofs of claim and interest against DevonMobile and its subsidiaries for approximately $129,000,000 in debt and equityclaims, as well as an additional claim of approximately $35,000,000 relating tothe Company’s guarantee of certain Devon Mobile obligations (collectively, the “CompanyClaims”).  By order dated October 1,2003, the Devon Mobile Bankruptcy Court confirmed Devon Mobile’s First AmendedJoint Plan of Liquidation (the “Devon Plan”). The Devon Plan became effective on October 17, 2003, at which time theCompany’s limited partnership interest in Devon Mobile was extinguished.  Under the Devon Plan, the Devon MobileCommunications Liquidating Trust (the “Devon Liquidating Trust”) succeeded toall of the rights of Devon Mobile, including prosecution of causes of actionagainst Adelphia.

On orabout January 8, 2004, the Devon Liquidating Trust filed proofs of claim in theChapter 11 Cases seeking, in the aggregate, approximately $100,000,000 inrespect of, among other things, certain cash transfers alleged to be eitherpreferential or fraudulent and claims for deepening insolvency, alter egoliability and breach of an alleged duty to fund Devon Mobile operations, all ofwhich arose prior to the commencement of the Chapter 11 Cases (the “DevonClaims”).  On June 21, 2004, the DevonLiquidating Trust commenced an adversary proceeding in the Chapter 11 Cases(the “Devon Adversary Proceeding”) through the filing of a complaint (the “DevonComplaint”) which incorporates the Devon Claims.  On August 20, 2004, the Company filed ananswer and counterclaim in response to the Devon Complaint denying theallegations made in the Devon Complaint and asserting various counterclaimsagainst the Devon Liquidating Trust, which encompassed the Company Claims.  On November 22, 2004, the Company filed amotion for leave (the “Motion for Leave”) to file a third party complaint forcontribution and indemnification against Devon G.P. and Lisa-Gaye ShearingMead, the sole owner and President of Devon G.P.  By endorsed order entered January 12, 2005,Judge Robert E. Gerber, the judge presiding over the Chapter 11 Cases and theDevon Adversary Proceeding, granted a recusal request made by counsel to DevonG.P.  On January 21, 2005, the Devon AdversaryProceeding was reassigned from Judge Gerber to Judge Cecelia G. Morris.  By an order dated April 5, 2005, Judge Morrisdenied the Motion for Leave and a subsequent motion for reconsideration.

OnMarch 6, 2006, the Bankruptcy Court issued a memorandum decision grantingAdelphia summary judgment on all counts of the Devon Complaint except for thefraudulent conveyance/breach of limited partnership claim.  The BankruptcyCourt denied in its entirety the summary judgment motion filed by the DevonLiquidating Trust.  Trial commenced on April 17, 2006.  On April 18,2006, the parties agreed on the record in the Bankruptcy Court to settle theirdisputes.  The Devon Liquidating Trust agreed to release all claims it hasagainst the Company, and the Company agreed to release all claims it hasagainst the Devon Liquidating Trust.  Neither party will pay any money tothe other party as a result of this settlement.

TheCompany and the Devon Liquidating Trust are in the process of documenting thesettlement they have reached.  Thesettlement is subject to Bankruptcy Court approval.

*NFHLPClaim.*  On January 13,2003, Niagara Frontier Hockey, L.P., a Delaware limited partnership owned bythe Rigas Family (“NFHLP”) and certain of its subsidiaries (the “NFHLP Debtors”)filed voluntary petitions to reorganize under Chapter 11 in the United StatesBankruptcy Court of the Western District of New York (the “NFHLP BankruptcyCourt”) seeking protection under the U. S. bankruptcy laws.  Certain of the NFHLP Debtors entered into anagreement dated March 13, 2003 for the sale of certain assets, including theBuffalo Sabres National Hockey League team, and the assumption of certainliabilities.  On October 3, 2003, theNFHLP Bankruptcy Court approved the NFHLP joint plan of liquidation.  The NFHLP Debtors filed a complaint, datedNovember 4, 2003, against, among others, Adelphia and the Creditors’ Committeeseeking to enforce certain prior stipulations and orders of the NFHLP

35

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**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued**

**(unaudited)**

Bankruptcy Court against Adelphia and the Creditors’Committee related to the waiver of Adelphia’s right to participate in certainsale proceeds resulting from the sale of assets. Certain of the NFHLP Debtors’pre-petition lenders, which are also defendants in the adversary proceeding,have filed cross-complaints against Adelphia and the Creditors’ Committeeasking the NFHLP Bankruptcy Court to enjoin Adelphia and the Creditors’Committee from prosecuting their claims against those pre-petitionlenders.  Although proceedings as to thecomplaint itself have been suspended, the parties have continued to litigatethe cross-complaints.  Discovery closedon November 1, 2005 and motions for summary judgment were filed on January 24,2006, with additional briefing on the motions to follow.

TheCompany cannot predict the outcome of these proceedings or estimate thepossible effects on the financial condition or results of operations of theCompany.

*Adelphia’sLawsuit Against Deloitte.* On November 6, 2002, Adelphia sued Deloitte, Adelphia’s formerindependent auditors, in the Court of Common Pleas for PhiladelphiaCounty.  The lawsuit seeks damagesagainst Deloitte based on Deloitte’s alleged failure to conduct an audit incompliance with generally accepted auditing standards, and for providing anopinion that Adelphia’s financial statements conformed with GAAP when Deloitteallegedly knew or should have known that they did not conform.  The complaint further alleges that Deloitteknew or should have known of alleged misconduct and misappropriation by theRigas Family, and other alleged acts of self-dealing, but failed to reportthese alleged misdeeds to the Board or others who could have and would havestopped the Rigas Family’s misconduct. The complaint raises claims of professional negligence, breach ofcontract, aiding and abetting breach of fiduciary duty, fraud, negligentmisrepresentation and contribution.

Deloittefiled preliminary objections seeking to dismiss the complaint, which wereoverruled by the court by order dated June 11, 2003.  On September 15, 2003, Deloitte filed ananswer, a new matter and various counterclaims in response to thecomplaint.  In its counterclaims,Deloitte asserted causes of action against Adelphia for breach of contract,fraud, negligent misrepresentation and contribution.  Also on September 15, 2003, Deloitte filed arelated complaint naming as additional defendants John J. Rigas, Timothy J.Rigas, Michael J. Rigas, and James P. Rigas. In this complaint, Deloitte alleges causes of action for fraud,negligent misrepresentation and contribution. The Rigas defendants, in turn, have claimed a right to contributionand/or indemnity from Adelphia for any damages Deloitte may recover against theRigas defendants.  On January 9, 2004,Adelphia answered Deloitte’s counterclaims. Deloitte moved to stay discovery in this action until completion of theRigas Criminal Action, which Adelphia opposed. Following the motion, discovery was effectively stayed for 60 days buthas now commenced.  Deloitte and Adelphiahave exchanged documents and are engaged in substantive discovery.  On May 25, 2006, the court extended thediscovery deadline to September 5, 2006 and ordered that the case be ready fortrial by January 2, 2007.

TheCompany cannot predict the outcome of these proceedings or estimate thepossible effects on the financial condition or results of operations of theCompany.

*ArahovaMotions*.  Substantialdisputes exist between creditors of the Debtors that principally affect therecoveries to the holders of certain notes due September 15, 2007, issued byFrontierVision Holdings, L.P. (an indirect subsidiary of Adelphia), thecreditors of Olympus Communications, L.P. (“Olympus”) and the creditors ofArahova and Adelphia (the “Inter-Creditor Dispute”).  On November 7, 2005, the *ad hoc*committee of Arahova noteholders (the “Arahova Noteholders’ Committee”) filedfour emergency motions for relief with the Bankruptcy Court seeking, amongother things, to: (i) appoint a trustee for Arahova and its subsidiaries(collectively, the “Arahova/Century Debtors”) who may not receive payment infull under the Debtors’ plan of reorganization or, alternatively, appointindependent officers and directors, with the assistance of separately retainedcounsel, to represent the Arahova/Century Debtors in connection with theInter-Creditor Dispute; (ii) disqualify Willkie Farr & Gallagher LLP (“WF&G”)from representing the Arahova/Century Debtors in the Chapter 11 Cases andthe balance of the Debtors with respect to the Inter-Creditor Dispute;(iii) terminate the exclusive periods during which the Arahova/CenturyDebtors may file and solicit acceptances of a Chapter 11 plan ofreorganization and related disclosure statement (the previous three motions,the “Arahova Emergency Motions”); and (iv) authorize the ArahovaNoteholders’ Committee to file confidential supplements containing certain information.  The Bankruptcy Court held a sealed hearing onthe Arahova Emergency Motions on January 4, 5 and 6, 2006.

Pursuantto an order dated January 26, 2006 (the “Arahova Order”), the Bankruptcy Court:(i) denied the motion to terminate the Arahova/Century Debtors’ exclusivity;(ii) denied the motion to appoint a trustee for the Arahova/Century Debtors,or, alternatively, to require the appointment of nonstatutory fiduciaries; and(iii) granted the

36

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**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued**

**(unaudited)**

motion for an order disqualifying WF&G fromrepresenting the Arahova/Century Debtors and any of the other Debtors in theInter-Creditor Dispute.  Without findingthat present management or WF&G have in any way acted inappropriately todate, the Bankruptcy Court found that WF&G’s voluntary neutrality in suchdisputes should be mandatory, except that the Bankruptcy Court stated thatWF&G could continue to act as a facilitator privately to assist creditorgroups that are parties to the Inter-Creditor Dispute reach a settlement.  The Arahova Noteholders’ Committee appealedthe Arahova Order to the District Court, and on March 30, 2006, theDistrict Court affirmed the Arahova Order. On April 7, 2006, the Arahova Noteholders’ Committee appealed theArahova Order to the Second Circuit.  OnJuly 26, 2006, the Second Circuit entered a stipulation and order between the Debtorsand the Arahova Noteholders’ Committee withdrawing the Arahova Noteholders’ Committee’sappeal from active consideration.  TheArahova Noteholders’ Committee may reactivate its appeal on or before October20, 2006.

TheCompany cannot predict the outcome of these proceedings or estimate thepossible effects on the financial condition or results of operations of theCompany.

*City ofMartinsville and Henry County, Virginia — Right of Purchase Claim.*  Pursuant to the asset purchase agreementbetween TW NY and Adelphia, the Company filed Federal Communications Commission(“FCC”) Form 394 franchise transfer requests with the City of Martinsville,Virginia (“Martinsville”) and County of Henry, Virginia (“Henry County”).  In response to the Company’s request forfranchise transfer approval, Martinsville asserted a right under its franchiseagreement with Multi-Channel T.V. Cable Company, an Adelphia subsidiary and aDebtor (“Multi-Channel T.V.”), to purchase the Adelphia systems serving itscommunity.  In addition, Henry Countyallegedly denied the Company’s request for franchise transfer approval within120 days of such request and thereafter purportedly assigned to Martinsvilleits purported right to purchase the Adelphia systems serving its communityunder its franchise agreement with Multi-Channel T.V.  As of June 30, 2006, the combined numberof Company subscribers in the two communities was approximately 16,000.

OnApril 26, 2006, Martinsville Cable, Inc. (“Martinsville Cable”) filed acomplaint against Multi-Channel T.V. with the Bankruptcy Court in the Chapter11 Cases seeking, among other things, a declaration that the alleged purchaserights of Martinsville and Henry County (which purportedly were assigned toMartinsville) are valid and enforceable. The complaint also seeks an order requiring Multi-Channel T.V. tospecifically perform pursuant to the terms of the franchise agreements to sellsuch systems to Martinsville Cable or, in the event the request for specificperformance is denied, judgment for all damages suffered by Martinsville Cable asa result of Multi-Channel T.V.’s alleged material breach of the franchiseagreements.  The complaint further seeksa permanent injunction prohibiting Multi-Channel T.V. from transferring suchsystems to TW NY or any third party.  TheCompany believes that there are significant legal barriers to Martinsvilleenforcing its alleged purchase rights under the Bankruptcy Code, the CableCommunications Policy Act of 1984, as amended, and Virginia state law.

OnJune 14, 2006, Martinsville Cable filed a complaint against TW NY and TWCin Virginia state court seeking a declaratory judgment that thealleged purchase rights are enforceable and have been properly exercised withregard to a subsequent proposed sale of the Martinsville and Henry County cableassets by TW NY to Comcast (the “Virginia Action”).  The complaint in theVirginia action also requests an injunction prohibiting TW NY and TWC fromtransferring the Martinsville and Henry County cable assets to Comcast or anyother third party, in the event that TW NY acquires the relevant cable systemsfrom Adelphia.  On June 26, 2006, theaction was removed from Virginia state court to the United States DistrictCourt for the Western District of Virginia (the “Virginia District Court”).

OnJuly 20, 2006, the Virginia District Court entered an agreed order in theVirginia Action (the “Agreed Order”) providing that Comcast CableCommunications Holdings, Inc. (“Comcast Cable Communications”) and Comcast ofGeorgia, Inc. (“Comcast Georgia,” together with Comcast Cable Communications, “ComcastCable”), each a subsidiary of Comcast, will operate the cable systems in suchcommunities from the Effective Date until the resolution of the VirginiaAction.  Pursuant to the Agreed Order,during such interim period, Comcast Cable is prohibited from selling any of thesystem assets or making any physical, material, administrative or operationalchange that would tend to (i) degrade the quality of services to thesubscribers, (ii) decrease income or (iii) diminish the materialvalue of the system assets without the prior written consent of MartinsvilleCable, Martinsville and Henry County.

OnAugust 1, 2006, the Bankruptcy Court entered a stipulated order by the partiesproviding for the interim management of the systems by Comcast Cable upon termsand conditions substantially similar to those in the Virginia District

37

----

 

**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued**

**(unaudited)**

Court Agreed Order. The Company will continue to own the systems until a final resolution ofMartinsville Cable’s Bankruptcy Court complaint.

TheCompany cannot predict the outcome of these proceedings or estimate thepossible effects on the financial condition or results of operations of theCompany.

*TheAmerica Channel Litigation.* On May 30, 2006, The America Channel, LLC (“TAC”), a Delaware limitedliability company organized to own and operate a television programmingnetwork, filed a lawsuit in the United States District Court for the Districtof Minnesota (the “Minnesota District Court”) against TWC, TW NY, Time Warnerand Comcast (together, the “Purchasers”), alleging that the Purchasers hadviolated sections 1 and 2 of the Sherman Antitrust Act and section 7 of theClayton Antitrust Act (the “TAC Action”).  TAC alleged that completion ofthe Sale Transaction by the Purchasers, as well as certain other transactions,would constitute further violations of the Sherman and Clayton AntitrustActs.  TAC, among other things, requested as relief an injunctionenjoining the Purchasers from consummating the Sale Transaction.

