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



Form 10-K

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.For the fiscal year ended December 31, 2009.oro

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 001-32408



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

Delaware(State or Other Jurisdiction of
Incorporation or Organization)

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

28202(Zip code)




Registrant's Telephone Number, Including Area Code:
(704) 344-8150

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Exchange on Which RegisteredCommon Stock, par value $0.01 per share

None


Securities
registered pursuant to Section 12(g) of the Act:None

Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Act. Yes o    No ý

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter)
is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer o

Accelerated filer ý

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

Smaller reporting company o


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

The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2009 (based on the closing price of $0.60
per share as quoted on the New York Stock Exchange as of such date) was approximately $52,946,423.

Indicate
by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a
court. Yes o    No o*

As of April 30, 2010, there were 89,989,144 shares of the Registrant's common stock, par value $0.01 per share, outstanding.

Documents
incorporated by reference:None

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ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2009



Item
Number



Page
NumberIndex

iPART I1.

Business

21A.

Risk Factors

391B.

Unresolved Staff Comments

532.

Properties

533.

Legal Proceedings

534.

(Removed and Reserved)

53PART II5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

546.

Selected Financial Data

577.

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

597A.

Quantitative and Qualitative Disclosures about Market Risk

798.

Financial Statements and Supplementary Data

809.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

1559A.

Controls and Procedures

1559B.

Other Information

156PART III10.

Directors, Executive Officers and Corporate Governance

15711.

Executive Compensation

16212.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

18513.

Certain Relationships and Related Transactions, and Director Independence

18814.

Principal Accounting Fees and Services

189PART IV15.

Exhibits, Financial Statement Schedules

191Signatures

192Exhibit Index

193


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PART I

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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



These
forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions and other statements contained in this Annual Report
that are not historical facts. When used in this Annual Report, the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions are generally intended
to identify

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forward-looking
statements. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results, events or
developments to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors discussed under
"Item 1A. Risk Factors" and other parts of this Annual Report. You should not place undue reliance on such forward-looking statements, which are based on the information currently available to
us and speak only as of the date on which this Annual Report was filed with the SEC. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. However, your attention is directed to any further disclosures made on related subjects in our subsequent periodic reports filed with the SEC on
Forms 10-K, 10-Q and 8-K and Schedule 14A.

ITEM 1.    BUSINESS

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



Chapter 11 Cases

On October 26, 2009 (the "Petition Date"), the Company and substantially all of its direct and indirect subsidiaries filed
voluntary petitions for relief under Chapter 11 of title 11 of the United States Code (the "Bankruptcy Code" or "Chapter 11") in the United States Bankruptcy Court for the Southern
District of New York (the "Bankruptcy Court"). The cases are being jointly administered under the captionIn re FairPoint Communications, Inc.,
Case No. 09-16335 (the "Chapter 11 Cases").



On January 15, 2007, the Company entered into an agreement and plan of merger with Verizon and Spinco pursuant to which the
Company committed to purchase and assume
Verizon's landline operations in Maine, New Hampshire and Vermont (the "Merger Agreement"). The transaction required Verizon to contribute specified assets and liabilities of the local exchange
businesses of Verizon New England in Maine, New Hampshire and Vermont to Spinco and the related long distance and internet service provider businesses in those states to subsidiaries of Spinco. After
extensive federal and state regulatory review and approval, on March 31, 2008, Spinco was merged with and into the Company, with the Company being the surviving entity in the Merger.

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In
connection with the Merger, the Company and Spinco entered into a $2.03 billion credit facility, as subsequently amended (the "Pre-petition Credit Facility"), and
Spinco issued and the Company subsequently assumed $551 million of 131/8% Senior Notes due 2018 (the "Old Notes"). In consideration of the Merger, Verizon received a
$1.16 billion cash payment from Spinco and an additional $551 million in cash from the proceeds of the issuance of the Old Notes. Verizon's stockholders received approximately
54 million shares of the Company's common stock, representing approximately 60.2% of the equity ownership interests in the Company at that time. As a result of the Merger the Company's size, as
measured by access lines and revenues, increased approximately fivefold.

Following
the acquisition of the Northern New England operations, the Company faced significant short- and long term challenges, including, among other things (i) integrating the
Northern New England operations into the Company's existing operations, (ii) keeping pace with competition from bundled offerings by cable companies, as well as the use of alternative
technologies, which are eroding the Company's traditional base of wireline voice customers, (iii) monitoring, repairing and upgrading the existing telecommunications network of the Northern New
England operations, while simultaneously building a new state-of-the-art next generation Internet protocol ("IP")-based network, and (iv) overcoming the
difficulty of transitioning certain back-office functions from Verizon's integrated systems to newly created systems of the Company, which occurred in January 2009 (the "Cutover").

These
challenges were made even more difficult by deteriorating market conditions. Although local exchange carriers ("LECs") were the only source of voice communications for many years,
more recently LECs, including the Company, have experienced a decline in the number of access lines in service, primarily due to increased competition from wireless carriers, cable television
operators who offer voice services, and Internet service providers who offer voice over IP ("VoIP") services. Moreover, these competitive challenges were exacerbated by the turmoil in the financial
markets, which significantly limited available capital and resulted in a significant decline in the domestic economy. The Company believes that the economic decline has reduced consumer spending and
contributed to an increase in the rate of decline in access lines and an increase in overdue accounts receivable balances from customers. Additionally, in connection with the Cutover, the Company
incurred higher than anticipated incremental costs and was required to devote significant resources, including management time and attention, to resolving Cutover-related problems. Finally, the
regulatory regimes under which the Company operates limit its flexibility in addressing these problems. As a result of the combined
impact of each of these factors, the Company was unable to attain the performance levels it expected at the time of the acquisition of the Northern New England operations.

The
inability to achieve the expected financial performance levels with respect to the Northern New England operations made it impossible for the Company to service its approximately
$2.7 billion in debt obligations. Interest costs on the Company's significant debt absorbed a large portion of its operating cash flow, thereby imposing limitations on the Company's ability to
construct its next generation, IP-based network which the Company believes will enable it to offer a new suite of IP-based services and implement its strategic business plan.
The Company believes these are necessary steps to reverse the current downward trend of the Company's revenue and operating cash flows.



As a result of the various factors affecting the Company's financial performance and operations, the Company determined that it may not
be in compliance with certain financial covenants in the Pre-petition Credit Facility for the period ended June 30, 2009. Accordingly, as a first step in a restructuring of its
capital structure, the Company initiated an offer to exchange (the "Exchange Offer") the Old Notes for new 131/8% Senior Notes due 2018 (the "New Notes" and, together with the Old
Notes, the "Notes"). The Exchange Offer was consummated on July 29, 2009. Pursuant to the Exchange Offer, $439.6 million in aggregate principal amount of the Old Notes (which amount was

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equal
to approximately 83% of the then-outstanding Old Notes) were exchanged for the New Notes in the aggregate principal amount of $439.6 million. In addition, pursuant to the
terms of the Exchange Offer, an additional $18.9 million in aggregate principal amount of the New Notes were issued to noteholders who tendered their Old Notes in the Exchange Offer as payment
for accrued and unpaid interest on the exchanged Old Notes up to, but not including, the July 29, 2009 settlement date of the Exchange Offer (the "Settlement Date"). The New Notes permitted the
Company to pay the interest payable on the New Notes for the period from July 29, 2009 through and including September 30, 2009 (the "Initial Interest Payment Period") in the form of
cash, by capitalizing such interest and adding it to the principal amount of the New Notes or a combination of both cash and such capitalization of interest, at the Company's option.

Although
the Company was able to successfully consummate the Exchange Offer and, as a result, the Company believed at the time that it was able to maintain compliance with the financial
covenants contained in the Pre-petition Credit Facility for the measurement period ended June 30, 2009, the Exchange Offer did not provide a sufficient reduction in the Company's
cash interest expense to prevent a breach of the interest coverage ratio maintenance covenant in the Pre-petition Credit Facility for the measurement period ended September 30,
2009. In
addition, the Company anticipated that it would be in breach of the leverage ratio maintenance covenant in the Pre-petition Credit Facility for the measurement period ended
September 30, 2009. Such breaches would have permitted the lenders under the Pre-petition Credit Facility to accelerate the maturity of the loans outstanding thereunder, seek
foreclosure upon any collateral securing such loans and terminate any remaining commitments to lend to the Company. If the lenders under the Pre-petition Credit Facility had exercised such
remedies, the Company did not believe that it could refinance the Pre-petition Credit Facility on reasonable terms, or at all, in the then prevailing lending environment.