OnJune 1, 2006, the Debtors filed an adversary proceeding in the Bankruptcy Courtseeking (i) a declaration that TAC and its attorneys (the “TAC Defendants”)impermissibly interfered with the Bankruptcy Court’s jurisdiction and mandate,(ii) a declaration that the TAC Defendants should have commenced the TACAction, if at all, in the Bankruptcy Court, (iii) a declaration that the TACAction violates the automatic stay embodied in 11 U.S.C. Section 362(a)(3), and(iv) a preliminary and permanent injunction enjoining the TAC Defendantsfrom interfering with the Bankruptcy Court’s jurisdiction over the Debtors’Chapter 11 Cases and the Sale Transaction by prosecuting the TAC Action in anycourt other than the Bankruptcy Court.

OnJune 2, 2006, the Bankruptcy Court issued a temporary restraining order that,among other things, prohibited the TAC Defendants from continuing any furtherproceedings in the TAC Action.  Following the Bankruptcy Court’s issuanceof the temporary restraining order, also on June 2, 2006, the TACDefendants filed, in the Minnesota District Court, a motion to vacate theBankruptcy Court’s June 2, 2006 order (the “Motion to Vacate”).  On June5, 2006, on the Debtors’ motion, the Bankruptcy Court held the TAC Defendantsin contempt for violating the temporary restraining order by filing the Motionto Vacate.

OnJune 19, 2006, the Bankruptcy Court heard argument from the Debtors and the TACDefendants on the Debtors’ motion for a preliminary injunction.  TheDebtors and the TAC Defendants agreed that any preliminary injunction enteredwould be treated as a permanent injunction. On June 26, 2006, the Bankruptcy Court entered a judgment declaring thatthe TAC Defendants’ efforts to enjoin the Sale Transaction in the TAC Actionviolated the automatic stay under 11 U.S.C. section 362(a)(3).  Also on this date, the Bankruptcy Courtentered a permanent injunction (the “TAC Injunction”) enjoining the TACDefendants from: (a) continuation of any further proceedings in the TAC Action;(b) taking any other action, with the exception of any action taken in theBankruptcy Court, to interfere with the Debtors’ disposition of their assets;and (c) taking any other action, with the exception of any action taken in theBankruptcy Court, to interfere with the Bankruptcy Court’s jurisdiction overthe Debtors’ chapter 11 cases.  The TACInjunction does, however, permit the TAC Defendants to proceed with the TAC Actionin the Minnesota District Court, or elsewhere, but only to the extent that theTAC Defendants seek no relief other than: (a) damages; (b) an order requiringthe Debtors and/or the Purchasers to carry TAC on their cable systems; and/or(c) post-Sale Transaction divestiture.

OnJune 26, 2006, the TAC Defendants filed a notice of appeal from the BankruptcyCourt’s judgment and permanent injunction. On July 12, 2006, the TAC Defendants filed a notice of motion toexpedite in the District Court.  On July25, 2006, the District Court denied the TAC Defendants’ motion to expedite andset a briefing schedule whereby the TAC Defendants would submit their appellatebrief on or before August 1, 2006, the Debtors would submit their responsebrief on or before August 15, 2006, and the TAC Defendants would submit theirreply brief on or before August 22, 2006. No relief has been granted on the TAC Defendants’ appeal of theBankruptcy Court’s judgment and permanent injunction.

38

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**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued**

**(unaudited)**

TheCompany cannot predict the outcome of these proceedings or estimate thepossible effects on the financial condition or results of operations of theCompany.

*TheCompany’s Claims Against Motorola, Inc.*  On June 22, 2006, the Debtors filed anadversary proceeding against Motorola, Inc. and certain subsidiaries ofMotorola, Inc. (“Motorola”), as well as three transferees of claims filed by Motorola(the “Claim Transferees”), in the Bankruptcy Court.  The complaint seeks relief for five causes ofaction.  First, the complaint seeksdamages from Motorola for aiding and abetting breaches of fiduciary duty by theCompany’s former management in manipulating the Company’s consolidatedfinancial statements and performance results for the fiscal years 2000 and2001.  Second, the complaint seeksavoidance and recovery of preferential and fraudulent transfers of more than$60,000,000 made to Motorola pursuant to Sections 544, 547, 548 and 550 ofthe Bankruptcy Code and applicable state law. Third, the complaint seeks avoidance of purported (but unperfected)liens asserted by Motorola against property of the Debtors pursuant toSection 544 of the Bankruptcy Code. Fourth, the complaint seeks disallowance of some or all of theclaims asserted by Motorola and the Claim Transferees (totaling in excess of$60,000,000) in the Debtors’ bankruptcy proceedings to the extent that theclaims are improperly asserted against subsidiaries of Adelphia rather thanAdelphia.  Fifth, the complaint seeksequitable subordination under Bankruptcy Code Section 510(c) of any claimsfiled by Motorola, including claims held by the Claim Transferees, to theextent, if any, that such claims are allowed.

TheCompany cannot predict the outcome of these proceedings or estimate thepossible effects on the financial condition or results of operations of theCompany.

*Series Eand F Preferred Stock Conversion Postponements.*  On October 29, 2004, Adelphia filed amotion to postpone the conversion of Adelphia’s 7.5% Series E MandatoryConvertible Preferred Stock (“Series E Preferred Stock”) into shares ofClass A Common Stock from November 15, 2004 to February 1, 2005,to the extent such conversion was not already stayed by the Debtors’ bankruptcyfiling, in order to protect the Debtors’ net operating loss carryovers.  On November 18, 2004, the BankruptcyCourt entered an order approving the postponement effective November 14,2004.

Adelphiahas subsequently entered into several stipulations further postponing, to theextent applicable, the conversion date of the Series E Preferred Stock.  Adelphia has also entered into severalstipulations postponing, to the extent applicable, the conversion date ofAdelphia’s 7.5% Series F Mandatory Convertible Preferred Stock, which wasinitially convertible into shares of Class A Common Stock on February 1, 2005.

**EPA Self Disclosure and Audit. **On June 2, 2004, the Company orallyself-disclosed potential violations of environmental laws to the United StatesEnvironmental Protection Agency (“EPA”) and notified EPA that it intended toconduct an audit of its operations to identify and correct violations ofcertain environmental requirements. The potential violations primarily concernreporting and record keeping requirements arising from the Company’s storageand use of petroleum and batteries to provide backup power for its cableoperations.  On July 6, 2006, the Companyexecuted an agreement with EPA to settle EPA’s civil and administrative claimswith respect to environmental violations that are identified by the Company,disclosed to EPA, and corrected in accordance with the agreement.  The agreement caps the Company’s totalliability for civil and administrative fines for such violations at $233,000subject to certain restrictions.  OnJuly 24, 2006, the Bankruptcy Court approved the agreement.  Pursuant to the agreement, on July 26, 2006,the Company submitted the results of its environmental self-audit to EPA.

Based on current facts, the Company does not anticipate thatthis matter will have a material adverse effect on the Company’s financialcondition or results of operations.

*Other.* The Company may be subject to various other legal proceedings and claimswhich arise in the ordinary course of business. Management believes, based on information currently available, that theamount of ultimate liability, if any, with respect to any of these otheractions will not materially affect the Company’s financial condition or resultsof operations.

39

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**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued**

**(unaudited)**

## **Note 9: Other Financial Information**

### *Supplemental Cash Flow Information*

The      tablebelow sets forth the Company’s supplemental cash flow information (amounts inthousands):

|                         | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------|------------|---------------------------------------------------|------------|
| ** **              | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
|                    |       |                                              |       |   |   |
| Cash paid for  interest |       | $                                                 | 324,206    |   | $ | 317,147 |   |
| Capitalized interest    |       | $                                                 | (3,781     | ) | $ | (4,604 | ) |

 

### *Stock-Based Compensation*

In December 2004, the FASB issued SFAS No. 123-R, *Share-Based Payment* (“SFAS No. 123-R”), which is a revisionof SFAS No. 123, *Accounting for Stock-Based Compensation*(SFAS No. 123”), and supersedes Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* (“APB Opinion No.25”), and related interpretations.  SFAS No. 123-R requires allshare-based payments to employees, including grants of employee stock options,to be valued at fair value on the date of grant, and to be expensed over theemployee’s requisite service period.  Effective January 1, 2006, theCompany adopted the provisions of SFAS No. 123-R using the modified prospectiveapplication method.  Under the modified prospective application method,the Company is required to recognize compensation cost for all stock optionawards granted after January 1, 2006 and for all existing awards for which therequisite service had not been rendered as of the date of adoption.

As of January 1, 2006, there were 23,250 fully vested optionsoutstanding under the Company’s only share based payment plan, the 1998Long-Term Incentive Compensation Plan (the “1998 Plan”).  No awards wereissued since 2001 pursuant to the 1998 Plan and the Company does not intend togrant any new awards pursuant to the 1998 Plan.  As no share based awardswere granted during the three-month and six-month periods ending June 30, 2006,the adoption of SFAS No. 123-R did not have any impact on the Company’sfinancial position or results of operations.

### *Recent Accounting Pronouncements*

In June 2005, the Emerging Issues Task Force (“EITF”) reacheda consensus on Issue No. 04-5, *Determining Whether aGeneral Partner, or the General Partners as a Group, Controls a Limited Partnershipor Similar Entity When the Limited Partners Have Certain Rights*(“EITF04-5”).  EITF 04-5 provides guidance inassessing when a general partner controls and consolidates its investment in alimited partnership or similar entity. The general partner is assumed to control the limited partnership unlessthe limited partners have substantive kick-out or participating rights.  The provisions of EITF 04-5 were required tobe applied beginning June 30, 2005 for partnerships formed or modifiedsubsequent to June 30, 2005 and were effective for general partners in allother limited partnerships beginning January 1, 2006.  EITF 04-5 had no impact on the Company’sfinancial position or results of operations.

InJuly 2006, the FASB issued FASB Interpretation 48, *Accounting for Income Tax Uncertainties*(“FIN48”).  FIN 48 defines the threshold forrecognizing the benefits of tax return positions in the financial statements as“more-likely-than-not” to be sustained by the taxing authority.  The recently issued literature also providesguidance on the derecognition, measurement and classification of income taxuncertainties, along with any related interest and penalties.  FIN 48 also includes guidance concerningaccounting for income tax uncertainties in interim periods and increases thelevel of disclosures associated with any recorded income taxuncertainties.  FIN 48 is effective forfiscal years beginning after December 31, 2006.  Management has not yet determined the impact,if any, of adopting the provisions of FIN 48 on the Company’s financialposition and results of operations.

### *Earnings (Loss) Per Common Share (“EPS”)*

TheCompany uses the two-class method for computing basic and diluted EPS.  Basic and diluted EPS for the Class A CommonStock and the Class B Common Stock was computed by allocating the incomeapplicable to common

40

----

 

**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued**

**(unaudited)**

stockholders to Class A common stockholders and ClassB common stockholders as if all of the earnings for the period had beendistributed.  This allocation, and thecalculation of the basic and diluted net income (loss) applicable to Class Acommon stockholders and Class B common stockholders, do not reflect any adjustmentfor interest on the convertible subordinated notes and do not reflect anydeclared or accumulated dividends on the convertible preferred stock, asneither has been recognized since the Petition Date.  Under the two-class method for computingbasic and diluted EPS, losses have not been allocated to each class of commonstock, as security holders are not obligated to fund such losses.  As the Company has net losses in 2006, thereare no differences between basic and diluted EPS in 2006.  The following table provides the incomeapplicable to common stockholders that has been allocated to the Class A CommonStock and Class B Common Stock for purposes of computing basic and diluted EPSin 2005 (amounts in thousands):

|                                                                              | ** ** | **Three months  ended June 30,  2005** | ** ** | **Six months  ended June 30,  2005** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| Basic EPS:                                                                   |       |                                                  |       |                                                |       |
| Income applicable to common stockholders allocated  to  Class A Common Stock | ** ** | $                                                     | 263,540    |                                                | $          | 188,088 |   |
| Income applicable to common stockholders allocated  to  Class B Common Stock | ** ** | $                                                     | 27,498     |                                                | $          | 19,625 |   |
| Diluted EPS:                                                                 |       |                                                  |       |                                                |       |
| Income applicable to common stockholders allocated  to  Class A Common Stock | ** ** | $                                                     | 260,586    |                                                | $          | 185,980 |   |
| Income applicable to common stockholders allocated  to  Class B Common Stock | ** ** | $                                                     | 30,452     |                                                | $          | 21,733 |   |

 

DilutedEPS of Class A and Class B Common Stock considers the potential impact ofdilutive securities.  For the three- andsix- month periods ended June 30, 2006, the inclusion of potential commonshares would have had an anti-dilutive effect. Accordingly, potential common shares of 86,789,246 and 86,791,573 wereexcluded from the diluted EPS calculations for the three- and six- monthperiods ended June 30, 2006, respectively. For the three- and six- month periods ended June 30, 2005, 233,753 and267,204, respectively, of potential common shares subject to stock options havebeen excluded from the diluted EPS calculation as the option exercise price isgreater than the average market price of the Class A Common Stock.

The potential common shares at June 30, 2006 and 2005 consistof Adelphia’s 5 1/2% Series D Convertible Preferred Stock (“Series D PreferredStock”), 7 1/2% Series E Mandatory Convertible Preferred Stock (“Series EPreferred Stock”), 7 1/2% Series F Mandatory Convertible Preferred Stock (“SeriesF Preferred Stock”), 6% subordinated convertible notes, 3.25% subordinatedconvertible notes and stock options.  Asa result of the filing of the Debtors’ Chapter 11 Cases, Adelphia, as of thePetition Date, discontinued accruing dividends on all of its outstandingpreferred stock and has excluded those dividends from the diluted EPScalculations.  The debt instruments areconvertible into shares of Class A and Class B Common Stock.  The preferred securities and stock optionsare convertible into Class A Common Stock. The basic and diluted weighted average shares outstanding used for EPScomputations for the periods presented are as follows:

|                                                          | ** ** | **Three and six months ended  June 30,** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                                          | ** ** | **2005** | ** ** |
| Basic weighted average  shares of Class A Common Stock   |       | 228,692,414                                                       |       | 228,692,414 |   |
| Potential common shares:                                 |       |                                                              |       |   |   |
| Convertible  preferred stock                             |       | —                                                            | ** ** | 45,924,486 | ** ** |
| Convertible  subordinated notes                          |       | —                                                            | ** ** | 28,683,846 | ** ** |
| Diluted weighted  average shares of Class A Common Stock |       | 228,692,414                                                       | ** ** | 303,300,746 | ** ** |
|                                                     |       |                                                              |       |   |   |
| Basic weighted average  shares of Class B Common Stock   |       | 25,055,365                                                        | ** ** | 25,055,365 | ** ** |
| Potential common  shares:                                |       |                                                              |       |   |   |
| Convertible  subordinated notes                          |       | —                                                            | ** ** | 12,159,768 | ** ** |
| Diluted weighted  average shares of Class B Common Stock |       | 25,055,365                                                        | ** ** | 37,215,133 | ** ** |

 

41

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**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued**

**(unaudited)**

### *Intangible Assets*

The carrying value and accumulated amortization of intangibleassets are summarized below (amounts in thousands):
| ** **                        | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
|                                   | ** ** | **Gross  carrying  value**  | ** ** | **Accumulated  amortization**   | ** ** | **Net  carrying  value** | ** ** | **Gross  carrying  value** | ** ** | **Accumulated  amortization** | ** ** | **Net  carrying  value** | ** ** |
| Customer relationships  and other |       | $                           | 1,646,203  |                            | $          | (1,241,106 | ) | $ | 405,097 |   | $ | 1,641,146 |   | $ | (1,186,540 | ) | $ | 454,606 |   |
| Franchise rights                  |       |                        |       |                            |       | 5,440,165 |   |   |   |   |   | 5,440,173 |   |
| Goodwill                          |       |                        |       |                            |       | 1,634,385 |   |   |   |   |   | 1,634,385 |   |
|                              |       |                        |       |                            |       | $ | 7,479,647 |   |   |   |   |   | $ | 7,529,164 |   |
|                                   |            |                             |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Goodwill and franchise rights are not amortized as theirlives have been determined to be indefinite. Customer relationships represent the value attributed to customerrelationships acquired in business combinations and are amortized over a10-year period.  The Company amortizesits customer relationships using the double declining balance method, whichreflects the attrition patterns of its customer relationships.  Amortization of intangible assets aggregated$26,948,000 and $29,061,000 for the three months ended June 30, 2006 and 2005,respectively, and $54,566,000 and $58,927,000 for the six months ended June 30,2006 and 2005, respectively.

### *Accrued Liabilities*

Thedetails of accrued liabilities are set forth below (amounts in thousands):

|                                  | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2006**          | ** ** | **2005**              | ** ** |
|                             |       |              |       |                  |       |
| Programming  costs               |       | $                 | 120,382    |                  | $          | 116,239 |   |
| Interest                         |       | 51,086            |       | 51,627                |       |
| Payroll                          |       | 97,077            |       | 92,162                |       |
| Property, sales and  other taxes |       | 61,143            |       | 51,181                |       |
| Franchise fees                   |       | 42,532            |       | 63,673                |       |
| Other                            |       | 171,452           |       | 176,717               |       |
| Total                            |       | $                 | 543,672    |                  | $          | 551,599 |   |

 

### *Tax Matters*

TheCompany recorded an income tax provision of $21,418,000 and $71,441,000 for thethree months and six months ended June 30, 2006, respectively.  For the three months ended June 30, 2006, theCompany calculated its income tax provision based on the year-to-date actualloss before income taxes, as opposed to the projected annual effective ratecalculation used for the three months ended March 31, 2006, which resulted inan income tax provision of $50,023,000. As a result of the Sale Transaction, the Company no longer believes itcan reliably estimate its projected effective tax rate for the year given theuncertainties with respect to the confirmation of a plan of reorganization, theanticipated implementation of liquidation accounting in the third quarter andother related matters.  Accordingly,calculating the income tax provision on a year-to-date basis results in a moremeaningful presentation in the financial statements.  Income tax expense for 2006 and 2005primarily relates to the increase in the Company’s deferred tax liability forfranchise rights and goodwill intangible assets that are not amortized forfinancial reporting purposes, but are amortized for income tax purposes.

42

----

 

**ADELPHIACOMMUNICATIONS CORPORATION AND SUBSIDIARIES**

**(Debtors-In-Possession)**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued**

**(unaudited)**

### *Transactions With Other Officers andDirectors*

In a letter agreement between Adelphia and FPLGroup, Inc. (“FPL Group”) dated January 21, 1999, Adelphia agreed to(i) repurchase 20,000 shares of 8 1/8% Series C Cumulative Preferred Stock(“Series C Preferred Stock”) and 1,091,524 shares of Class A Common Stockowned by Telesat Cablevision, Inc., a subsidiary of FPL Group (“Telesat”)and (ii) transfer all of the outstanding common stock of West BocaSecurity, Inc. (“WB Security”), a subsidiary of Olympus, to FPL Group inexchange for FPL Group’s 50% voting interest and 1/3 economic interest inOlympus.  The Company owned the economicand voting interests in Olympus that were not then owned by FPL Group. At thetime this agreement was entered into, Dennis Coyle, then a member of theAdelphia Board of Directors, was the General Counsel and Secretary of FPLGroup. WB Security was a subsidiary of Olympus and WB Security’s sole asset wasa $108,000,000 note receivable (the “WB Note”) from a subsidiary of Olympusthat was secured by the FPL Group’s ownership interest in Olympus and dueSeptember 1, 2004.  OnJanuary 29, 1999, Adelphia purchased all of the aforementioned shares ofSeries C Preferred Stock and Class A Common Stock described above fromTelesat for aggregate cash consideration of $149,213,000, and onOctober 1, 1999, the Company acquired FPL Group’s interest in Olympus inexchange for all of the outstanding common stock of WB Security.  The acquired shares of Class A CommonStock are presented as treasury stock in the accompanying condensedconsolidated balance sheets.  Theacquired shares of Series C Preferred Stock were returned to theiroriginal status of authorized but unissued. On June 24, 2004, the Creditors’ Committee filed an adversaryproceeding in the Bankruptcy Court, among other things, to avoid, recover andpreserve the cash paid by Adelphia pursuant to the repurchase of itsSeries C Preferred Stock and Class A Common Stock together with allinterest paid with respect to such repurchase. A hearing date relating to such adversary proceeding has not yet beenset. Interest on the WB Note is calculated at a rate of 6% per annum (or afterdefault at a variable rate of LIBOR plus 5%). FPL Group has the right, upon at least 60 days prior writtennotice, to require repayment of the principal and accrued interest on the WBNote on or after July 1, 2002.  Asof June 30, 2006 and December 31, 2005, the aggregate principal andinterest due to the FPL Group pursuant to the WB Note was $127,537,000. TheCompany has not accrued interest on the WB Note for periods subsequent to thePetition Date.  To date, the Company hasnot yet received a notice from FPL Group requiring the repayment of the WB Note.

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**  ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**OVERVIEW**

***General***

As of June 30, 2006, our operations consisted primarily ofproviding analog and digital cable services, HSI services and other advancedservices to residential subscribers over our cable systems.  At June 30, 2006, our consolidated cableoperations served approximately 4,892,000 basic cable subscribers, of whichapproximately 2,036,000 also received digital cable service.  Our consolidated cable systems also providedHSI services to approximately 1,864,000 subscribers at June 30, 2006.  With the exception of approximately 56,000basic cable subscribers that were located in Brazil, all of our consolidatedbasic cable subscribers at June 30, 2006 were located in the UnitedStates.  At June 30, 2006, our domesticconsolidated cable operations were located in 31 states, with large clusters inLos Angeles, New England, Western New York, West Palm Beach, Cleveland, WesternPennsylvania, Northern Virginia and Colorado Springs.

As of June 30, 2006, our only reportable operatingsegment was our “cable” segment.  Thecable segment included our cable system operations (including consolidatedsubsidiaries and equity method investments) that provided video services, HSIservices and media services.  Operatingsegments that were not included in the cable segment were aggregated togetherin the “corporate and other” segment. For additional information, see Note 6, “Segments,” to theaccompanying condensed consolidated financial statements.

On July31, 2006, we completed the sale of assets, which in the aggregate comprisesubstantially all of our U.S. assets, to TW NY and Comcast.  Proceeds from the Sale Transaction totaledapproximately $17.4 billion, consisting of cash in the amount of approximately$12.5 billion and shares of TWC Class A Common Stock with a preliminaryestimated fair value as of the Effective Date of approximately $4.9billion.  Such estimated fair value ofthe TWC Class A Common Stock was determined by the Company based on management’sreview of the underlying factors affecting the valuation of cable companies,taking into account the approximately $4.9 billion valuation agreed with TW NYfor purposes of the TW NY asset purchase agreement, the $4.85 billionvaluation for the Plan Agreement agreed to by the Company, the Creditors’Committee and certain creditors and *ad hoc*creditorcommittees, subject to certain adjustments based on market valuation, updatesfrom its financial advisors and the recent upward movement in the price of publiclytraded cable companies’ stocks.

The aggregate purchase price is subject to certainpost-closing adjustments.  Uponconsummation of the Sale Transaction, a portion of the aggregate purchaseprice, consisting of approximately $503 million of cash and shares of TWC ClassA Common Stock with a preliminary estimated fair value as of the Effective Dateof approximately $195 million, was deposited in escrow accounts to pay forour indemnification obligations and any post-closing purchase price adjustmentsdue to the buyers from us pursuant to the Purchase Agreements. The post-closingadjustments, if any, will be determined over the next several months. To theextent that such post-closing adjustments are in favor of TW NY orComcast, the amount of the escrow ultimately released to us will be reduced. Inthe event that the post-closing purchase price adjustment is in favor ofTW NY or Comcast and exceeds the amount of the escrow, we are required topay such excess outside of the escrow. For additional information regardingthe Sale Transaction, see Note 2, “Bankruptcy Proceedings and Sale of Assets ofthe Company,” to the accompanying condensed consolidated financial statements.

Thediscussion below describes the financial results of the Company for the reportedperiods.  As a result of the SaleTransaction, the Company disposed of substantially all of its operating assetsand expects to adopt a liquidation basis of accounting in the third quarter of2006.  Upon adoption of a liquidationbasis of accounting, assets will be recorded at their estimated realizableamounts and liabilities that will be paid in full will be recorded at thepresent value of amounts to be paid. Liabilities subject to compromise will be recorded at their face amountsuntil they are settled, at which time they will be adjusted to their settlementamounts.

## ***Bankruptcy Proceedings***

In June 2002, Adelphia and substantially all of itsdomestic subsidiaries filed voluntary petitions to reorganize under Chapter 11of the Bankruptcy Code in the Bankruptcy Court. On June 10, 2002, Century filed a voluntary petition to reorganize underChapter 11.  On October 6 and November15, 2005, certain additional subsidiaries of Adelphia filed voluntary petitionsto reorganize under Chapter 11.  On March31, 2006, the Forfeited Entities and certain other entities filed voluntarypetitions to reorganize under Chapter 11. The Debtors are currently operating their businesses asdebtors-in-possession under Chapter 11. The rights and claims of the Debtors’various creditors and security holders will be determined by a plan ofreorganization that is ultimately subject to confirmation by the BankruptcyCourt.

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By order dated November 23, 2005, the Bankruptcy Courtapproved the November Disclosure Statement as containing “adequate information”pursuant to Section 1125 of the Bankruptcy Code. By December 12,2005, the Debtors had completed the mailing of the November DisclosureStatement and related solicitation materials in connection with the NovemberPlan. On April 28, 2006, the Bankruptcy Court approved the DS Supplementas containing “adequate information” pursuant to Section 1125 of theBankruptcy Code. By May 12, 2006, the Debtors had completed the mailing ofthe DS Supplement and related solicitation materials in connection with theApril Plan.

On May26, 2006, the Debtors filed the 363 Motion with the Bankruptcy Court seeking,among other things, approval to proceed with the sale of certain assets to TWNY and the sale of certain other assets to Comcast without first confirming aChapter 11 plan of reorganization (other than with respect to the JVDebtors).  A hearing to consider certainamended bid protections proposed in the 363 Motion was held on June 16,2006, and on that date the Bankruptcy Court entered an order approving newprovisions for termination, for the payment of the breakup fee, a reduction inthe purchase price under certain circumstances and reaffirming theeffectiveness of the “no-shop provision” and overruling all objectionsthereto.  On June 28, 2006, theBankruptcy Court entered the 363 Approval Order approving the balance of the363 Motion.  On June 30, 2006, JPMC fileda notice of appeal, appealing entry of the 363 Approval Order to the DistrictCourt.  The appeal was subsequentlywithdrawn as part of a settlement among the Debtors, the Creditors’ Committeeand JPMC.

OnJune 22, 2006, the Debtors filed the JV Plan for the JV Debtors with theBankruptcy Court with respect to our partnerships with Comcast.  By June 9, 2006, the Debtors’ service agenthad completed the mailing of a notice describing certain matters relating tothe JV Plan.  In response to the Debtors’Plan Modification Motion, the Bankruptcy Court approved the information in the363 Motion and the Plan Modification Motion as containing “adequate information”pursuant to Section 1125 of the Bankruptcy Code.  On June 29, 2006, the Bankruptcy Courtentered the JV Confirmation Order confirming the JV Plan.  Together the JV Confirmation Order and the363 Approval Order authorized, among other things, consummation of the SaleTransaction.  On July 31, 2006, the JVPlan became effective.  Accordingly, fromand after July 31, 2006, the Debtors no longer include the JVDebtors.  We expect to pay approximately$1.8 billion of bankruptcy claims in the third quarter of 2006 in accordancewith the JV Plan, of which approximately $1.6 billion relates topre-petition debt obligations. We paid $1.2 billion of such pre-petitiondebt obligations on the Effective Date. In connection with the confirmation of the JV Plan, we recorded $50million of additional interest expense for certain of these allowed claimsduring the quarter ended June 30, 2006. Other than pre-petition debt obligations which accrue interest at theircontractual rate, the JV Plan generally provides for interest on allowed claimsat a rate of 8% from the petition date through July 31, 2006.

Forthe balance of the Debtors, the April Plan remains pending.  The deadline for the submission of ballots tothe balloting agent to accept or reject the April Plan is September 12,2006, and in the case of securities held through an intermediary, the deadlinefor instructions to be received by the intermediary is September 7, 2006 orsuch other date as specified by the applicable intermediary.