In
order to address these issues, the Company developed an out-of-court restructuring plan (the "Out-of-Court Restructuring Plan") with
the assistance of its financial advisor. The Out-of-Court Restructuring Plan related to all of the Company's outstanding Notes and was generally designed to (i) reduce
the Company's indebtedness and interest expense, (ii) improve the Company's liquidity and financial and operational flexibility in order to allow it to compete more effectively and maximize
enterprise value and (iii) help the Company maintain compliance with the maintenance covenants in the Pre-petition Credit Facility. In particular, the
Out-of-Court Restructuring Plan contemplated, among other things, that the holders of Notes would tender their Notes in exchange for shares of convertible preferred stock in
the Company. The Out-of-Court Restructuring Plan was conditioned on acceptance by 95% of the outstanding Notes, which was the threshold necessary to sufficiently reduce
leverage for purposes of the maintenance covenants in the Pre-petition Credit Facility as well as for liquidity purposes.

This
effort, however, was unsuccessful for two primary reasons: (1) following lengthy negotiations with substantial holders of the Notes, it became apparent that the minimum
tender threshold could not be met and (2) that the holders of the Notes were unwilling to lend an additional $25 million in funds that the Company believed at the time would have been
necessary to effectively implement the Out-of-Court Restructuring Plan.

Following
unsuccessful negotiations with the holders of the Notes, the Company entered into discussions with certain of the lenders under the Pre-petition Credit Facility. On
September 25, 2009, the Company entered into a forbearance agreement (the "Forbearance Agreement") with lenders holding approximately 68% of the loans and commitments outstanding under the
Pre-petition Credit Facility (the "Forbearing Lenders"). The Forbearance Agreement permitted the Company to forgo certain principal and interest payments due on September 30, 2009
under the Pre-petition Credit Facility. Further, the Forbearing Lenders agreed to forbear from accelerating the maturity of the loans outstanding under the Pre-petition Credit
Facility and from exercising any other remedies thereunder

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until
October 30, 2009 if the Company failed to meet certain interest coverage ratio and leverage ratio covenants contained in the Pre-petition Credit Facility for the period ended
September 30, 2009.

In
addition, the Company entered into certain forbearance agreements with the counterparties to the ISDA Master Agreement with Wachovia Bank, N.A., dated as of December 12, 2000,
as amended and restated as of February 1, 2008, and the ISDA Master Agreement with Morgan Stanley Capital Services Inc., dated as of February 1, 2005 (collectively, the "Swaps").

Following
the execution of the forbearance agreements described above, the Company engaged in extensive negotiations with a steering committee of its pre-petition secured
lenders (the "Steering Committee") regarding a recapitalization of the Company's significant indebtedness. Subsequently, the Company and the Steering Committee reached agreement on the Plan Support
Agreement described herein.

As
a result of the restatement of the Company's condensed consolidated financial statements for the period ended June 30, 2009, as set forth in a Quarterly Report on
Form 10-Q/A dated April 30, 2010, the Company determined that the Company was not in compliance with the interest coverage ratio maintenance covenant and the leverage ratio
maintenance covenant under the Pre-petition Credit Facility for the measurement period ended June 30, 2009, which constituted an event of default under each of the
Pre-petition Credit Facility and the Swaps, and may have constituted an event of default under the Notes, in each case at June 30, 2009.



In anticipation of the Chapter 11 Cases, the Company entered into a Plan Support Agreement (the "Plan Support Agreement"), dated
as of October 25, 2009, with secured lenders (the "Consenting Lenders") holding more than 50% of the outstanding debt under the Pre-petition Credit Facility. Pursuant to the Plan
Support Agreement, the Consenting Lenders agreed, subject to the terms and conditions contained in the Plan Support Agreement, to support the Company's proposed financial restructuring described in
the FairPoint Communications, Inc. and Affiliates Chapter 11 Plan Term Sheet (the "Plan Term Sheet"), which was attached as an exhibit to the Plan Support Agreement. The Plan Term Sheet,
among other things, provided the framework for a comprehensive balance sheet restructuring of the Company that would result in the conversion of more than $1.7 billion of debt into equity,
consisting of $1.2 billion of debt under the Pre-petition Credit Facility and all of the outstanding Notes.

Pursuant
to the Plan Support Agreement, the Company committed to the achievement of certain milestones, including obtaining an order by the Bankruptcy Court confirming a
Chapter 11 plan of reorganization reflecting the proposed financial restructuring described in the Plan Term Sheet on or before 5:00 P.M. Eastern Time on July 8, 2010. Our failure
to achieve these milestones by the dates required under the Plan Support Agreement would (unless duly waived or extended) constitute a termination event under the Plan Support Agreement, pursuant to
which the Consenting Lenders
agreed to support such a plan, that could allow the Consenting Lenders to terminate their obligations to support the Plan.



The Plan contemplates the reorganization of the Company and the discharge of all outstanding claims against and interests in the
Company.

Following
the Petition Date, an ad hoc committee of the holders of the Notes raised certain concerns regarding the proposed treatment of holders of unsecured claims against FairPoint
Communications ("FairPoint Communications Unsecured Claims") under the Plan Term Sheet. In an effort to resolve these concerns, and after extensive negotiations, certain changes were made to the

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terms
of the proposed financial restructuring contained in the Plan Term Sheet, as evidenced in the Plan.

In
addition, the Plan is the result of extensive negotiations among the Company, the Steering Committee, certain unions and certain representatives of regulatory authorities in Maine,
New Hampshire and Vermont. The Plan incorporates and implements various settlements reached with these parties, but is subject to the approval of the applicable state commissions or boards with
respect to certain actions resulting from the Plan.

On
February 8, 2010, the Company filed an initial version of the Plan, together with an accompanying Disclosure Statement, with the Bankruptcy Court. On February 11, 2010,
the Company filed an amended version of the Plan together with an accompanying amended Disclosure Statement. On March 10, 2010, the Company filed the Plan and the accompanying amended
Disclosure Statement. On March 11, 2010, the Bankruptcy Court approved the adequacy of the Disclosure Statement, the solicitation and notice procedures with respect to confirmation of the Plan
and the form of various ballots and notices in connection therewith. On April 23, 2010, the Company filed a supplement to the Plan (as modified, supplemented or amended, the "Plan Supplement").
The voting deadline with respect to the Plan occurred on April 28, 2010. The vote tabulation has concluded and the Company has obtained the approval of the classes of creditors entitled to vote
to accept or reject the Plan. On May 7, 2010, the Company filed a supplement to the Plan Supplement and on May 11, 2010, the Company filed a modified version of the Plan.

The
Plan will become effective only if it is confirmed by the Bankruptcy Court and upon the fulfillment of certain other conditions contained in the Plan. These conditions precedent
include, but are not limited to, the following:



The
conditions precedent to the Plan may be waived by the Company, except with respect to certain conditions, which waiver requires the consent of the Steering Committee. The Company cannot make any
assurances as to when, or ultimately if, the Plan will become effective.

The
confirmation hearing to determine whether to confirm the Plan in the Bankruptcy Court commenced on May 11, 2010. The Bankruptcy Court continued the hearing to July 2010,
pending approvals of the PUCs in Maine, New Hampshire and Vermont and the resolution of any dispute with respect to the litigation trust contemplated by the Plan.

The
summary of the provisions of the Plan and our related capital structure contained herein highlights certain substantive provisions of the Plan and our resulting capital structure and
is not a complete description of the Plan or its provisions or our proposed post-petition capital structure. The summary is qualified in its entirety by reference to the full text of the
Plan, which is available at www.fprestructuring.com under the "Court Filings" link.The Plan and the information on, or accessible through this website, are not part of or
incorporated by reference herein.

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General

Pursuant to the Plan, all outstanding equity interests of the Company, including but not limited to all outstanding shares of common
stock, options and contractual or other rights to acquire any equity interests, will be cancelled and extinguished on the actual date of emergence from Chapter 11 protection (the "Effective
Date").