EffectiveJuly 21, 2006, we entered into the Plan Agreement with certain representativesof the *ad hoc* committee of holders of ACCSenior Notes represented by Hennigan, Bennett & Dorman LLP, the *ad hoc* committee of holders of ACC Senior Notes and ArahovaNotes represented by Pachulski Stang Ziehl Young Jones & Weintraub LLP, the*ad hoc*committee of Arahova Noteholders,the *ad hoc c*ommittee of holders ofFrontierVision Opco Notes Claims and FrontierVision Holdco Notes Claims, W.R.Huff Asset Management Co., L.L.C., the *ad hoc*committeeof ACC Trade Claimants, the *ad hoc*committeeof Subsidiary Trade Claimants and the Creditors’ Committee.

ThePlan Agreement is designed to form the basis of the Modified Plan, whichincludes a proposed global compromise and settlement of all disputes among thecreditors, not all of whom are parties to the Plan Agreement.  Our obligations under the Plan Agreement aresubject to the entry by the Bankruptcy Court of an order approving a disclosurestatement with respect to the Modified Plan and authorizing the Debtors topropose the Modified Plan as provided in the Plan Agreement.  The Modified Plan contemplated by the PlanAgreement is subject to Bankruptcy Court approval.  The Plan Agreement does not apply to the JVDebtors, whose plan became effective on July 31, 2006.

ThePlan Agreement reflects a compromise among certain creditor groups under which$1.08 billion in value will be transferred from certain unsecured creditors ofvarious subsidiaries of ours to certain of our unsecured senior and tradecreditors.  In some cases, theseunsecured creditors will be entitled to reimbursement from contingent sourcesof value, including the proceeds of a litigation trust to be established underthe plan to pursue claims against third parties that are alleged to havedamaged us.  The Plan Agreement alsocontemplates that our creditors (other than the creditors of the JV Debtors)would receive, in addition to the $1.08 billion described above, the residualsale consideration after funding all other distributions and reserves andinterests in the litigation trust as described in the Plan Agreement.

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ThePlan Agreement is conditioned upon the Modified Plan effective date occurringno later than September 15, 2006. Conditions to the Modified Plan effective date would also includematerial completion of the distribution of the TWC Class A Common Stock tocreditors on the Modified Plan effective date, and the distribution to ourcreditors on the effective date or immediately thereafter plan consideration ofat least $1.08 billion, before deducting a true-up reserve to account forcertain fluctuations in the value of TWC Class A Common Stock.

Foradditional information, see Note 2, “Bankruptcy Proceedings and Sale of Assetsof the Company,” to the accompanying condensed consolidated financialstatements.

***Termination of Third Extended DIP Facility***

In connection with the completion of the Sale Transaction, onthe Effective Date, we terminated the Third Extended DIP Facility.  In connection with the termination of theThird Extended DIP Facility, we repaid all loans outstanding under the ThirdExtended DIP Facility and all accrued and unpaid interest thereon, with suchpayments totaling approximately $986 million. In addition, in connection with the termination of the Third ExtendedDIP Facility we paid all accrued and unpaid fees of the lenders and agent banksunder the Third Extended DIP Facility. In connection with these payments, effective as of the Effective Date,the collateral agent under the Third Extended DIP Facility released any and allliens and security interests on the assets that collateralized the obligationsunder the Third Extended DIP Facility. As described in Note 8 to the accompanying condensed consolidatedfinancial statements, we issued certain letters of credit under the DIPfacilities.  As a result of thetermination of the Third Extended DIP Facility, on the Effective Date, wecollateralized letters of credit issued under the Third Extended DIP Facilitywith cash of $88 million.

## ***Subscribers and Average Revenue per Unit (“ARPU”)***

The following table summarizes our subscribers at June 30,2006 and 2005, respectively (amounts in thousands):

|            | ** ** | **June 30,** | ** ** | **%  Increase** | ** ** |
|------------|------------|-------------------|------------|-----------------|------------|
| ** ** | ** ** | **2006**          | ** ** | **2005**        | ** ** | **(decrease)** | ** ** |
|       |       |              |       |            |       |   |   |
| Basic      |       | 4,892             |       | 4,987           |       | (1.9 | )% |
| Digital    |       | 2,036             |       | 1,982           |       | 2.8 |   |
| HSI        |       | 1,864             |       | 1,550           |       | 20.3 |   |

 

Competition for our video services, primarily from directbroadcast satellite operators, and for our HSI services, from local telephonecompanies put downward pressure on the number of basic subscribers and pricingfor certain services.  Basic cablesubscribers decreased 1.9% at June 30, 2006 as compared to the same period in2005.  In an effort to reverse the trendof basic subscriber losses, prior to the Effective Date, we increased oursubscriber retention efforts and our emphasis on enhancing and differentiatingour video products and services with video-on-demand (“VOD”), high-definitiontelevision (“HDTV”) and digital video recorders.

Digital cable subscribers increased 2.8% at June 30, 2006when compared to the same period in 2005. As a result of an industry-wide shiftto digital products, growth of digital cable subscribers has increased fromthat of prior periods.  The increase inavailable VOD offerings and HDTV channels has contributed to this shift.

HSI subscribers increased 20.3% at June 30, 2006 whencompared to the same period in 2005.  Theincrease is a result of continued demand for our HSI product.

We have used ARPU as a measure of performance for ourbusiness.  ARPU represents total revenuefor the related period, divided by the number of months in the period, dividedby an average of the number of monthly subscribers for the related period.

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The following table summarizes ARPU for selected revenuecomponents:
|                                                                                   | ** ** | **Three months ended  June 30,** | ** ** | **Increase** | ** ** | **Six months ended  June 30,** | ** ** | **Increase** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|--------------|------------|-----------------------------------------------|------------|--------------|------------|
| ** **                                                                        | ** ** | **2006**                                        | ** ** | **2005**     | ** ** | **(decrease)**                                | ** ** | **2006**     | ** ** | **2005** | ** ** | **(decrease)** | ** ** |
| ARPU:                                                                             |       |                                            |       |         |       |                                          |       |         |       |   |   |   |   |
| Video revenue  (including digital cable and media services), per basic subscriber |       | $                                               | 66.13      |         | $          | 60.80                                         |       | $            | 5.33       |   | $ | 64.69 |   | $ | 59.86 |   | $ | 4.83 |   |
| HSI revenue, per  HSI subscriber                                                  |       | $                                               | 39.71      |         | $          | 39.69                                         |       | $            | 0.02       |   | $ | 39.83 |   | $ | 39.47 |   | $ | 0.36 |   |
| Total revenue, per  basic subscriber                                              |       | $                                               | 81.34      |         | $          | 73.33                                         |       | $            | 8.01       |   | $ | 79.58 |   | $ | 72.00 |   | $ | 7.58 |   |

 

ARPU for video revenue increased $5.33, or 9%, and $4.83, or8%, during the three and six months ended June 30, 2006 as compared to the sameperiods in 2005, respectively.  ARPU forHSI revenue remained flat during the three and six month periods ended June 30,2006 as compared to the same periods in 2005. ARPU for total revenue increased $8.01, or 11% and $7.58, or 11% duringthe three and six months ended June 30, 2006 as compared to the same period in2005, respectively.

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# RESULTS OFOPERATIONS

## ***Three Months Ended June 30, 2006 Compared toThree Months Ended June 30, 2005***

The following table summarizes the results of operations forthe periods presented (dollars in thousands):
|                                                                                                                                                    | ** ** | **Three months ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                                         | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                                                                                                         | ** ** | **$**                                               | ** ** | **% of  Revenue** | ** ** | **$** | ** ** | **% of  Revenue** | ** ** |
|                                                                                                                                               |       |                                                |       |   |   |   |   |   |   |
| Revenue                                                                                                                                            |       | $                                                   | 1,198,279  |   | 100 | % | $ | 1,103,223 |   | 100 | % |
|                                                                                                                                               |       |                                                |       |   |   |   |   |   |   |
| Costs and expenses:                                                                                                                                |       |                                                |       |   |   |   |   |   |   |
| Direct operating  and programming                                                                                                                  |       | 704,560                                             |       | 59 |   | 666,258 |   | 60 |   |
| Selling, general  and administrative                                                                                                               |       | 90,164                                              |       | 7 |   | 92,549 |   | 8 |   |
| Investigation,  re-audit and sale transaction costs                                                                                                |       | 9,626                                               |       | 1 |   | 18,055 |   | 2 |   |
| Depreciation                                                                                                                                       |       | 191,780                                             |       | 16 |   | 200,717 |   | 18 |   |
| Amortization                                                                                                                                       |       | 33,231                                              |       | 3 |   | 39,613 |   | 4 |   |
| Provision for  uncollectible amounts due from the Rigas Family and Other Rigas Entities                                                            |       | —                                              |       | — |   | 11,338 |   | 1 |   |
| Loss (gain) on  disposition of long-lived assets                                                                                                   |       | (394                                                | )          | — |   | 129 |   | — |   |
| Total costs and  expenses                                                                                                                          |       | 1,028,967                                           |       | 86 |   | 1,028,659 |   | 93 |   |
|                                                                                                                                               |       |                                                |       |   |   |   |   |   |   |
| Operating income                                                                                                                                   |       | 169,312                                             |       | 14 |   | 74,564 |   | 7 |   |
| Other income (expense),  net:                                                                                                                      |       |                                                |       |   |   |   |   |   |   |
| Interest expense,  net of amounts capitalized                                                                                                      |       | (219,642                                            | )          | (18 | ) | (185,493 | ) | (17 | ) |
| Other income  (expense), net                                                                                                                       |       | (34,436                                             | )          | (3 | ) | 459,746 |   | 42 |   |
| Total other  income (expense), net                                                                                                                 |       | (254,078                                            | )          | (21 | ) | 274,253 |   | 25 |   |
| Income (loss)  before reorganization income (expenses), income taxes, share of income  (losses) of equity affiliates, and minority’s interest |       | (84,766                                             | )          | (7 | ) | 348,817 |   | 32 |   |
| Reorganization income  (expenses) due to bankruptcy, net                                                                                           |       | 84,623                                              |       | 7 |   | (17,516 | ) | (2 | ) |
| Income tax expense                                                                                                                                 |       | (21,418                                             | )          | (2 | ) | (40,334 | ) | (4 | ) |
| Share of income  (losses) of equity affiliates, net                                                                                                |       | 92                                                  |       | — |   | (882 | ) | — |   |
| Minority’s interest in  loss of subsidiary                                                                                                    |       | 10,173                                              |       | 1 |   | 953 |   | — |   |
| Net income (loss)                                                                                                                                  |       | $                                                   | (11,296    | ) | (1 | )% | $ | 291,038 |   | 26 | % |

 

Thefollowing is a discussion of our results of operations and includes an analysisof significant changes from historical trends in our results of operations forthe three months ended June 30, 2006 as compared to the three months ended June30, 2005.

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### *Revenue*

Revenue increased $95 million, or 9%, during the three monthsended June 30, 2006 as compared to the same period in 2005.  The following table summarizes revenue forthe periods indicated (dollars in thousands, except ARPU amounts):
|                            | ** ** | **Three months ended June 30,** | ** ** | ** **             | ** ** | ** **  | ** ** |
|----------------------------|------------|-----------------------------------------------------|------------|------------------------|------------|-------------|------------|
| ** **                 | ** ** | **2006**                                            | ** ** | **2005**               | ** ** | **$**       | ** ** | **%** | ** ** |
| ** **                 | ** ** | **Revenue**                                         | ** ** | **% of  Revenue** | ** ** | **Revenue** | ** ** | **% of  Revenue** | ** ** | **Increase  (decrease)** | ** ** | **Increase  (decrease)** | ** ** |
|                       |       |                                                |       |                   |       |        |       |   |   |   |   |   |   |
| Cable:                     |       |                                                |       |                   |       |        |       |   |   |   |   |   |   |
| Video (including  digital) |       | $                                                   | 907,431    |                   | 76         | %           | $          | 854,310 |   | 78 | % | $ | 53,121 |   | 6 | % |
| HSI                        |       | 218,622                                             |       | 18                     |       | 180,540     |       | 16 |   | 38,082 |   | 21 |   |
| Media services             |       | 70,400                                              |       | 6                      |       | 65,163      |       | 6 |   | 5,237 |   | 8 |   |
| Total cable                |       | 1,196,453                                           |       | 100                    |       | 1,100,013   |       | 100 |   | 96,440 |   | 9 |   |
| Corporate and other        |       | 1,826                                               |       | —                 |       | 3,210       |       | — |   | (1,384 | ) | (43 | ) |
| Total                      |       | $                                                   | 1,198,279  |                   | 100        | %           | $          | 1,103,223 |   | 100 | % | $ | 95,056 |   | 9 |   |
| ARPU                       |       | $                                                   | 81.34      |                   |       |        | $          | 73.33 |   |   |   | $ | 8.01 |   | 11 | % |

 

Cable revenue increased $96 million, or 9%, during the threemonths ended June 30, 2006, as compared to the same period in 2005.  The increase in cable revenue was primarilyattributable to higher rates for basic and expanded basic service tiers,increased revenue from HSI services, enhanced product offerings and mediaservices.  The positive impact of higherrates for basic and expanded basic service tiers was partially offset by adecrease in our basic subscriber base. An increase in HSI subscribers accounted for the majority of theincrease in HSI revenue.  The increase inmedia services revenue was attributable to our ability to increase both theaverage rate received and the volume of advertising sold.  Subscribers increased 20.3% for HSI services,2.8% for digital cable and decreased 1.9% for basic cable at June 30, 2006 ascompared to the same period in 2005.

Corporate and other revenue decreased primarily due to theFebruary 2006 sale of our long-distance telephone resale business.

### *Direct operating and programming costs*

Direct operating and programming costs increased $38 million,or 6%, during the three months ended June 30, 2006 as compared to the sameperiod in 2005.  The following tablesummarizes direct operating and programming costs for the periods indicated(dollars in thousands):

|                     | ** ** | **Three months ended June 30,** | ** ** | **$  Increase** | ** ** | **%  Increase** | ** ** |
|---------------------|------------|-----------------------------------------------------|------------|-----------------|------------|-----------------|------------|
| ** **          | ** ** | **2006**                                            | ** ** | **2005**        | ** ** | **(decrease)**  | ** ** | **(decrease)** | ** ** |
| ** **          | ** ** | ** **                                          | ** ** | ** **      | ** ** | ** **      | ** ** | ** ** | ** ** |
| Cable:              |       |                                                |       |            |       |            |       |   |   |
| Programming  costs  |       | $                                                   | 324,193    |            | $          | 298,505         |       | $ | 25,688 |   | 9 | % |
| Other cable         |       | 379,540                                             |       | 364,744         |       | 14,796          |       | 4 |   |
| Total cable         |       | 703,733                                             |       | 663,249         |       | 40,484          |       | 6 |   |
| Corporate and other |       | 827                                                 |       | 3,009           |       | (2,182          | )          | (73 | ) |
| Total               |       | $                                                   | 704,560    |            | $          | 666,258         |       | $ | 38,302 |   | 6 | % |

 

Programming costs consist primarily of costs paid toprogrammers for the provision of analog, premium and digital channels andpay-per-view programs.  Programming costsincreased $26 million, or 9%, primarily due to an increase in the rates paid toprogramming providers and an increase in digital subscribers, offset bydeclines tied to the drop in basic cable subscribers.