Under
the Plan, claims of (i) the lenders under the Pre-petition Credit Facility, (ii) the Administrative Agent (as defined herein) under the
Pre-petition Credit Facility and (iii) any other claims against the Company arising under the Pre-petition Credit Facility (collectively, "Pre-petition
Credit Agreement Claims") will receive the following in full and complete satisfaction of such Pre-petition Credit Agreement Claims: (i) a pro rata share of the Exit Term Loan (as
defined below), (ii) a pro rata share of certain cash payments, (iii) a pro rata share of 47,241,436 shares of the reorganized Company's new common stock, par value $0.01 per share (the
"New Common Stock") and (iv) a pro rata share of a 55% interest in a litigation trust.

In
addition, claims of holders of FairPoint Communications Unsecured Claims will receive the following in full and complete satisfaction of such FairPoint Communications Unsecured
Claims: (i) a pro rata share of 4,203,352 shares of New Common Stock, (ii) a pro rata share of a 45% interest in a litigation trust and (iii) a pro rata share of warrants to
purchase up to 7,164,804 shares of New Common Stock (the "New Warrants"), the terms of which are more fully described in the form of Warrant Agreement which is attached to the Plan Supplement, which
is available at www.fprestructuring.com under the "Court Filings" link.

Finally,
claims of holders of unsecured claims against FairPoint Communications' subsidiaries, unless otherwise agreed, will receive payment in full in cash in the amount of their
allowed claim.

The
classification and treatment of all claims and equity interests in the Company are described in Sections IV and V of the Plan.

Exit Financing

The Plan provides for the Company to incur indebtedness upon the Effective Date consisting of a $1,075,000,000 senior secured credit
facility (the "Exit Facility") to be provided to the Company and FairPoint Logistics, Inc. ("Logistics" and, together with the Company, the "Exit Borrowers") by Bank of America, N.A., Banc of
America Securities LLC and a syndicate of lenders (collectively, the "Exit Facility Lenders").

The
Exit Facility is expected to be comprised of a $75,000,000 revolving loan facility (the "Exit Revolving Loan") and a $1,000,000,000 term loan facility (the "Exit Term Loan" and
together with the Exit Revolving Loan, collectively, the "Exit Facility Loans"). Interest on the Exit Facility will accrue at an annual rate equal to the British Bankers Association LIBOR Rate
("LIBOR") plus 4.50%, with a 2.00% LIBOR floor for the Exit Term Loans, and a 0.75% commitment fee on the average daily unused portion of the Exit Revolving Loan. The outstanding principal amount of
the Exit Facility will be due and payable five years after the Effective Date (the "Exit Maturity Date"). The loan agreement governing the Exit Facility (the "Exit Facility Loan Agreement") will
require quarterly repayments of principal of the Exit Term Loan in an amount equal to $2,500,000 during the first two fiscal years following the Effective Date, $12,500,000 during the third fiscal
year following the Effective Date, $37,500,000 during the fourth fiscal year following the Effective Date and $50,000,000 during the first three fiscal quarters of the fifth fiscal year following the
Effective Date, with all remaining outstanding principal of the Exit Term Loan being due and payable on the Exit Maturity Date.

The
Exit Facility will be guaranteed by subsidiaries of the Company to be set forth on a schedule to the Exit Facility Loan Agreement, in addition to each future direct and indirect
domestic subsidiary of the Company other than (x) any subsidiary of the Company that is a controlled foreign corporation

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or
a subsidiary that is held directly or indirectly by a controlled foreign corporation or (y) any subsidiary that is prohibited by applicable law from guaranteeing the obligations under the
Exit Facility and/or providing any security therefor without the consent of a PUC (together with the Exit Borrowers, collectively, the "Exit Financing Loan Parties"). The Exit Facility will be secured
by first priority liens upon substantially all existing and after-acquired assets of the Exit Financing Loan Parties.

The
Exit Facility Loan Agreement will contain certain representations, warranties and affirmative covenants. In addition, the Exit Facility Loan Agreement will contain restrictive
covenants that limit,
among other things, the ability of the Exit Financing Loan Parties to incur indebtedness, create liens, engage in mergers, consolidations and other fundamental changes, make investments or loans,
engage in transactions with affiliates, pay dividends, make capital expenditures and repurchase capital stock. The Exit Facility Loan Agreement will also contain minimum interest coverage and maximum
total leverage financial maintenance covenants. The Exit Facility Loan Agreement will contain certain events of default, including failure to make payments, breaches of covenants and representations,
cross defaults to other material indebtedness, unpaid and uninsured judgments, changes of control and bankruptcy events of default. The Exit Facility Lenders' commitments to fund amounts under the
Exit Facility on or following the Effective Date will be subject to certain customary conditions as well as confirmation of the Plan.

A
copy of the form of the Exit Facility Loan Agreement is attached to the Plan Supplement, which is available at www.fprestructuring.com under the "Court Filings" link.

Certificate of Incorporation and By-Laws

In connection with the Plan, the Company is expected to adopt a Ninth Amended and Restated Certificate of Incorporation of FairPoint
Communications, Inc. (the "Amended Charter"), which is expected to become effective on the Effective Date. The Amended Charter will authorize the Company to issue up to 5,000,000 shares of
preferred stock and up to 75,000,000 shares of New Common Stock. In addition, in connection with the Plan, the Company is expected to adopt Second Amended and Restated By-Laws (the
"Amended By-Laws").

A
copy of the form of Amended Charter and Amended By-Laws are attached to the Plan Supplement, which is available at www.fprestructuring.com under the "Court Filings" link.

Board of Directors

As of the Effective Date, the reorganized Company is expected to have a newly appointed seven person board of directors (the "New
Board"). Selected biographical information for each of the seven proposed new board members is attached to the Plan Supplement, which is available at www.fprestructuring.com under the "Court Filings"
link. In accordance with the Amended By-Laws, the initial members of the New Board are expected to hold office until the first annual meeting of stockholders which will be held following
the one year anniversary of the Effective Date. Thereafter, members of the board of directors of the Company are expected to have one-year terms so that their terms will expire at each
annual meeting of stockholders.

New Long Term Incentive Plan and Success Bonus Plan

As contemplated by the Plan, on the Effective Date, the Company will be deemed to have adopted the FairPoint
Communications, Inc. 2010 Long Term Incentive Plan (the "New Long Term Incentive Plan") and the FairPoint Communications, Inc. 2010 Success Bonus Plan (the "Success Bonus Plan") without
any further action by the Company. Each of the New Long Term Incentive Plan and the Success Bonus Plan was attached to the Plan Supplement, and may be accessed at www.fprestructuring.com under the
"Court Filings" link.

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On the Effective Date, in accordance with the Plan, (i) certain employees are expected to receive (a) certain cash bonuses (the "Success Bonuses")
pursuant to the terms of the Success Bonus Plan and/or (b) New Common Stock awards, consisting of restricted shares of New Common Stock and/or options to purchase shares of New Common Stock,
pursuant to the terms of the New Long Term Incentive Plan, and (ii) members of the New Board are expected to receive options to purchase New Common Stock pursuant to the terms of the New Long
Term Incentive Plan. The Success Bonuses are expected to be earned based upon certain performance measures, subject to upward or downward adjustments to reflect the timing of the Effective Date.
6,269,206 shares of New Common Stock are expected to be reserved for awards under the New Long Term Incentive Plan that are expected to consist of stock options and restricted stock awards, which will
be granted to certain employees of the Company and members of the New Board. On the Effective Date, (i)(a) 1,018,746 shares of restricted New Common Stock are expected to be granted to certain
employees of the Company under the New Long Term Incentive Plan and (b) at the sole discretion of the New Board, an additional 78,365 shares of restricted New Common Stock may be granted to
certain employees of the Company and (ii)(a) 1,724,032 options to purchase shares of New Common Stock are expected to be granted to certain employees of the Company, (b) 264,030 options to
purchase shares of New Common Stock are expected to be granted to members of the New Board and (c) at the sole discretion of the New Board, an additional 313,460 options to purchase shares of
New Common Stock may be granted to certain employees of the Company, in each case pursuant to the New Long Term Incentive Plan. These awards are expected to vest 25% on the Effective Date, and the
remainder of these awards are expected to vest in three equal annual installments, commencing on the first anniversary of the Effective Date, with accelerated vesting on a change in control or a
termination of an award holder's employment without cause. In addition, 2,870,573 shares of New Common Stock are expected to be available for future distribution under the New Long Term Incentive
Plan. However, if the aggregate enterprise value of the Company does not equal or exceed $2.3 billion on or prior to the expiration date of the New Warrants, the aggregate amount of options to
purchase New Common Stock that are available for
future distribution under the New Long Term Incentive Plan will be automatically reduced by 620,651 shares.