Other cable operating costs consist of labor and othercosts associated with the provision of cable services to subscribers and theoperation and maintenance of our cable systems. When comparing the three months ended June 30, 2006

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tothe same period in 2005, approximately half of the $15 million increase isattributable to salaries and employee benefit costs.  Rising fuel and utility costs alsocontributed to the increase in cable operating costs.

Corporate and other costs decreased $2 million when comparingthe three months ended June 30, 2006 to the same period in 2005.  The decline was primarily due to the February2006 sale of our long-distance telephone resale business.

### *Selling, general and administrative expenses(“SG&A”)*

SG&A expenses consist of salaries and benefits, marketingexpenses, professional fees, insurance and other general and administrativeexpenses related to our operations. SG&A expenses decreased approximately $2 million, or 3%, whencomparing the three months ended June 30, 2006 to the same period in 2005.  The decrease in SG&A expenses isprimarily attributable to a decrease in marketing expenses.

### *Investigation, re-audit and sale transactioncosts*

* *Investigation, re-audit and saletransaction costs aggregated $10 million and $18 million for the three months ending June 30, 2006 and2005, respectively.  The 2006 costs areprimarily related to additional costs associated with the Sale Transactionwhereas the 2005 costs relate primarily to our re-audit effort and certaincosts associated with the Sale Transaction.

### *Depreciation*

Depreciation expense decreased by $9 million, or 4%,during the three months ended June 30, 2006, as compared to the same period in2005.  The decrease reflects the neteffect of a decrease in depreciation expense associated with an increase inproperty and equipment that had become fully depreciated or was retired,partially offset by an increase in depreciation expense due to capitalexpenditures.

*Provisionfor uncollectible amounts due from the Rigas Family and Other Rigas Entities*

During the three months ended June 30, 2005, we recorded an$11 million provision for uncollectible amounts due from the Rigas Family andOther Rigas Entities due to further declines in the fair value of the underlyingsecurities.  For additional information,see Note 4, “Transactions with theRigas Family and Other Rigas Entities,” to the accompanying condensedconsolidated financial statements.

### *Interest expense, net of amounts capitalized*

Interest expense, net of amounts capitalized, was$220 million for the three months ended June 30, 2006 as compared to$185 million for the same period in 2005. Interest expense increased in 2006 primarily as a result of higher averagemonthly outstanding debt balances and higher average interest rates.  In addition, during the three months endedJune 30, 2006, we recorded $50 million of interest expense on allowed claims inconnection with the confirmation of the JV Plan.  Interest expense for the three months endedJune 30, 2005 included $58 million of deferred financing costs which werewritten off as a result of the termination of our exit financing commitment inMay 2005.  Since the Petition Date, wehave been paying or accruing interest only on amounts outstanding under the DIPfacilities and the pre-petition credit agreements, including the entireprincipal balance outstanding under the Co-Borrowing Facilities.

### *Other income (expense), net*

 We recorded other expense, net of $34 millionduring the three months ended June 30, 2006 as compared to $460 million ofother income, net for the three months ended June 30, 2005.  We recorded a $30 million charge during thequarter ended June 30, 2006 associated with claims asserted by Verizon MediaVentures in connection with two separate asset purchase agreements which werenot consummated.  In connection with the2005 Government Settlement Agreements, we recorded a $458 million net benefitrelated to the settlement of, among other matters, net amounts payable from us(including the Rigas Co-Borrowing Entities) to the Rigas Family and Other RigasEntities during the quarter ended June 30, 2005.  For additional information, see Note 4, “Transactionswith the Rigas Family and Other Rigas Entities,” to the accompanying condensedconsolidated financial statements.

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### *Reorganization income (expenses) due tobankruptcy, net*

Certain income and expenses directly related to the Chapter11 filing are included in reorganization income (expenses) due to bankruptcy,net.  We recognized $85 million of netreorganization income during the three months ended June 30, 2006 as comparedto $18 million of net expense during the same period in 2005.  The net reorganization income in 2006resulted primarily from the net impact of the reversal of $127 million ofaccrued interest resulting from the Bankruptcy Court’s disallowance of suchinterest, $38 million of professional fees incurred in connection with theChapter 11 Cases, $10 million of expense related to adjustments of liabilitiessubject to compromise to reflect the allowed claims for the JV Plan and $6million of interest income earned during reorganization.  The net reorganization expense in 2005resulted primarily from the net impact of $51 million of professional feesincurred in connection with the Chapter 11 Cases, $2 million of interest incomeearned during reorganization and $2 million of expenses related tosettlements.  We will continue to incursignificant reorganization costs until we emerge from bankruptcy.  In addition, the claims reconciliationprocess could significantly impact reorganization income (expenses) due tobankruptcy, net.  For additionalinformation, see Note 2, “Bankruptcy Proceedings and Sale of Assets of theCompany,” to the accompanying condensed consolidated financial statements.

### *Income tax expense*

We recorded income tax expense of $21 million and $40 millionfor the three months ended June 30, 2006 and 2005, respectively.  Income tax expense differs from the amountthat would have resulted from the application of statutory tax rates primarilydue to increases in the valuation allowance provided against our net operatingloss carryforwards.  In the secondquarter of 2006, we began calculating our income tax provision based on theyear-to-date actual loss before income taxes, as opposed to the projectedannual effective rate calculation used previously.  As a result of the Sale Transaction, we nolonger believe that we can reliably estimate our projected effective tax ratefor the year given the uncertainties with respect to the confirmation of a planof reorganization, the anticipated implementation of liquidation accounting inthe third quarter and other related matters. Accordingly, calculating the income tax provision on a year-to-datebasis results in a more meaningful presentation in the financialstatements.  Income tax expense for 2006and 2005 primarily relates to the increase in our deferred tax liability forfranchise rights and goodwill intangible assets that are not amortized forfinancial reporting purposes, but are amortized for income tax purposes.

*Minority’s interest in loss ofsubsidiary*

We recorded minority’s interest in loss of subsidiary of $10million for the three months ended June 30, 2006 as compared to $1 million forthe same period in 2005.  This increaseis primarily attributable to additional interest expense and other adjustmentsrecorded in 2006 in connection with the confirmation of the JV Plan.  For additional information, see Note 2, “BankruptcyProceedings and Sale of Assets of the Company,” to the accompanying condensedconsolidated financial statements.

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## ***Six Months Ended June 30, 2006 Compared toSix Months Ended June 30, 2005***

The following table summarizes the results of operations forthe periods presented (dollars in thousands):
|                                                                                                                                         | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                              | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                                                                                                              | ** ** | **$**                                             | ** ** | **% of  Revenue** | ** ** | **$** | ** ** | **% of  Revenue** | ** ** |
|                                                                                                                                    |       |                                              |       |   |   |   |   |   |   |
| Revenue                                                                                                                                 |       | $                                                 | 2,348,001  |   | 100 | % | $ | 2,172,225 |   | 100 | % |
|                                                                                                                                    |       |                                              |       |   |   |   |   |   |   |
| Costs and  expenses:                                                                                                                    |       |                                              |       |   |   |   |   |   |   |
| Direct operating and programming                                                                                                        |       | 1,394,473                                         |       | 59 |   | 1,320,588 |   | 61 |   |
| Selling, general and administrative                                                                                                     |       | 177,253                                           |       | 8 |   | 171,614 |   | 8 |   |
| Investigation, re-audit and sale transaction costs                                                                                      |       | 30,232                                            |       | 1 |   | 38,485 |   | 2 |   |
| Depreciation                                                                                                                            |       | 379,907                                           |       | 16 |   | 413,822 |   | 19 |   |
| Amortization                                                                                                                            |       | 66,531                                            |       | 3 |   | 74,032 |   | 3 |   |
| Provision for uncollectible amounts due from the  Rigas Family and Other Rigas Entities                                                 |       | —                                            |       | — |   | 13,338 |   | — |   |
| Gain on disposition of long-lived assets                                                                                                |       | (1,358                                            | )          | — |   | (5,771 | ) | — |   |
| Total costs and expenses                                                                                                                |       | 2,047,038                                         |       | 87 |   | 2,026,108 |   | 93 |   |
|                                                                                                                                    |       |                                              |       |   |   |   |   |   |   |
| Operating income                                                                                                                        |       | 300,963                                           |       | 13 |   | 146,117 |   | 7 |   |
| Other income  (expense), net:                                                                                                           |       |                                              |       |   |   |   |   |   |   |
| Interest expense, net of amounts capitalized                                                                                            |       | (377,295                                          | )          | (16 | ) | (302,735 | ) | (14 | ) |
| Other income (expense), net                                                                                                             |       | (108,066                                          | )          | (5 | ) | 460,939 |   | 21 |   |
| Total other income (expense), net                                                                                                       |       | (485,361                                          | )          | (21 | ) | 158,204 |   | 7 |   |
| Income (loss) before reorganization income (expenses),  income taxes, share of losses of equity affiliates and minority’s interest |       | (184,398                                          | )          | (8 | ) | 304,321 |   | 14 |   |
| Reorganization  income (expenses) due to bankruptcy, net                                                                                |       | 62,639                                            |       | 3 |   | (31,574 | ) | (1 | ) |
| Income tax  expense                                                                                                                     |       | (71,441                                           | )          | (3 | ) | (64,466 | ) | (3 | ) |
| Share of losses  of equity affiliates, net                                                                                              |       | (818                                              | )          | — |   | (1,368 | ) | — |   |
| Minority’s  interest in loss of subsidiary                                                                                         |       | 11,106                                            |       | — |   | 1,383 |   | — |   |
| Net income  (loss)                                                                                                                      |       | $                                                 | (182,912   | ) | (8 | )% | $ | 208,296 |   | 10 | % |

 

Thefollowing is a discussion of our results of operations and includes an analysisof significant changes from historical trends in our results of operations forthe six months ended June 30, 2006 as compared to the six months ended June 30,2005.

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### *Revenue*

Revenue increased $176 million, or 8%, during the six monthsended June 30, 2006 as compared to the same period in 2005.  The following table summarizes revenue forthe periods indicated (dollars in thousands, except ARPU amounts):
|                           | ** ** | **Six months ended June 30,** | ** ** | ** **             | ** ** | ** **  | ** ** |
|---------------------------|------------|---------------------------------------------------|------------|------------------------|------------|-------------|------------|
| ** **                | ** ** | **2006**                                          | ** ** | **2005**               | ** ** | **$**       | ** ** | **%** | ** ** |
| ** **                | ** ** | **Revenue**                                       | ** ** | **% of  Revenue** | ** ** | **Revenue** | ** ** | **% of  Revenue** | ** ** | **Increase  (decrease)** | ** ** | **Increase  (decrease)** | ** ** |
|                      |       |                                              |       |                   |       |        |       |   |   |   |   |   |   |
| Cable:                    |       |                                              |       |                   |       |        |       |   |   |   |   |   |   |
| Video (including digital) |       | $                                                 | 1,786,714  |                   | 76         | %           | $          | 1,692,030 |   | 78 | % | $ | 94,684 |   | 6 | % |
| HSI                       |       | 427,914                                           |       | 18                     |       | 349,268     |       | 16 |   | 78,646 |   | 23 |   |
| Media services            |       | 130,307                                           |       | 6                      |       | 120,645     |       | 6 |   | 9,662 |   | 8 |   |
| Total cable               |       | 2,344,935                                         |       | 100                    |       | 2,161,943   |       | 100 |   | 182,992 |   | 8 |   |
| Corporate and  other      |       | 3,066                                             |       | —                 |       | 10,282      |       | — |   | (7,216 | ) | (70 | ) |
| Total                     |       | $                                                 | 2,348,001  |                   | 100        | %           | $          | 2,172,225 |   | 100 | % | $ | 175,776 |   | 8 |   |
| ARPU                      |       | $                                                 | 79.58      |                   |       |        | $          | 72.00 |   |   |   | $ | 7.58 |   | 11 | % |

 

Cable revenue increased $183 million, or 8%, during thesix months ended June 30, 2006, as compared to the same period in 2005. Theincrease in cable revenue was primarily attributable to higher rates for basicand expanded basic service tiers, increased revenue from HSI services, enhancedproduct offerings and media services. The positive impact of higher rates for basic and expanded basic servicetiers was partially offset by a decrease in our basic subscriber base.  An increase in HSI subscribers accounted formost of the increase in HSI revenue.  Theincrease in media services revenue was attributable to our ability to increaseboth the average rate received and the volume of advertising sold.  Subscribers increased 20.3% for HSI services,2.8% for digital cable and decreased 1.9% for basic cable when comparingsubscriber counts at June 30, 2006 to the same period in 2005.

Corporate and other revenue includes revenue from oursecurity monitoring business and our long-distance telephone resalebusiness.  Corporate and other revenuedecreased primarily due to the February 2005 sale of substantially all of oursecurity monitoring business and the February 2006 sale of our long-distancetelephone resale business.

### *Direct operating and programming costs*

Direct operating and programming costs increased $74 million,or 6%, during the six months ended June 30, 2006 as compared to the same periodin 2005.  The following table summarizesdirect operating and programming costs for the periods indicated (dollars inthousands):

|                      | ** ** | **Six months ended June 30,** | ** ** | **$  Increase** | ** ** | **%  Increase** | ** ** |
|----------------------|------------|---------------------------------------------------|------------|-----------------|------------|-----------------|------------|
| ** **           | ** ** | **2006**                                          | ** ** | **2005**        | ** ** | **(decrease)**  | ** ** | **(decrease)** | ** ** |
| ** **           | ** ** | ** **                                        | ** ** | ** **      | ** ** | ** **      | ** ** | ** ** | ** ** |
| Cable:               |       |                                              |       |            |       |            |       |   |   |
| Programming costs    |       | $                                                 | 645,966    |            | $          | 594,511         |       | $ | 51,455 |   | 9 | % |
| Other cable          |       | 747,632                                           |       | 718,059         |       | 29,573          |       | 4 |   |
| Total cable          |       | 1,393,598                                         |       | 1,312,570       |       | 81,028          |       | 6 |   |
| Corporate and  other |       | 875                                               |       | 8,018           |       | (7,143          | )          | (89 | ) |
| Total                |       | $                                                 | 1,394,473  |            | $          | 1,320,588       |       | $ | 73,885 |   | 6 | % |

 

Programming costs increased $51 million, or 9%,primarily due to an increase in the rates paid to programming providers and anincrease in digital subscribers, offset by declines tied to the drop in basiccable subscribers.