In connection with the Chapter 11 Cases, the Company and FairPoint Logistics, Inc. (collectively, the "DIP Borrowers")
entered into a Debtor-in-Possession Credit Agreement, dated as of October 27, 2009 (as amended, the "DIP Credit Agreement"), with certain financial institutions (the
"DIP Lenders") and Bank of America, N.A., as the administrative agent for the DIP Lenders (in such capacity, the "Administrative Agent"). The DIP Credit Agreement provides for a revolving facility in
an aggregate principal amount of up to $75 million, of which up to $30 million is also available in the form of one or more letters of credit that may be issued to third parties for the
account of the Company and its subsidiaries (the "DIP Financing"). Pursuant to an Order of the Bankruptcy Court, dated October 28, 2009 (the "Interim Order"), the DIP Borrowers were authorized
to enter into and immediately draw upon the DIP Credit Agreement on an interim basis in an aggregate amount of $20 million, pending a final hearing before the Bankruptcy Court. Pursuant to a
final order of the Bankruptcy Court, dated March 11, 2010, (the "Final DIP Order"), the DIP Borrowers were permitted access to the total $75 million of the DIP Financing, subject to the
terms and conditions of the DIP Credit Agreement and related orders of the Bankruptcy Court. As of December 31, 2009, the Company had not borrowed any amounts under the DIP Credit Agreement and
letters of credit totaling $1.6 million had been issued under the DIP Credit Agreement.

The
DIP Financing matures and is repayable in full on the earlier to occur of (i) July 26, 2010, which date can be extended up to three months at the request of the DIP
Borrowers upon the prior written consent of non-defaulting DIP Lenders holding a majority of the aggregate principal amount of

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the
outstanding loans and letters of credit plus unutilized commitments under the DIP Financing (the "Required DIP Lenders") with no fee payable by the DIP Borrowers in connection with any such
extension, (ii) the Effective Date, (iii) the voluntary reduction by the DIP Borrowers to zero of all commitments to lend under the DIP Credit Agreement or (iv) the date on which
the obligations under
the DIP Financing are accelerated by the Required DIP Lenders upon the occurrence and during the continuance of certain events of default.

Other
material provisions of the DIP Credit Agreement include the following:

Interest Rate and Fees.Interest rates for borrowings under the DIP Credit Agreement are, at the DIP Borrowers' option, at either
(i) the
Eurodollar rate plus a margin of 4.5% or (ii) the base rate plus a margin of 3.5%, payable monthly in arrears on the last business day of each month.

Interest
accrues from and including the date of any borrowing up to but excluding the date of any repayment thereof and is payable (i) in respect of each base rate loan, monthly
in arrears on the last business day of each month, (ii) in respect of each Eurodollar loan, on the last day of each interest period applicable thereto (which shall be a period of one month) and
(iii) in respect of each such loan, on any prepayment or conversion (on the amount prepaid or converted), at maturity (whether by acceleration or otherwise) and, after such maturity, on demand.
The DIP Credit Agreement provides for the payment to the Administrative Agent, for the pro rata benefit of the DIP Lenders, of an upfront fee in the aggregate principal amount of $1.5 million,
which upfront fee was payable in two installments: (1) the first installment of $400,000 was due and payable on October 28, 2009, the date on which the Interim Order was entered by the
Bankruptcy Court, and (2) the remainder of the upfront fee was due and payable on the date the Final DIP Order was entered by the Bankruptcy Court. The DIP Credit Agreement also provides for an
unused line fee of 0.50% on the unused revolving commitment, payable monthly in arrears on the last business day of each month (or on the date of maturity, whether by acceleration or otherwise), and a
letter of credit facing fee of 0.25% per annum calculated daily on the stated amount of all outstanding letters of credit, payable monthly in arrears on the last business day of each month (or on the
date of maturity, whether by acceleration or otherwise), as well as certain other fees.

Voluntary Prepayments.Voluntary prepayments of borrowings and optional reductions of the unutilized portion of the commitments are
permitted without
premium or penalty (subject to payment of breakage costs in the event Eurodollar loans are prepaid prior to the end of an applicable interest period).

Covenants.Under the DIP Credit Agreement, the DIP Borrowers are required to maintain compliance with certain covenants, including
maintaining
minimum EBITDAR (earnings before interest, taxes, depreciation, amortization, restructuring charges and certain other non-cash costs and charges, as set forth in the DIP Credit Agreement)
and not exceeding maximum permitted capital expenditure amounts. The DIP Credit Agreement also contains customary affirmative and negative covenants and restrictions, including, among others, with
respect to investments, additional indebtedness, liens, changes in the nature of the business, mergers, acquisitions, asset sales and
transactions with affiliates. As of December 31, 2009, the DIP Borrowers are in compliance with all covenants under the DIP Credit Agreement.

Events of Default.The DIP Credit Agreement contains customary events of default, including, but not limited to, failure to pay
principal, interest
or other amounts when due, breach of covenants, failure of any representations to have been true in all material respects when made, cross-defaults to certain other indebtedness in excess of specific
amounts (other than obligations and indebtedness created or incurred prior to the filing of the Chapter 11 Cases), judgment defaults in excess of specified amounts, certain defaults under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the failure of any guaranty or security document supporting the DIP Credit Agreement to be in full

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force
and effect, the occurrence of a change of control and certain matters related to the Interim Order, the Final DIP Order and other matters related to the Chapter 11 Cases.



The DIP Borrowers and certain of FairPoint Communications' subsidiaries (collectively, the "DIP Pledgors") entered into the DIP Pledge
Agreement with Bank of America N.A., as collateral agent (in such capacity, the "DIP Collateral Agent"), dated as of October 30, 2009 (the "DIP Pledge Agreement"), as required under the terms
of the DIP Credit Agreement. Pursuant to the DIP Pledge Agreement, the DIP Pledgors provided to the DIP Collateral Agent for the secured parties identified therein, a security interest in 100% of the
equity interests and promissory notes owned by the DIP Pledgors and all proceeds arising therefrom, including cash dividends and distributions, subject to certain exceptions and qualifications (the
"Pledge Agreement Collateral").



Certain of FairPoint Communications' subsidiaries (collectively, the "DIP Guarantors") entered into the DIP Subsidiary Guaranty with
the Administrative Agent, dated as of October 30, 2009 (the "DIP Subsidiary Guaranty"), as required under the terms of the DIP Credit Agreement. Pursuant to the DIP Subsidiary Guaranty, the DIP
Guarantors agreed to jointly and severally guarantee the full and prompt payment of all fees, obligations, liabilities and indebtedness of the DIP Borrowers, as borrowers under the DIP Financing.
Pursuant to the terms of the DIP Subsidiary Guaranty, the DIP Guarantors further agreed to subordinate any indebtedness of the DIP
Borrowers held by such DIP Guarantor to the indebtedness of the DIP Borrowers held by the secured parties under the DIP Financing.



The DIP Borrowers and the DIP Guarantors (collectively, the "DIP Grantors") entered into the DIP Security Agreement with the DIP
Collateral Agent, dated as of October 30, 2009 (the "DIP Security Agreement"), as required under the terms of the DIP Credit Agreement. Pursuant to the DIP Security Agreement, the DIP Grantors
provided to the DIP Collateral Agent for the benefit of the secured parties identified therein, a security interest in all assets other than the DIP Pledge Agreement Collateral, any causes of action
arising under Chapter 5 of the Bankruptcy Code and FCC licenses and authorizations by state regulatory authorities to the extent that any DIP Grantor is prohibited from granting a lien and
security interest therein pursuant to applicable law.