Other cable operating costs increased $30 million whencomparing the six months ended June 30, 2006 to the same period in 2005.  Approximately half of the increase isattributable to salaries and employee benefit costs.  Rising fuel and utility costs alsocontributed to the increase in cable operating costs.

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Corporate and other costs decreased $7 million, or 89%, whencomparing the six months ended June 30, 2006 to the same period in 2006.  The decline was primarily due to the February2005 sale of substantially all of our security monitoring business and theFebruary 2006 sale of our long-distance telephone resale business.

### *Selling, general and administrative expenses*

SG&A expenses consist of salaries and benefits, marketingexpenses, professional fees, insurance and other general and administrativeexpenses related to our operations. SG&A expenses increased approximately $6 million, or 3%, whencomparing the six months ended June 30, 2006 to the same period in 2005.

### *Investigation, re-audit and sale transactioncosts*

* *Investigation, re-audit and saletransaction costs aggregated $30 million and $38 million for the six months ending June 30, 2006 and2005, respectively.  The 2006 costs areprimarily related to additional costs associated with the Sale Transactionwhereas the 2005 costs relate primarily to our re-audit effort and certaincosts associated with the Sale Transaction.

### *Depreciation*

Depreciation expense decreased by $34 million, or 8%, for thesix months ended June 30, 2006 as compared to the same period in 2005.  The decrease reflects the net effect of adecrease in depreciation expense associated with an increase in property andequipment that had become fully depreciated or was retired, partially offset byan increase in depreciation expense due to capital expenditures.

*Provisionfor uncollectible amounts due from the Rigas Family and Other Rigas Entities*

During the six months ended June 30, 2005, we recorded a $13million provision for uncollectible amounts due from the Rigas Family and OtherRigas Entities due to further declines in the fair value of underlyingsecurities.  For additional information,see Note 4, “Transactions with theRigas Family and Other Rigas Entities,” to the accompanying condensedconsolidated financial statements.

### *Interest expense, net of amounts capitalized*

Interest expense, net of amounts capitalized, was$377 million for the six months ended June 30, 2006 as compared to$303 million for the same period in 2005. Interest expense increased in 2006 primarily as a result of higheraverage monthly outstanding debt balances and higher average interestrates.  In addition, during the sixmonths ended June 30, 2006, we recorded $50 million of interest expense onallowed claims in connection with the confirmation of the JV Plan.  Interest expense for the six months endedJune 30, 2005 included $58 million of deferred financing costs which werewritten off as a result of the termination of our exit financing commitment inMay 2005.  Since the Petition Date, wehave been paying or accruing interest only on amounts outstanding under the DIPfacilities and the pre-petition credit agreements, including the entireprincipal balance outstanding under the Co-Borrowing Facilities.

### *Other income (expense), net*

Other expense, net was $108 million versus other income, netof $461 million during the six months ended June 30, 2006 and 2005,respectively.  This change was primarilydue to a $64 million charge we recorded during 2006 in connection with ourdispute with ML Media and a $39 million charge associated with claims assertedby Verizon Media Ventures in connection with two separate asset purchaseagreements which were not consummated. In connection with the 2005 Government Settlement Agreements, werecorded a $458 million net benefit related to the settlement of, among othermatters, net amounts payable from us (including the Rigas Co-BorrowingEntities) to the Rigas Family and Other Rigas Entities during the six monthsended June 30, 2005.  For additionalinformation, see Note 4, “Transactions with the Rigas Family and OtherRigas Entities,” to the accompanying condensed consolidated financialstatements.

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### *Reorganization income (expenses) due tobankruptcy, net*

Reorganization income (expenses) due to bankruptcy, netaggregated $63 million of net income and $32 million of net expensefor the six months ended June 30, 2006 and 2006, respectively.  The net reorganization income in 2006resulted primarily from the net impact of the reversal of $127 million ofaccrued interest resulting from the Bankruptcy Court’s disallowance of suchinterest, $70 million of professional fees incurred in connection with theChapter 11 Cases, $10 million of expense related to adjustments of liabilitiessubject to compromise to reflect the allowed claims for the JV Plan, $11million of interest income earned during reorganization and $4 million ofincome related to settlements.  The netreorganization expense in 2005 resulted primarily from the net impact of $41million of professional fees incurred in connection with the Chapter 11 Cases,$5 million of interest income earned during reorganization and $5 million of incomerelated to settlements.  For additionalinformation see Note 2, “Bankruptcy Proceedings and Sale of Assets of theCompany,” to the accompanying condensed consolidated financial statements.

### *Income tax expense*

 We recorded income taxexpense of $71 and $64 million for the six months ended June 30, 2006 and 2005,respectively.  Income tax expense differsfrom the amount that would have resulted from the application of statutory taxrates primarily due to increases in the valuation allowance provided againstour net operating loss carryforwards.  Inthe second quarter of 2006, we began calculating our income tax provision basedon the year-to-date actual loss before income taxes, as opposed to theprojected annual effective rate calculation used previously.  As a result of the Sale Transaction, we nolonger believe that we can reliably estimate our projected effective tax ratefor the year given the uncertainties with respect to the confirmation of a planof reorganization, the anticipated implementation of liquidation accounting inthe third quarter and other related matters. Accordingly, calculating the income tax provision on a year-to-datebasis results in a more meaningful presentation in the financialstatements.  Income tax expense for 2006and 2005 primarily relates to the increase in our deferred tax liability forfranchise rights and goodwill intangible assets that are not amortized forfinancial reporting purposes, but are amortized for income tax purposes.

*Minority’s interest in loss ofsubsidiary*

We recorded minority’s interest in loss of subsidiary of $11million for the six months ended June 30, 2006 as compared to $1 million forthe same period in 2005.** **This increase is primarilyattributable to additional interest expense and other adjustments recorded in2006 in connection with the confirmation of the JV Plan.  For additional information, see Note 2, “BankruptcyProceedings and Sale of Assets of the Company,” to the accompanying condensedconsolidated financial statements.

**LIQUIDITY AND CAPITAL RESOURCES**

## *HistoricalSources and Uses of Cash*

Thefollowing table summarizes net cash provided by (used in) our operating,investing and financing activities during the indicated periods (amounts inthousands):

|                            | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------|------------|-----------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
|                       |       |                                          |       |   |   |
| Operating  activities      |       | $                                             | 261,087    |   | $ | 307,366 |   |
|                       |       |                                          |       |   |   |
| Investing  activities:     |       |                                          |       |   |   |
| Capital expenditures       |       | $                                             | (284,621   | ) | $ | (338,191 | ) |
| Other investing activities |       | 278,513                                       |       | (10,150 | ) |
| Total investing activities |       | $                                             | (6,108     | ) | $ | (348,341 | ) |
|                       |       |                                          |       |   |   |
| Financing activities       |       | $                                             | 89,629     |   | $ | 11,264 |   |

 

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*Operating activities. *Netcash provided by operating activities for the six months ended June 30, 2006and 2005 was $261 million and $307 million, respectively.  The $46 million decrease was primarily theresult of an $87 million payment made in connection with the settlement of ourlitigation with ML Media in 2006 and a $36 million increase in payments forreorganization expenses, offset by changes in operating assets and liabilitiesand an increase in net cash generated by our operations.

*Investing activities*.  Net cash usedin investing activities decreased to $6 million for the six months ended June30, 2006 from $348 million for the comparable period of the prior year.  In both periods, we continued to make significant capital expenditures tosupport the growth of enhanced services and to upgrade our cable systems.  Such expenditures were $285 million for thesix months ended June 30, 2006 and $338 million for the same period of theprior year.  Other investing activitieschanged primarily as a result of the settlement of our litigation with ML Mediawhich provided for the release of $262 million of cash previously held inescrow.  In addition, proceeds from thesale of our security monitoring business in 2005 had a positive impact on otherinvesting activities for both the six months ended June 30, 2006 and 2005.  In 2005, we received proceeds of $36 millionfrom the sale of our security monitoring business, of which $19 million wasrestricted as to use under the Second Extended DIP Facility.  In 2006, the restrictions on the use of theseproceeds were removed.

*Financing activities. *The $78 million increase in net cash providedby financing activities was primarily due to the $45 million payment made in2005 in connection with the termination of our exit financing facility, a netincrease in 2006 borrowings to fund the operations and capital expenditures ofcertain borrowers under the DIP facilities and a decrease in financing costspaid for refinancing of the DIP facilities. For the six months ended June 30, 2006, we had borrowings and repaymentsof $1,023 million and $932 million, respectively, under the DIP facilities ascompared to borrowings and repayments of $766 million and $705 million,respectively, for the six months ended June 30, 2005.

**CURRENT AND FUTURE SOURCES OF LIQUIDITY**

Since the Petition Date, we have utilized cash provided byoperating activities and borrowings under our DIP facilities to fund capitalexpenditures and other liquidity requirements.

On March 17, 2006, the Loan Parties entered into the $1,300million Third Extended DIP Facility, which superseded and replaced in itsentirety the Second Extended DIP Facility. The Third Extended DIP Facility was approved by the Bankruptcy Court onMarch 16, 2006 and closed on March 17, 2006. In connection with the completion of the Sale Transaction, on theEffective Date, we terminated the Third Extended DIP Facility.  In connection with the termination of theThird Extended DIP Facility, we repaid all loans outstanding under the ThirdExtended DIP Facility and all accrued and unpaid interest thereon, with suchpayments totaling approximately $986 million. In addition, in connection with the termination of the Third ExtendedDIP Facility we paid all accrued and unpaid fees of the lenders and agent banksunder the Third Extended DIP Facility. In connection with these payments, effective as of the Effective Date,the collateral agent under the Third Extended DIP Facility released any and allliens and security interests on the assets that collateralized the obligationsunder the Third Extended DIP Facility. As described in Note 8 to the accompanying condensed consolidatedfinancial statements, we issued certain letters of credit under the DIPfacilities.  As a result of thetermination of the Third Extended DIP Facility, on the Effective Date, wecollateralized letters of credit issued under the Third Extended DIP Facilitywith cash of $88 million.

We also expect to pay approximately $1.8 billion of claims inthe third quarter of 2006 in accordance with the JV Plan, of whichapproximately $1.6 billion relates to pre-petition debt obligations. Wepaid $1.2 billion of such pre-petition debt obligations on the EffectiveDate.  The remaining proceeds from theSale Transaction will be used to fund our future liquidity requirements whichconsist primarily of pre-petition liabilities that are subject to compromise,fees and other items directly related to the Chapter 11 filings and costsassociated with certain corporate functions that will continue either in partor in whole for some period of time following the Sale Transaction.  We do not have any additional sources of liquidity.

At June 30, 2006, we had $18,424 million of pre-petitionliabilities that are subject to compromise. We currently cannot predict the amount of cash that will be required tosettle pre-petition liabilities subject to compromise, as the rights and claimsof the Debtors’ various creditors will be determined by a plan ofreorganization that is ultimately subject to confirmation by the BankruptcyCourt.  Proceeds from the SaleTransaction are not sufficient to provide a full payout of all outstandingclaims in the Chapter 11 Cases.

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**CRITICAL ACCOUNTING POLICIES**

Our critical accounting policies have not changed from thosereported in Management’s Discussion and Analysis of Financial Condition andResults of Operations in the 2005 Form 10-K.

**NEW ACCOUNTING PRONOUNCEMENTS**

InDecember 2004, the FASB issued SFAS No. 123-R,*Share-BasedPayment*, which is a revision of SFAS No. 123 and supersedes APBOpinion No. 25 and related interpretations.  SFAS No. 123-R requires allshare-based payments to employees, including grants of employee stock options,to be valued at fair value on the date of grant, and to be expensed over theemployee’s requisite service period.  Effective January 1, 2006, weadopted the provisions of SFAS No. 123-R using the modified prospectiveapplication method.  Under the modified prospective application method, weare required to recognize compensation cost for all stock option awards grantedafter January 1, 2006 and for all existing awards for which the requisiteservice had not been rendered as of the date of adoption.

As of January 1, 2006, there were 23,250 fully vested optionsoutstanding under our only share based payment plan, the 1998 Plan.  Noawards were issued since 2001 pursuant to the 1998 Plan, and we do not intendto grant any new awards pursuant to the 1998 Plan.  As no share basedawards were granted during the six months ended June 30, 2006, the adoption ofSFAS No. 123-R did not have any impact on our financial position or results ofoperations.

In June 2005, the EITF reached a consensus on Issue No. 04-5*, Determining Whether a General Partner, or the General Partners as aGroup, Controls a Limited Partnership or Similar Entity When the LimitedPartners Have Certain Rights* (“EITF 04-5”).  EITF 04-5 provides guidance in assessing whena general partner controls and consolidates its investment in a limitedpartnership or similar entity.  Thegeneral partner is assumed to control the limited partnership unless thelimited partners have substantive kick-out or participating rights.  The provisions of EITF 04-5 were required tobe applied beginning June 30, 2005 for partnerships formed or modifiedsubsequent to June 30, 2005, and are effective for general partners in allother limited partnerships beginning January 1, 2006.  EITF 04-5 had no impact on our financialposition or results of operations.

InJuly 2006, the FASB issued FIN 48. FIN 48 defines the threshold for recognizing the benefits of tax returnpositions in the financial statements as “more-likely-than-not” to be sustainedby the taxing authority.  The recentlyissued literature also provides guidance on the derecognition, measurement andclassification of income tax uncertainties, along with any related interest andpenalties.  FIN 48 also includes guidanceconcerning accounting for income tax uncertainties in interim periods andincreases the level of disclosures associated with any recorded income taxuncertainties.  FIN 48 is effective forfiscal years beginning after December 31, 2006.  We have not yet determined the impact, ifany, of adopting the provisions of FIN 48 on our financial position and resultsof operations.

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

As of June 30, 2006, there were no material changes from the2005 Form 10-K related to our exposure to market risk from interest rates.

**ITEM 4. CONTROLS AND PROCEDURES**

## *Evaluationof Disclosure Controls and Procedures*

The Company maintains disclosure controls and procedures thatare designed to ensure that information required to be disclosed in our reportsfiled under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures includecontrols and procedures designed to ensure that such information is accumulatedand communicated to our management, including our CEO, Chief Financial Officer(“CFO”) and Chief Accounting Officer (“CAO”), as appropriate, to allow timelydecisions regarding required financial disclosure.

Ourmanagement, under the supervision and with the participation of our CEO, CFOand CAO, has completed an evaluation of the effectiveness of the design andoperation of our disclosure controls and procedures (as defined in Rule13a-15(e) under the Exchange Act) as of the end of the quarter ended June 30,2006.  Based on our evaluation of

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the effectivenessof the design and operation of our disclosure controls and procedures, ourmanagement, including our CEO, CFO and CAO, concluded that as of June 30, 2006,our disclosure controls and procedures were effective.

### *Changes in Internal Control Over FinancialReporting*

Duringthe quarter ended June 30, 2006, there were no changes in our internal controlover financial reporting identified in connection with the evaluation of ourdisclosure controls and procedures for the quarter ended June 30, 2006 thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

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**PARTII.  OTHER INFORMATION**

## **ITEM 1.  LEGAL PROCEEDINGS**

*BankruptcyProceedings. *OnJune 25, 2002, Adelphia and substantially all of its wholly owned,domestic subsidiaries filed voluntary petitions to reorganize underChapter 11 in the Bankruptcy Court. Previously, on June 10, 2002, Century filed a voluntary petition toreorganize under Chapter 11.  On October6 and November 15, 2005, certain additional subsidiaries of Adelphia filed voluntarypetitions to reorganize under Chapter 11 and, on March 31, 2006, the ForfeitedEntities and certain other entities filed voluntary petitions to reorganizeunder Chapter 11.  The Debtors arecurrently operating their businesses as debtors-in-possession under Chapter11.  These cases are being jointlyadministered under the caption “In re: Adelphia Communications Corporation, etal., Case No. 02-41729.”

Asfurther described in Note 2 to the accompanying condensed consolidatedfinancial statements, on the Effective Date, Adelphia consummated the SaleTransaction and the JV Plan became effective. Accordingly, from and after the Effective Date, the Debtors no longerinclude the JV Debtors.

Underthe Bankruptcy Code, actions to collect pre-petition indebtedness, as well asmost other pending litigation, are stayed and other contractual obligationsagainst the Company generally may not be enforced. Absent an order of theBankruptcy Court, substantially all pre-petition contractual liabilities,including certain of the proceedings described in Note 8, “Contingencies –Litigation Matters,” to the accompanying condensed consolidated financialstatements, will be settled under a plan of reorganization, which must be votedupon by holders of claims and equity interests and approved by the BankruptcyCourt.

TheCompany cannot predict the outcome of these proceedings or estimate thepossible effects on the financial condition or results of operations of theCompany.

*OtherLegal Proceedings*.  SeeNote 8, “Contingencies — Litigation Matters,” to the accompanying condensedconsolidated financial statements.

**ITEM1A.  RISK FACTORS**

#### The information presentedbelow provides a detailed discussion of our risk factors as of the EffectiveDate.

#### ***Factors Relating to the Chapter 11 Cases***

***If a plan of reorganization is notconfirmed or is not confirmed in a timely manner for the Debtors (other thanthe JV Debtors), we will continue to incur substantial costs as a result of theChapter 11 bankruptcy proceeding, which will reduce the amount available fordistribution to the stakeholders under such plan.***

If weare unable to obtain the Bankruptcy Court’s confirmation of a plan ofreorganization for the Debtors (other than the JV Debtors) or do so in atimely manner, we will continue to incur substantial costs and fees as a resultof the continuation of the Chapter 11 bankruptcy proceedings and ourobligations under the Registration Rights Agreement.  Such continued incurrence of costs and feeswill reduce the amount available for distribution to the stakeholders under aplan of reorganization.

#### ***Allowance of claims maysubstantially dilute the recovery to holders of claims and equity interestsunder a plan of organization.***

As ofJanuary 9, 2004, approximately 17,000 proofs of claim asserting in excess of$3.20 trillion in claims were filed and, as of July 31, 2006,approximately 19,500 proofs of claim asserting approximately $3.98 trillion inclaims were filed, in each case including duplicative claims but excluding anyestimated amounts for unliquidated claims. The Debtors are in the process of reviewing, analyzing and reconcilingthe scheduled and filed claims and have filed several omnibus objections thataddress approximately $3.68 trillion of such claims.  Hearings on certain claims objections areongoing.  Although certain claimsaddressed in such omnibus objections have been reduced and allowed, disallowedand expunged or subordinated by orders of the Bankruptcy Court, the ultimatenumber and allowed amounts of such claims are not determinable at present, andthe Debtors expect that the claims resolution process will take significanttime to complete and will continue following consummation of a plan ofreorganization. The failure to obtain disallowance of a substantial majority ofthese proofs of claims would substantially dilute the recoveries to the Debtors’stakeholders under a plan of reorganization.

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#### ***Risk Factors relating to Completionof the Sale Transaction***

#### ***The aggregate purchase price we received in the SaleTransaction is subject to certain post-closing adjustments, which, if anybecome payable  to TW NY or Comcast,would reduce the amount available for distribution to the stakeholders under aplan of reorganization.***

On theEffective Date, we completed the sale of assets, which in the aggregatecomprise substantially all of our U.S. assets, to TW NY and Comcast.  Proceeds from the Sale Transaction totaledapproximately $17.4 billion, consisting of cash in the amount of approximately$12.5 billion and shares of TWC Class A Common Stock with a preliminaryestimated fair value as of the Effective Date of approximately $4.9billion.  The aggregate purchase price issubject to certain post-closing adjustments. Upon consummation of the Sale Transaction, a portion of the aggregatepurchase price, consisting of approximately $503 million of cash and shares ofTWC Class A Common Stock with a preliminary estimated fair value as of theEffective Date of approximately $195 million, was deposited in escrow accountsto secure Adelphia’s indemnification obligations and any post-closing purchaseprice adjustments due to the buyers from Adelphia pursuant to the PurchaseAgreements.  The post-closingadjustments, if any, will be determined over the next several months.  To the extent such post-closing adjustmentsare in favor of TW NY or Comcast, the amount of the escrow ultimately releasedto us will be reduced.  In the event thatthe post-closing purchase price adjustment is in favor of TW NY or Comcast andexceeds the amount of the escrow, we are required to pay such excess outside ofthe escrow and the amount available for distribution to the stakeholders undera plan of reorganization would be reduced.

#### ***The fair value of the TWC Class A Common Stock wereceived in the Sale Transaction may decrease, which would reduce the amountavailable for distribution to the stakeholders under a plan of reorganization.***

#### The fair value of the TWCClass A Common Stock we received in the Sale Transaction may decrease based onthe financial performance of TWC, adjustments in market valuation and movementsin the price of publicly traded cable company stocks.  Any decrease would reduce the amountavailable for distribution to the stakeholders under a plan of reorganization.

#### ***We are at risk of experiencingincreased levels of employee attrition in the period subsequent to the closingof the Sale Transaction, which could result in our inability to complete ourquarterly financial reporting and 2006 audit and year-end financial reporting.***

On theEffective Date, we completed the Sale Transaction with TW NY andComcast.  Although we believe that wehave retained sufficient senior management and other employees to complete ourquarterly financial reporting and 2006 audit and year-end financial reporting,we are at risk of experiencing increased levels of employee attrition in theperiod following the closing of the Sale Transaction.  We believethat recruiting replacement employees of the caliber required to complete thiswork will be extremely difficult as we do not expect to have sufficientemployment opportunities at the Company to attract such individuals in thefuture.  The failure to replaceour departing personnel, if any, in a timely manner could result in ourinability to complete our quarterly financial reporting and 2006 audit andyear-end financial reporting.

***Ourincome and franchise tax liabilities in connection with the Sale Transactionand consummation of a plan of reorganization could be materially more thanestimated.***

Wewill be liable for federal, state and local income and franchise taxes as aresult of the Sale Transaction.  Thecurrent estimated range of this tax liability is approximately $400 million to$800 million.  This estimated range ofthe liability, however, is based on incomplete information as a result ofdeficiencies in our tax records. Accordingly, these estimates are subject to change, and by the time ofthe consummation of a plan of reorganization, our estimate of income andfranchise tax liabilities and our estimate of the potential range of suchliabilities resulting from the Sale Transaction may be materially in excess ofthe current estimates.  We expect that wewill distribute on or as soon as reasonably possible after the effective dateof a plan of reorganization all of our material non-cash assets to ourcreditors and certain equity holders and to reserves, funds, holdbacks andescrows created pursuant to a plan of reorganization. As such, we do not expectto be subject to asset tax basis reduction. However, there can be no assurancethat the Internal Revenue Service (the “IRS”) will not seek to require basisreduction with respect to the assets then held by us or assert that we actuallyor constructively hold additional assets subject to basis reduction (such asthose assets held by any reserves, funds, holdbacks or escrows created pursuantto a plan of reorganization).  If the IRSwere successful in requiring such basis reduction, we could be subject toadditional income and franchise tax liability potentially in a material amount.

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#### ***Risk Factors Relating to Legal andRegulatory Matters***

#### ***We are defendants in significantpending litigation, which could subject us to substantial damages and otherpenalties and reduce the amount available for distribution to stakeholdersunder a plan of reorganization.***

We aredefendants in certain significant litigation, described in more detail in Note8, “Contingencies—Litigation Matters,” to the notes to the accompanyingcondensed consolidated financial statements.  If any of these proceedingsis decided against us, we could be subject to substantial damages, otherpenalties or non-monetary remedies. These penalties and other effects of litigation, including thesignificant legal fees and expenses we are incurring and will continue toincur, would reduce the amount available for distribution to stakeholders undera plan of reorganization.

#### ***If court approval of the GovernmentSettlement Agreements is overturned or vacated, we may face the risk ofindictment by the U.S. Attorney and the SEC’s claim against us may be fixed bythe District Court and allowed by the Bankruptcy Court, which could materiallydilute the recoveries to the other creditors under a plan of organization.***

TheGovernment Settlement Agreements were approved by the Bankruptcy Court.  Our consent to the final judgment in the SECCivil Action has been approved by both the Bankruptcy Court and the DistrictCourt. Various parties have challenged and sought appellate review orreconsideration of the orders of the Bankruptcy Court approving the GovernmentSettlement Agreements.  The DistrictCourt affirmed the Bankruptcy Court’s approval of the Non-ProsecutionAgreement, Adelphia’s consent to the final judgment in the SEC Civil Action andthe Adelphia-Rigas Settlement Agreement. On March 24, 2006, various parties appealed the District Court’sorder affirming the Bankruptcy Court’s approval to the Second Circuit. TheDistrict Court’s order approving our consent to the final judgment in the SECCivil Action has not been appealed.  Theappeals of the District Court’s approval of the Government-Rigas SettlementAgreement and the creation of the Restitution Fund have been denied by theSecond Circuit.  If the Bankruptcy Courtorder is overturned or vacated, then the Government Settlement Agreements may notremain effective and we may face the risk of indictment by the U.S. Attorney,and the SEC’s claim against us may be fixed by the District Court and allowedby the Bankruptcy Court, which could materially dilute the recoveries of othercreditors.

#### ***We may not be able to make thepayments required under the Non-Prosecution Agreement if a plan of organizationis not effective by October 15, 2006.***

Unlessextended on consent of the U.S. Government, which consent may not beunreasonably withheld, we are required to contribute $715 million in value tothe Restitution Fund called for by the Non-Prosecution Agreement by October 15,2006. If a plan of reorganization is not consummated by October 15, 2006, wemay not be able to make the payments to the Restitution Fund required under theNon-Prosecution Agreement.  Our failureto make the payments required under the Non-Prosecution Agreement in a timelyfashion may constitute a material breach of the Non-Prosecution Agreement andthe final judgment in the SEC Civil Action. Under such circumstances, amongother things, we may still face the risk of indictment by the U.S. Attorney,the SEC’s claim against us may be fixed by the District Court and allowed bythe Bankruptcy Court, which could materially dilute the recoveries of othercreditors under a plan of reorganization.

***There is uncertainty regarding the amountof our tax attributes and our potential tax liabilities.***

As aresult of the fraud and other alleged improper acts committed by RigasManagement (as explained in greater detail in Item 1 of our 2005 Form 10-Ktitled, “Business — Certain Business and Other Developments Relating to theChapter 11 Cases — Certain Events Leading to the Installation of InterimManagement and Commencement of the Chapter 11 Cases in 2002”), we corrected ourbooks and records for the years 1999-2004.  We currently intend to filecertain amended federal, state and local income and franchise tax returns forcertain of these years to conform to our corrected books and records. This may entailthe preparation and filing of over 3,600 federal, state and local income andfranchise tax returns.  Although we have begun the process of preparingthese amended returns, this undertaking will take a substantial amount of timeto complete. We expect that the amendment of these income tax and franchise taxreturns will result in substantial changes to the amount and location of ourtax attributes (such as asset tax basis and net operating loss carryovers) forfederal, state and local income and franchise tax purposes.  It ispossible that the amended tax returns will reflect additional federal, stateand local income tax and franchise tax liabilities for these periods that werenot reflected on the original returns and that will become payable.

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Inaddition, there is currently uncertainty related to our tax attributes andhistorical tax liability. We recorded reserves to reflect this uncertainty;however, our ultimate tax liability for these periods may exceed such reservesby a material amount.  In light of thisuncertainty, we expect to set aside a portion of the proceeds from the SaleTransaction to fund these and other contingent liabilities.

***The tax consequences of certain advances byus to the Rigas Family and the Rigas Family Entities, our settlements with theU.S. Attorney and the SEC and our acquisition of the Rigas Co-BorrowingEntities (other than Coudersport and Bucktail) and subsequent sale of theassets of those entities in the Sale Transaction with TW NY and Comcastare uncertain.***

Theproper characterization for federal, state and local income and franchise taxpurposes of amounts advanced by the Company to the Rigas Family and the RigasFamily Entities is uncertain.  Alsouncertain is the proper tax treatment for federal, state and local income andfranchise tax purposes of our settlements with the U.S. Attorney and the SECand our acquisition of the Rigas Co-Borrowing Entities (other than Coudersportand Bucktail) and subsequent sale of the assets of those entities to TW NY andComcast in the Sale Transaction.  Accordingly, the amount and timing ofincome, gain, loss or deduction resulting from these various transactions isnot known with certainty.  It is possible that the acquisition of suchRigas Co-Borrowing Entities and the subsequent sale of the assets of thoseentities in the Sale Transaction may result in income and franchise taxliability to us, which could be material.  We expect to set aside aportion of the proceeds from the Sale Transaction to fund this potentialliability.

**ITEM3.  DEFAULTS UPON SENIOR SECURITIES**

(b)  See Note 12, “Stockholders’Deficit,” to the notes to the consolidated financial statements contained inthe Company’s 2005 Form 10-K.