As a result of the filing of the Chapter 11 Cases, the Company is now required to file various documents with, and provide
certain information to, the Bankruptcy Court, including statements of financial affairs, schedules of assets and liabilities, and monthly operating reports in forms prescribed by federal bankruptcy
law. Such materials have been and will be prepared according to requirements of the Bankruptcy Code. While these materials accurately provide then-current information required under the
Bankruptcy Code, they are nonetheless unaudited, are prepared in a format different from that used in the Company's consolidated financial statements filed under the securities laws and certain of
this financial information may be prepared on an unconsolidated basis. Accordingly, the Company believes that the substance and format of these materials do not allow meaningful comparison with its
regular publicly-disclosed consolidated financial statements. Moreover, the materials filed with the Bankruptcy Court are not prepared for the purpose of providing a basis for an investment decision
relating to the Company's securities, or for comparison with other financial information filed with the SEC.

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Shortly after the Petition Date, the Company began notifying current or potential creditors of the Chapter 11 Cases. Subject to
certain exceptions under the Bankruptcy Code, the Chapter 11 Cases automatically enjoined, or stayed, the continuation of any judicial or administrative proceedings or other actions against the
Company or its property to recover on, collect or secure a claim arising prior to the Petition Date. Thus, for example, most creditor actions to obtain possession of property from the Company, or to
create, perfect or enforce any lien against the property of the Company, or to collect on monies owed or otherwise exercise rights or remedies with respect to a claim arising prior to the Petition
Date are enjoined unless and until the Bankruptcy Court lifts the automatic stay. Vendors are being paid for goods furnished and services provided after the Petition Date in the ordinary course of
business.



As required by the Bankruptcy Code, the United States Trustee for the Southern District of New York has appointed a statutory committee
of unsecured creditors (the "Creditors' Committee"). The Creditors' Committee and its legal representatives have a right to be heard on all matters that come before the Bankruptcy Court with respect
to the Company.



Under Section 365 and other relevant sections of the Bankruptcy Code, the Company may assume, assume and assign or reject
certain executory contracts and unexpired leases, including, without limitation, leases of real property, subject to the approval of the Bankruptcy Court and certain other conditions. Any description
of an executory contract or unexpired lease in this Annual Report, including where applicable, the Company's express termination rights or a quantification of its obligations, must be read in
conjunction with, and is qualified by, any overriding rejection rights the Company has under Section 365 of the Bankruptcy Code. Claims may arise as a result of rejecting any executory
contract.



The Company has incurred and will continue to incur significant costs associated with the Chapter 11 Cases. The amount of these
costs, which are being expensed as incurred, are expected to significantly affect the Company's results of operations. For the year ended December 31, 2009, the Company has incurred
$53.0 million of reorganization costs.



The Company's NOLs must be reduced by certain debt discharged pursuant to the bankruptcy plan of reorganization. Further, the Company's
ability to utilize its NOL carryforwards will be limited by Section 382 of the Internal Revenue Code of 1986, as amended, after the Company consummates a debt restructuring that results in an
ownership change. In general, following an ownership change, a limitation is imposed on the amount of pre-ownership change NOL carryforwards that may be used to offset taxable income in
each year following the ownership change. Under a special rule that may be elected for an ownership change pursuant to a Chapter 11 reorganization, the amount of this annual limitation is equal
to the "long term tax-exempt rate" (published monthly by the IRS) for the month in which the ownership change occurs, multiplied by the value of FairPoint Communications' stock immediately
after, rather than immediately before, the ownership change. By taking into account the value of FairPoint Communications' stock immediately after the Chapter 11 reorganization, the limitation
is increased as a result of the cancellation of debt that occurs pursuant to the Chapter 11 reorganization. Because the Company expects to elect this treatment, an annual limitation will be
imposed on the amount of the Company's pre-ownership change NOL carryforwards that can be utilized to offset its taxable income after consummation of the Chapter 11 reorganization.
In order to

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prevent
an ownership change that limits the Company's NOL carryforwards prior to the Effective Date, the Bankruptcy Court has put in place notification procedures and potential restrictions on the
trading of FairPoint Communications' common stock.

Any
portion of the annual limitation that is not used in a particular year may be carried forward and used in subsequent years. The annual limitation is increased by certain
built-in gains recognized (or treated as recognized) during the five years following the ownership change (up to the total amount of built-in gain that existed at the time of
the ownership change). The Company expects any NOL limitation for the five years following an ownership change will be increased by built-in gains. The Company also projects that all
available NOL carryforwards after giving effect to the reduction for debt discharged will be utilized to offset future
income within the NOL carryforward periods. Therefore, the Company does not expect to have NOL carryforwards after such time.



The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern and
contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. The Company's ability to continue as a going concern is contingent upon its ability to
comply with the financial and other covenants contained in the DIP Credit Agreement and, after the Effective Date, the Exit Facility and the Bankruptcy Court's approval of the Plan, among other
things. As a result of the Chapter 11 Cases, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as
debtor-in-possession under the Bankruptcy Code, the Company may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the
Bankruptcy Court or as otherwise permitted in the ordinary course of business (and subject to restrictions contained in the DIP Credit Agreement), in amounts other than those reflected in the
accompanying consolidated financial statements. Further, a plan of reorganization could materially change the amounts and classifications in the historical consolidated financial statements. The
accompanying consolidated financial statements do not include any direct adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities or any
other adjustments that might be necessary should the Company be unable to continue as a going concern or as a consequence of the Chapter 11 Cases.

The
Reorganizations Topic of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification (the "ASC"), which is applicable to companies in Chapter 11,
generally does not change the manner in which financial statements are prepared. However, it does require that the financial statements for periods subsequent to the filing of the Chapter 11
Cases distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Amounts that can be directly associated with the
reorganization and restructuring of the business must be reported separately as reorganization items in the statements of operations beginning in the quarter ending December 31, 2009. The
balance sheet must distinguish pre-petition liabilities subject to compromise from both those pre-petition liabilities that are not subject to compromise and from
post-petition liabilities. Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be allowed, even if they may be settled for lesser
amounts. In addition, cash provided by and used for reorganization items must be disclosed separately in the statement of cash flows. The Company has applied the Reorganizations Topic of the ASC
effective as of the Petition Date, and has segregated those items as outlined above for all reporting periods subsequent to such date.



The filing of the Chapter 11 Cases constituted an event of default under each of the following debt
instruments:



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Under
the terms of the New Indenture, as a result of the filing of the Chapter 11 Cases, all of the outstanding New Notes became due and payable without further action or notice.
Under the terms of the Pre-petition Credit Facility, upon the filing of the Chapter 11 Cases, all commitments under the Pre-petition Credit Facility were terminated and
all loans (with accrued interest thereon) and all other amounts outstanding under the Pre-petition Credit Facility (including, without limitation, all amounts under any letters of credit)
became immediately due and payable. In addition, as a result of the filing of the Chapter 11 Cases, an early termination event occurred under the Swaps. The Company believes that any efforts to
enforce payment obligations under such debt instruments are stayed as a result of the filing of the Chapter 11 Cases.

Prior
to the filing of the Chapter 11 Cases, the Company failed to make principal and interest payments due under the Pre-petition Credit Facility on
September 30, 2009. The failure to make the principal payment on the due date and failure to make the interest payment within five days of the due date constituted events of default under the
Pre-petition Credit Facility. An event of default under the Pre-petition Credit Facility permits the lenders under the
Pre-petition Credit Facility to accelerate the maturity of the loans outstanding thereunder, seek foreclosure upon any collateral securing such loans and terminate any remaining
commitments to lend to the Company. The occurrence of an event of default under the Pre-petition Credit Facility constituted an event of default under the Swaps. In addition, the Company
failed to make payments due under the Swaps on September 30, 2009, which failure resulted in an event of default under the Swaps upon the expiration of a three business day grace period.

Prior
to the filing of the Chapter 11 Cases, the Company also failed to make the October 1, 2009 interest payment on the Notes. The failure to make the interest payment on
the Notes constituted an event of default under the Notes upon the expiration of a thirty day grace period. An event of default under the Notes permits the holders of the Notes to accelerate the
maturity of the Notes. In addition, the filing of the Chapter 11 Cases constituted an event of default under the New Notes.

In
addition, as a result of the restatement of the Company's condensed consolidated financial statements for the period ended June 30, 2009, as set forth in a Quarterly Report on
Form 10-Q/A dated April 30, 2010, the Company determined that the Company was not in compliance with the interest coverage ratio maintenance covenant and the leverage ratio
maintenance covenant under the Pre-petition Credit Facility for the measurement period ended June 30, 2009, which constituted an event of default under each of the
Pre-petition Credit Facility and the Swaps, and may have constituted an event of default under the Notes, in each case at June 30, 2009.



As a result of the filing of the Chapter 11 Cases, on October 26, 2009, the New York Stock Exchange (the "NYSE") notified
us that it had determined that the listing of our common stock should be suspended immediately.

The
last day that our common stock traded on the NYSE was October 23, 2009. On November 16, 2009, the NYSE completed its application to the SEC to delist our common stock.

Our
common stock is currently trading under the symbol "FRCMQ" on the Pink Sheets.



The ability of the Company, both during and after the Bankruptcy Court proceedings, to continue as a going concern, is dependent upon,
among other things, the ability of the Company to confirm the Plan. Uncertainty as to the outcome of these factors raises substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements contained in this Annual

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Report
do not include any adjustments to reflect or provide for the consequences of the bankruptcy proceedings. See "Chapter 11 CasesFinancial Reporting in Reorganization" for
additional information. In particular, such financial statements do not purport to show (i) as to assets, their realization value on a liquidation basis or their availability to satisfy
liabilities, (ii) as to liabilities arising prior to the Petition Date, the amounts that may be allowed for claims or contingencies, or the status and priority thereof, (iii) as to
stockholder accounts, the effect of any changes that may be made in the capitalization of the Company or (iv) as to operations, the effects of any changes that may be made in the underlying
business. A confirmed plan of reorganization would likely cause material changes to the amounts currently disclosed in the consolidated financial statements.

As
a result of the Chapter 11 Cases, realization of assets and liquidation of liabilities are subject to uncertainty. While operating as a
debtor-in-possession under the protection of the Bankruptcy Code, and subject to Bankruptcy Court approval or otherwise as permitted in the normal course of business, the
Company may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements. Further, the Plan could materially
change the amounts and classifications reported in the consolidated historical financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of
liabilities that might be necessary as a consequence of confirmation of a plan of reorganization.

Negative
events associated with the Chapter 11 Cases could adversely affect revenues and the Company's relationship with customers, as well as with vendors and employees, which in
turn could adversely affect the Company's operations and financial condition, particularly if the Bankruptcy Court proceedings are protracted. Also, transactions outside of the ordinary course of
business are subject to the prior approval of the Bankruptcy Court, which may limit the Company's ability to respond timely to certain events or take advantage of certain opportunities. Because of the
risks and uncertainties associated with the Bankruptcy Court proceedings, the ultimate impact that events that occur during these proceedings will have on the Company's business, financial condition
and results of operations cannot be accurately predicted or quantified, and until such issues are resolved, there remains substantial doubt about the Company's ability to continue as a going concern.

Cutover-Related Issues

From 2007 through January 2009, we were in the process of developing and deploying new systems, processes and personnel to replace
those used by Verizon to operate and support our network and back-office functions in the Maine, New Hampshire and Vermont operations we acquired from Verizon. These services were provided
by Verizon under the Transition Services Agreement, dated as of January 15, 2007, which we entered into with certain subsidiaries of Verizon in connection with the Merger, as amended on
March 31, 2008 (the "Transition Services Agreement"), through January 30, 2009. On January 30, 2009, we began the Cutover, and on February 9, 2009, we began operating our
new platform of systems independently from the Verizon systems, processes and personnel. During the period from January 23, 2009 until January 30, 2009, all retail orders were taken
manually and following the Cutover were entered into the new systems. From February 2, 2009 through February 9, 2009, we manually processed only emergency orders, although we continued
to provide repair and maintenance services to all customers.

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

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While
many of these issues were anticipated, the magnitude of difficulties experienced was beyond our expectations.

We
have since worked diligently to remedy these issues. The order backlog has been reduced significantly and order handle times continue to be reduced. Provisioning of new orders has
steadily improved and call volumes into the customer service centers have returned to pre-Cutover levels. In addition, systems functionality supporting our collection efforts continues to
improve, but certain functionality is not fully operational. As a result of these functionality issues and past billing issues, our efforts to collect past due amounts continue to be hampered. During
the third quarter of 2009, we revised the methodology of calculating the allowance for doubtful accounts based on recent collections experience. The issues discussed above and the change in
methodology resulted in a significant increase in our allowance for doubtful accounts during the third quarter of 2009. Overall, delays in implementing the collections software functionality, together
with other Cutover issues, have caused an increase in accounts receivable, which has adversely impacted our liquidity.

Because
of these Cutover issues, during the year ended December 31, 2009, we incurred $28.8 million of incremental expenses in order to operate our business, including
third-party contractor costs and internal labor costs in the form of overtime pay. The Cutover issues also required significant staff and senior management attention, diverting their focus from other
efforts.

In
addition to the significant incremental expenses we incurred as a result of these Cutover issues, we were unable to fully implement our operating plan for 2009 and effectively compete
in the marketplace, which we believe had an adverse effect on our business, financial condition, results of operations and liquidity.

Restatement

On April 30, 2010, the Company filed amendments to its Quarterly Reports on Form 10-Q/A for the quarters
ended March 31, 2009, June 30, 2009 and September 30, 2009 (collectively, the "Amendments") to reflect the effect of an accounting error, a one-time
non-operating loss related to a disputed claim and certain billing and other adjustments. For the nine months ended September 30, 2009, the accounting error and the billing and
other adjustments resulted in a $25.0 million overstatement of revenues, a $0.2 million understatement of operating expenses and a $9.6 million overstatement of other income in
the financial data originally reported in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, which was originally filed with the SEC on
November 20, 2009. The restatement of the interim condensed consolidated financial statements contained in the Amendments (the "Restatement"), which Restatement accounts for the foregoing
overstatements and understatement, resulted in a reduction in net income of $21.8 million, net of income taxes, for the nine months ended September 30, 2009. For more information, see
the Amendments as filed with the SEC.

As
a result of the Restatement, the Company determined that the Company was not in compliance with the interest coverage ratio maintenance covenant and the leverage ratio maintenance
covenant under the Pre-petition Credit Facility for the measurement period ended June 30, 2009, which constituted an event of default under each of the Pre-petition
Credit Facility and the Swaps, and may have constituted an event of default under the Notes, in each case at June 30, 2009.

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Our Business

We are a leading provider of communications services in rural and small urban communities, offering an array of services, including
local and long distance voice, data, Internet, television and broadband product offerings. We operate in 18 states with 1.6 million access line equivalents (including voice access lines and
high speed data lines, which include digital subscriber lines ("DSL"), wireless broadband, cable modem and fiber-to-the-premises) in service as of
December 31, 2009.

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

As
our primary source of revenues, access lines are an important element of our business. Over the past several years, communications companies, including FairPoint, have experienced a
decline in access lines due to increased competition, including competition from wireless carriers and cable television operators, the introduction of DSL services (resulting in customers substituting
DSL for a second line) and challenging economic conditions. In addition, while we were operating under the Transition
Services Agreement, we had limited ability to change current product offerings. Upon completion of the Cutover from the Verizon systems to the new FairPoint systems, we expected to be able to modify
bundles and prices to be more competitive in the marketplace. However, due to certain systems functionality issues (as described herein), we have had limited ability during 2009 to make changes to our
product offerings. In late June 2009, we began actively marketing and promoting our DSL product for the first time since the Cutover.