**ITEM6.  EXHIBITS**
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                  |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                                                                                                                             |
| 2.01            |       | Plan of Reorganization Under Chapter 11 of the  Bankruptcy Code Filed by Century/ML Cable Venture, dated August 9, 2005  (Incorporated herein by reference to Exhibit 2.03 to the Company’s Annual  Report on Form 10-K for the year ended December 31, 2004) (File No. 0-16014).                                                 |
|            |       |                                                                                                                                                                                                                                                                                                                                             |
| 2.02            |       | Third Modified Fourth Amended Joint Plan of  Reorganization Under Chapter 11 of the Bankruptcy Code for Century-TCI  Debtors and Parnassos Debtors, dated as of June 28, 2006 (Incorporated  herein by reference to Exhibit 2.1 to the Company’s Current Report on  Form 8-K field on July 5, 2006) (File No. 0-16014). |
|            |       |                                                                                                                                                                                                                                                                                                                                             |
| 2.03.1          |       | Asset Purchase Agreement, dated as of April 20,  2005, between Adelphia Communications Corporation and Time Warner NY Cable  LLC (Incorporated herein by reference to Exhibit 2.1 to the Company’s Current  Report on Form 8-K filed on April 25, 2005) (File No. 0-16014).                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                             |
| 2.03.2          |       | Amendment No. 1, dated June 24, 2005, to Asset  Purchase Agreement Between Adelphia Communications Corporation and Time  Warner NY Cable LLC (Incorporated herein by reference to Exhibit C to  Exhibit 2.2 to the Company’s Current Report on Form 8-K filed on  June 27, 2005) (File No. 0-16014).          |
|            |       |                                                                                                                                                                                                                                                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                                                             |
| 2.03.3          |       | Letter Agreement, dated June 24, 2005, between Time  Warner NY Cable LLC, Adelphia Communications Corporation and Comcast  Corporation (Incorporated herein by reference to Exhibit C to  Exhibit 2.2 to the Company’s Current Report on Form 8-K filed on  June 27, 2005) (File No. 0-16014).                |
|            |       |                                                                                                                                                                                                                                                                                                                                             |
| 2.03.4          |       | Amendment No. 2, dated June 21, 2006, to Asset  Purchase Agreement Between Adelphia Communications Corporation and Time  Warner NY Cable LLC (Incorporated herein by reference to Exhibit 2.1 to  the Company’s Current Report on Form 8-K filed on June 27, 2006)  (File No. 0-16014).                            |
|            |       |                                                                                                                                                                                                                                                                                                                                             |
| 2.03.5          |       | Amendment No. 3, dated June 26, 2006, to Asset  Purchase Agreement Between Adelphia Communications Corporation and Time  Warner NY Cable LLC (Filed herewith).                                                                                                                                                                                   |

 

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| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                    |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                                                                                                               |
| 2.03.6          |       | Amendment No. 4, dated July 31, 2006, to Asset Purchase  Agreement Between Adelphia Communications Corporation and Time Warner NY  Cable LLC (Filed herewith).                                                                                                                                                                     |
|            |       |                                                                                                                                                                                                                                                                                                                               |
| 2.03.7          |       | Asset Purchase Agreement, dated as of April 20,  2005, between Adelphia Communications Corporation and Comcast Corporation  (Incorporated herein by reference to Exhibit 2.2 to the Company’s  Current Report on Form 8-K filed on April 25, 2005)  (File No. 0-16014).                              |
|            |       |                                                                                                                                                                                                                                                                                                                               |
| 2.03.8          |       | Amendment No. 1, dated June 24, 2005, to Asset  Purchase Agreement Between Adelphia Communications Corporation and Comcast  Corporation (Incorporated herein by reference to Exhibit D to  Exhibit 2.2 to the Company’s Current Report on Form 8-K filed on  June 27, 2005) (File No. 0-16014). |
|            |       |                                                                                                                                                                                                                                                                                                                               |
| 2.03.9          |       | Letter Agreement, dated June 24, 2005, between  Comcast Corporation, Adelphia Communications Corporation and Time Warner NY  Cable LLC (Incorporated herein by reference to Exhibit D to  Exhibit 2.2 to the Company’s Current Report on Form 8-K filed on  June 27, 2005) (File No. 0-16014).       |
|            |       |                                                                                                                                                                                                                                                                                                                               |
| 2.03.10         |       | Amendment No. 2, dated June 21, 2006, to Asset  Purchase Agreement Between Adelphia Communications Corporation and Comcast  Corporation (Incorporated herein by reference to Exhibit 2.2 to the  Company’s Current Report on Form 8-K filed on June 27, 2006)  (File No. 0-16014).                   |
|            |       |                                                                                                                                                                                                                                                                                                                               |
| 2.03.11         |       | Letter Agreement, dated June 21, 2006, with Comcast  Corporation (Incorporated herein by reference to Exhibit 2.3 to the  Company’s Current Report on Form 8-K filed on June 27, 2006)  (File No. 0-16014).                                                                                               |
|            |       |                                                                                                                                                                                                                                                                                                                               |
| 2.03.12         |       | Parent Agreement, dated as of April 20, 2005, among  Time Warner Cable Inc., Time Warner NY Cable LLC and Adelphia Communications  Corporation (Incorporated herein by reference to Exhibit 2.3 to the  Company’s Current Report on Form 8-K filed on April 25, 2005)  (File No. 0-16014).           |
|            |       |                                                                                                                                                                                                                                                                                                                               |
| 3.02            |       | Amended and Restated Bylaws of Adelphia  Communications Corporation, as amended through January 23, 2003  (Incorporated herein by reference to Exhibit 3.1 to the Company’s  Current Report on Form 8-K filed on March 5, 2003) (File  No. 0-16014).                                                 |
|            |       |                                                                                                                                                                                                                                                                                                                               |
| 4.01            |       | Certificate of Designations for 13% Series A  and Series B Cumulative Exchangeable Preferred Stock (Incorporated  herein by reference to Exhibit 4.01 to the Company’s Current Report on  Form 8-K filed on July 24, 1997) (File No. 0-16014).                                                  |
|            |       |                                                                                                                                                                                                                                                                                                                               |
| 4.02            |       | Certificate of Designations with respect to the  Company’s 51/2% Series D Convertible  Preferred Stock (Incorporated herein by reference herein to Exhibit 3.01  to the Company’s Current Report on Form 8-K filed on April 30,  1999) (File No. 0-16014).                                      |
|            |       |                                                                                                                                                                                                                                                                                                                               |
| 4.03.1          |       | Certificate of Designations with respect to the  Company’s 7.5% Series E Mandatory Convertible Preferred Stock  (Incorporated herein by reference to Exhibit 3.01 to the Company’s  Current Report on Form 8-K filed on November 16, 2001) (File  No. 0-16014).                                 |
|            |       |                                                                                                                                                                                                                                                                                                                               |
| 4.03.2          |       | Certificate of Amendment of Certificate of  Designations with respect to the Company’s 7.5% Series E Mandatory  Convertible Preferred Stock (Incorporated herein by reference to  Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on  November 18, 2004) (File No. 0-16014).      |
|            |       |                                                                                                                                                                                                                                                                                                                               |
| 4.03.3          |       | Certificate of Amendment of Certificate of  Designations with respect to the Company’s 7.5% Series E Mandatory  Convertible Preferred Stock (Incorporated herein by reference to  Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on  February 25, 2005) (File No. 0-16014).      |
|            |       |                                                                                                                                                                                                                                                                                                                               |
| 4.03.4          |       | Certificate of Amendment of Certificate of  Designations with respect to the Company’s 7.5% Series E Mandatory  Convertible Preferred Stock (Incorporated herein by reference to  Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on  March 4, 2005) (File No. 0-16014).          |

 

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| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                              |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                                                                                                                         |
| 4.03.5          |       | Certificate of Amendment of Certificate of  Designations with respect to the Company’s 7.5% Series E Mandatory Convertible  Preferred Stock (Incorporated herein by reference to Exhibit 3.1 to the  Company’s Current Report on Form 8-K filed on April 11, 2005) (File  No. 0-16014).                   |
|            |       |                                                                                                                                                                                                                                                                                                                                         |
| 4.03.6          |       | Certificate of Amendment of Certificate of  Designations with respect to the Company’s 7.5% Series E Mandatory  Convertible Preferred Stock (Incorporated herein by reference to  Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on  May 18, 2005) (File No. 0-16014).                     |
|            |       |                                                                                                                                                                                                                                                                                                                                         |
| 4.03.7          |       | Certificate of Amendment of Certificate of Designations  with respect to the Company’s 7.5% Series E Mandatory Convertible  Preferred Stock (Incorporated herein by reference to Exhibit 3.1 to the  Company’s Current Report on Form 8-K filed on June 29, 2005) (File  No. 0-16014).                    |
|            |       |                                                                                                                                                                                                                                                                                                                                         |
| 4.03.8          |       | Certificate of Amendment of Certificate of  Designations with respect to the Company’s 7.5% Series E Mandatory  Convertible Preferred Stock (Incorporated herein by reference to  Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on  November 17, 2005) (File No. 0-16014).                |
|            |       |                                                                                                                                                                                                                                                                                                                                         |
| 4.04.1          |       | Certificate of Designations with respect to the  Company’s 7.5% Series F Mandatory Convertible Preferred Stock  (Incorporated herein by reference to Exhibit 3.01 to the Company’s  Current Report on Form 8-K filed on February 1, 2002) (File  No. 0-16014).                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                         |
| 4.04.2          |       | Certificate of Amendment of Certificate of  Designations with respect to the Company’s 7.5% Series F Mandatory  Convertible Preferred Stock (Incorporated herein by reference to  Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on  February 25, 2005) (File No. 0-16014).                |
|            |       |                                                                                                                                                                                                                                                                                                                                         |
| 4.04.3          |       | Certificate of Amendment of Certificate of  Designations with respect to the Company’s 7.5% Series E Mandatory  Convertible Preferred Stock (Incorporated herein by reference to  Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on  March 4, 2005) (File No. 0-16014).                    |
|            |       |                                                                                                                                                                                                                                                                                                                                         |
| 4.04.4          |       | Certificate of Amendment of Certificate of  Designations with respect to the Company’s 7.5% Series F Mandatory  Convertible Preferred Stock (Incorporated herein by reference to  Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on  April 11, 2005) (File No. 0-16014).                   |
|            |       |                                                                                                                                                                                                                                                                                                                                         |
| 4.04.5          |       | Certificate of Amendment of Certificate of  Designations with respect to the Company’s 7.5% Series F Mandatory  Convertible Preferred Stock (Incorporated herein by reference to  Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on  May 18, 2005) (File No. 0-16014).                     |
|            |       |                                                                                                                                                                                                                                                                                                                                         |
| 4.04.6          |       | Certificate of Amendment of Certificate of  Designations with respect to the Company’s 7.5% Series F Mandatory  Convertible Preferred Stock (Incorporated herein by reference to  Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on  June 29, 2005) (File No. 0-16014).                    |
|            |       |                                                                                                                                                                                                                                                                                                                                         |
| 4.04.7          |       | Certificate of Amendment of Certificate of  Designations with respect to the Company’s 7.5% Series F Mandatory  Convertible Preferred Stock (Incorporated herein by reference to  Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on  November 17, 2005) (File No. 0-16014).                |
|            |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.01           |       | Second Amended and Restated Agreement Concerning  Terms and Conditions of a Modified Chapter 11 Plan, dated as of July 21,  2006 (subject to Bankruptcy Court approval) (Incorporated herein by reference  to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 24,  2006) (File No. 0-16014). |
|            |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.02           |       | Registration Rights and Sale Agreement, dated as of  July 31, 2006, by and between Adelphia Communications Corporation and  Time Warner Cable Inc. (Incorporated herein by reference to Exhibit 10.1 to  the Company’s Current Report on Form 8-K filed on August 4,  2006) (File No. 0-16014).                     |

 

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| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.03           |       | Stipulation and Consent Order Among JPMorgan Chase  Bank, N.A.; Adelphia Communications Corp. and its Affiliated Debtors and Debtors  in Possession; and Official Committee of Unsecured Creditors Providing Terms  and Conditions for Withdrawal of Appeal of JPMorgan Chase Bank, N.A. from  Sale Order, dated July 27, 2006 (Incorporated herein by reference to Exhibit  10.1 to the Company’s Current Report on Form 8-K filed on August 2, 2006)  (File No. 0-16014).                                                                                                                                     |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.04           |       | Escrow Agreement, dated as of July 31, 2006, by and  among Adelphia Communications Corporation, Time Warner NY Cable LLC and  Deutsche Bank Trust Company Americas (Filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 31.1            |       | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as  amended (Filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 31.2            |       | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as  amended (Filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 32.1            |       | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (Filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 32.2            |       | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (Filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 99.1            |       | Order Authorizing (i) Sale of Substantially All  Assets of Adelphia Communications Corporation and its Affiliated Debtors to  Time Warner NY Cable LLC and to Comcast Corporation, Free and Clear of Liens,  Claims, Encumbrances, and Interests and Exempt From Applicable Transfer  Taxes; (ii) Assumption and/or Assignment of Certain Agreements, Contracts  and Leases; and (iii) the Granting of Related Relief, dated  June 28, 2006 (Incorporated herein by reference to Exhibit 99.1 to the  Company’s Current Report on Form 8-K filed on July 5, 2006) (File  No. 0-16014). |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 99.2            |       | Order Confirming Third Modified Fourth Amended Joint  Plan of Reorganization Under Chapter 11 of the Bankruptcy Code for the  Century-TCI Debtors and Parnassos Debtors, dated June 29, 2006  (Incorporated herein by reference to Exhibit 99.2 to the Company’s Current  Report on Form 8-K filed on July 5, 2006) (File No. 0-16014).                                                                                                                                                                                                                                                |

 

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Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

 

|                  |   | ADELPHIA  COMMUNICATIONS CORPORATION |
|-----------------------|--------|--------------------------------------|
|                  |   | (Registrant)                         |
|                  |   |                                 |
|                  |   |                                 |
| Date: August 14, 2006 |   | By:                                  | /s/ Vanessa A.  Wittman |   |
|                  |   |                                 | Vanessa A.  Wittman |
|                  |   |                                 | Chief Financial  Officer |
|                  |   |                                 | (Principal  Financial Officer) |
|                  |   |                                 |   |
|                  |   |                                 |   |
| Date: August 14, 2006 |   | By:                                  | /s/ Scott D.  Macdonald |   |
|                  |   |                                 | Scott D.  Macdonald |
|                  |   |                                 | Chief Accounting  Officer |
|                  |   |                                 | (Principal  Accounting Officer) |

 

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