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

Legacy
FairPoint's operations and our Northern New England operations operate under different regulatory regimes in certain respects. For example, concerning interstate access, all of
the pre-Merger regulated interstate services of FairPoint were regulated under a rate-of-return model, while all of the rate-regulated interstate
services provided by the Verizon Northern New England business were regulated under a price cap model. On May 10, 2010, we received FCC approval to convert our Legacy FairPoint operations in
Maine and Vermont to the price cap model. Our Legacy FairPoint operations in Maine and Vermont will convert to price cap regulation on July 1, 2010. We have obtained permission to continue to
operate our existing Legacy FairPoint ILECs outside of Maine and Vermont under the rate-of-return regime until the FCC completes its general review of whether to modify or
eliminate the "all-or-nothing" rule. Without this permission, the all-or-nothing rule would require that all of our regulated operations be operated
under the price cap model for federal regulatory purposes. In addition, while all of our operations generally are subject to obligations that apply to all LECs, our non-rural operations
are subject to additional requirements concerning interconnection, non-discriminatory network access for competitive communications providers and other matters, subject to substantial
oversight by state regulatory commissions. In addition, the FCC has ruled that our Northern New England operations must comply with the regulations applicable to the Bell Operating Companies. Our
rural and non-rural operations are also subject to different regimes concerning universal service.

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Our Services

We offer a broad portfolio of high-quality communications services for residential and business customers in each of the
markets in which we operate. We have a long history of operating in our markets and have a recognized identity within each of our service areas. Our companies are locally staffed, which enables us to
efficiently and reliably provide an array of communications services to meet our customer needs. These include services traditionally associated with local telephone companies, as well as other
services such as long distance, Internet, television and broadband enabled services. Based on our understanding of our local customers' needs, we have attempted to be proactive by offering bundled
services designed to simplify the customer's purchasing and management process.

Generation of Revenue

We primarily generate revenue through: (i) the provision of our basic local telephone service to customers within our service
areas; (ii) the provision of network access to interexchange carriers for origination and termination of interstate and intrastate long distance phone calls and dedicated private line
facilities; (iii) Universal Service Fund high cost loop payments; and (iv) the provision of other services such as long distance resale, data and Internet and broadband enabled services,
enhanced services, such as caller name and number identification, and billing and collection for interexchange carriers.

See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Annual Report for more information regarding our revenue sources.



Local calling service enables the local customer to originate and receive an unlimited number of calls within a defined "exchange"
area. Local calling services include basic local lines, private lines and switched data services. We provide local calling services to residential and business customers, generally for a fixed monthly
charge and service charges for special calling features. In a rural LEC's territory, the amount that we can charge a customer for local service is determined by rate proceedings involving the
appropriate state regulatory authorities.



Network access enables long distance companies to utilize our local network to originate or terminate intrastate and interstate
communications. Network access charges relate to long distance, or toll calls, that typically involve more than one company in the provision of telephone service as well as to the termination of
interexchange private line services. Since toll calls and private line services are generally billed to the customer originating the call or ordering the private line service, a mechanism is required
to compensate each company providing services relating to the service. This mechanism is the access charge and we bill access charges to long distance companies and other customers for the use of our
facilities to access the customer, as described below.

Intrastate Access Charges.We generate intrastate access revenue when an intrastate long distance call involving an interexchange
carrier is
originated by a customer in one of our exchanges to a customer in another exchange in the same state, or when such a call is terminated to a customer in one of our local exchanges. We also generate
intrastate access revenue when an interexchange carrier orders special access to connect interexchange private line services, such as high speed data services, to a customer in one of our local
exchanges. The interexchange carrier pays us an intrastate access payment for either terminating or originating the communication. We bill access charges relating to such service through our carrier
access billing system and receive the access payment from the interexchange carrier. Access charges for intrastate services are regulated and approved by the state regulatory authority.

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Interstate Access Charges.We generate interstate access revenue when an interstate long distance call is originated by a customer in
one of our
exchanges to a customer in another state, or when such a call is terminated to a customer in one of our exchanges. We also generate interstate access revenue when an interexchange carrier orders
special access to connect interexchange private line services, such as high speed data services, to a customer in one of our local exchanges. We bill interstate access charges in the same manner as we
bill intrastate access charges; however, interstate access charges are regulated and approved by the FCC instead of the state regulatory authority.

Universal Service Fund High Cost Loop.The Universal Service Fund supplements the amount of local service revenue received by us to
ensure that basic
local service rates for customers in high cost areas
are consistent with rates charged in lower cost areas. The Universal Service Fund, which is funded by monthly fees charged to interexchange carriers and LECs, makes payments to us on a monthly basis
based upon our cost support for LECs whose cost of providing the local loop connections to customers is significantly greater than the national average. For our rural service areas, these payments
fluctuate based upon our average cost per loop compared to the national average cost per loop. For example, if the national average cost per loop increases and our operating costs (and average cost
per loop) remain constant or decrease, the payments we receive from the Universal Service Fund would decline. Conversely, if the national average cost per loop decreases and our operating costs (and
average cost per loop) remain constant or increase, the payments we receive from the Universal Service Fund would increase. For our non-rural service areas, these payments are based on
cost models which estimate the cost to provide services and generate universal service support payments for high cost areas. Universal Service Fund high cost loop revenue accounted for approximately
3% of our total revenue in the year ended December 31, 2009.



We offer switched and dedicated long distance services throughout our service areas through resale agreements with national
interexchange carriers. In addition, through our wholly-owned subsidiary FairPoint Carrier Services, Inc., we offer wholesale long distance services to communications providers that are not
affiliated with us.



We offer broadband Internet access via DSL technology, fiber-to-the-home "FAST" technology,
dedicated T-1 connections, Internet dial-up, high speed cable modem and wireless broadband. Customers can utilize this access in combination with customer owned equipment and
software to establish a presence on the world wide web. In addition, we offer enhanced Internet services, which include obtaining IP addresses, basic web site design and hosting, domain name services,
content feeds and web-based e-mail services. Our services include access to 24-hour, 7-day a week customer support.



We seek to capitalize on our LECs' local presence and network infrastructure by offering enhanced services to customers, as well as
billing and collection services for interexchange carriers.

Cable TV and Video.In certain of our markets, we offer video services to our customers by reselling DirectTV content and providing
cable and IP
television video-over-DSL.

Enhanced Services.Our advanced digital switch and voicemail platforms allow us to offer enhanced services such as call waiting, call
forwarding and
transferring, three-way calling, automatic callback, call hold, caller name and number identification, voice mail, teleconferencing, video conferencing,
store-and-forward fax, follow-me numbers, Centrex services and direct inward dial.

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Billing and Collection.Many interexchange carriers provide long distance services to our LEC customers and may elect to use our
billing and
collection services. Our LECs charge interexchange carriers a billing and collection fee for each call record generated by the interexchange carrier's customer.

Directory Services.Through our local telephone companies, we publish telephone directories in the majority of our locations. These
directories
provide white page listings, yellow page listings and community information listings. We contract with leading industry providers to assist in the sale of advertising and the compilation of
information, as well as the production, publication and distribution of these directories.



Most of our 33 local exchange companies operate as the incumbent LEC ("ILEC") in each of their respective markets. Approximately 63% of
our voice access lines served residential customers as of December 31, 2009. Our business customers accounted for approximately 29% of our voice access lines as of December 31, 2009 and
wholesale customers accounted for approximately 8% of our voice access lines as of December 31, 2009. Our business customers are predominantly in the agriculture, light manufacturing and
service industries.

Our
operations are primarily focused on small urban markets and are geographically concentrated in the northeastern United States.

The
following chart identifies the number of access line equivalents in each of our 18 states as of December 31, 2009:

State

Access Line EquivalentsMaine


558,723New Hampshire


472,398Vermont


306,020Florida


51,837New York


48,490Washington


44,095Missouri


14,382Ohio


13,124Virginia


8,636Kansas


6,959Illinois


6,465Idaho


6,233Pennsylvania


6,177Oklahoma


4,223Colorado


3,770Other States(1)


3,201Total:


1,554,733


(1)Includes
Massachusetts, Georgia and Alabama.


Sales and Marketing

Our marketing approach emphasizes customer-oriented sales, marketing and service. We believe most communications companies devote their
resources and attention primarily toward customers in more densely populated markets. To the extent we experience competition for any of our services, we

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seek
to differentiate ourselves from the competitors providing such services by providing a superior level of service to each of our customers.

Each
of our local exchange companies has a long history in the communities it serves. It is our policy to maintain and enhance the strong identity and reputation that each LEC enjoys in
its markets, as we believe this is a significant competitive advantage. As we market new services, we will seek to continue to utilize our identity in order to attain higher recognition with potential
customers.

In
addition, our strategy is to enhance our communications services by offering comprehensive bundling of services and deploying new technologies to build upon the strong reputation we
enjoy in our markets and to further promote economic development in the communities we serve.

Many
of the companies acquired by us traditionally have not devoted a substantial amount of their operating budget to sales and marketing activities. After acquiring such LECs, we
typically change this practice to provide additional support for existing products and services as well as to support the introduction of new services. As of December 31, 2009, we had 915
employees engaged in sales, marketing and customer service.

Information Technology and Support Systems

Our approach to back-office and operational support systems focuses on implementing applications that allow consistent
communication and coordination throughout our entire organization. Our objective is to improve profitability by reducing individual company costs through the sharing of best practices, centralization
or standardization of functions and processes, and deployment of technologies and systems that provide for greater efficiencies and profitability. We transitioned to approximately 60 new systems for
our Northern New England operations on February 9, 2009.

As
of December 31, 2008, all of our Legacy FairPoint companies had converted to a single outsourced billing platform. We are currently outsourcing certain systems integration and
support services. Our recently acquired Northern New England operations were converted to larger scale back-office and operations support systems as of January 30, 2009. Prior to
January 30, 2009, billing for our Northern New England operations was performed by Verizon under the Transition Services Agreement.

Network Architecture and Technology

Our LEC networks consists of eight signal transfer points, 85 host central offices and 414 remote central offices, all with advanced
digital switches. 99.5% of our central offices are served by fiber optic facilities which we own. The primary interconnection with other incumbent carriers is also fiber optic. Our outside plant
consists of both fiber optic and copper distribution networks.

Our
fiber optic transport system is primarily a Synchronous Optical Network ("SONET") capable of satisfying customer demand for high bandwidth transport services. This system supports
advanced services including Asynchronous Transfer Mode ("ATM"), Frame Relay and IP transport, facilitating delivery of advanced services as demand warrants.

In
our LEC markets, DSL-enabled access technology has been deployed to provide significant broadband capacity to our customers. As of December 31, 2009, nearly all of
our central offices are capable of providing broadband services through cable modem, wireless broadband and DSL technology.

Rapid
and significant changes in technology are expected in the communications industry. Our future success will depend, in part, on our ability to anticipate and adapt to technological
changes. With this in mind, we are in the process of building an advanced Next Generation Network for our Northern New England operations. The Next Generation Network is an IP / Multiple Protocol
Label Switched

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(IP/MPLS)
network that is fully fiber optic based. We believe that this network architecture will enable us to efficiently respond to these technological changes.

Competition

We face intense competition from a variety of sources for our local calling, long distance and Internet services in a majority of the
areas we now serve, and expect that such competition will continue to intensify in the future. Regulations and technology change quickly in the communications industry, and changes in these factors
historically have had, and may in the future have, a significant impact on competitive dynamics. In particular, the 1996 Act and other actions taken by the FCC and state regulatory authorities have
promoted competition in the provision of communications services. In addition, many of our competitors have access to a larger workforce and have substantially greater name-brand
recognition and financial, technological and other resources than we do. Although many of the competitive challenges now confronting larger regulated telephone companies are limited in the rural areas
we serve, these challenges are more prevalent in the small urban areas we serve.



In most of our service areas, we face competition from wireless carriers for both local calling and long distance services. As
technology and economies of scale improve, competition from wireless carriers is expected to continue to increase. In addition, the FCC's requirement that telephone companies offer
wireline-to-wireless number portability has increased the competition we face from wireless carriers. Our Northern New England operations service areas represent both rural and
small urban markets and tend to have better wireless coverage compared to Legacy FairPoint's predominantly rural service areas. Wireless competition is more robust in these service areas. However, if
and to the extent wireless service improves in the areas we serve, and specifically in the Legacy FairPoint service areas, we expect to face further competition from wireless providers.



We also face competition from wireline and cable competitors, such as competitive LECs and cable television providers. Competitive LECs
either maintain their own facilities or lease services at wholesale rates.

Competitive
LECs not only provide competition for our local calling and long distance services, but most also provide Internet services at competitive speeds and prices. In addition,
competitive LECs are
capable of offering video services in competition with us and we expect that they will increasingly do so in the future.

Cable
television companies have aggressively entered the communications market by upgrading their networks with fiber optics and installing facilities to provide voice, video and
Internet services. Cable high-speed Internet services are generally competitive with our Internet services in both pricing and the speed of such services. We estimate that as of
December 31, 2009, a majority of the customers that we serve had access to local calling, long distance and Internet services through a cable television company.

The
FCC's requirement that telephone companies offer wireline-to-wireline number portability has increased the competition we face from both competitive LECs and
cable television providers. In addition, competitive LECs and cable television companies have the ability to bundle voice, high-speed Internet and video services to their customers, which
has and will likely continue to intensify the competition we face from these providers.

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Electric
utilities could also become a competitive threat to our local calling, long distance and high-speed Internet services, since they have existing assets and access to
low cost capital that could allow them to enter a service area rapidly and accelerate network development.



VoIP.VoIP service is increasingly being embraced by all industry participants. VoIP service involves the routing of voice calls over
the public
Internet or private IP networks, through packets of data instead of transmitting the calls over the existing public switched telephone network. This routing mechanism may give VoIP service providers a
cost advantage, and enable them to offer services to end users at a lower price. While current VoIP applications typically complete calls using ILEC infrastructure and networks, as VoIP services
obtain acceptance and market penetration and technology advances further, a greater number of calls may be placed without utilizing the public switched telephone network. The
proliferation of VoIP, particularly to the extent these calls do not utilize our LECs' networks or are accorded different regulatory treatment, may result in an erosion of our customer base and loss
of local, long distance and network access revenues.

Internet Service Providers.In addition to wireline and cable companies, our Internet services also compete with Internet service
providers. In
addition to Internet access, many of these companies, such as Microsoft and Yahoo!, offer online content services consisting of access to closed, proprietary information networks.

Satellite.Satellite companies also currently offer broadband access to the Internet, primarily to remote, unserved locations, and
competition from
satellite companies may intensify in the future.

Strategic Alliances.Wireline, wireless, cable and utility companies have formed and may continue to form strategic alliances to offer
bundled
services in our service areas. Competition from these strategic alliances could increase if applications for certain broadband development funding submitted by certain of these strategic alliances
under the American Recovery Act of 2009 are approved.

Recipients of Government Stimulus.Municipalities, public utilities and private businesses receiving government stimulus funds may also
choose to
enter the high-speed Internet business.

Employees

As of December 31, 2009, we employed a total of 4,066 employees. 2,682 employees of our local exchange companies are covered by
fifteen collective bargaining agreements. We believe the state of our relationship with our union and non-union employees is generally good.

Intellectual Property

We believe we own or have the right to use all of the intellectual property that is necessary for the operation of our business as we
currently conduct it.

Regulatory Environment

We are subject to extensive federal, state and local regulation. At the federal level, the FCC generally exercises jurisdiction over
facilities and services of common carriers, such as us, to the extent those facilities are used to provide, originate or terminate interstate or international communications. State regulatory
commissions generally exercise jurisdiction over common carriers' facilities, services and rates to the extent those facilities are used to provide, originate or terminate intrastate communications.
In addition, pursuant to local competition provisions of the Communications Act, as amended by the 1996 Act, state and federal regulators share responsibility for implementing and enforcing certain
pro-competitive policies. In particular, state regulatory agencies exercise substantial

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oversight
over the offerings of ILECs to competing carriers of interconnection and non-discriminatory access to certain facilities and services designated as essential for local
competition.

Legacy
FairPoint and our Northern New England operations operate under different regulatory regimes in certain respects. For example, concerning interstate access, all of the
pre-Merger regulated interstate services of FairPoint were regulated under a rate-of-return model, while all of the rate-regulated interstate services
provided by the Verizon Northern New England business were regulated under a price cap model. On May 10, 2010, we received FCC approval to convert our Legacy FairPoint operations in Maine and
Vermont to the price cap model. Our Legacy FairPoint operations in Maine and Vermont will convert to price cap regulation on July 1, 2010. Under price cap regulation, limits are imposed on a
company's interstate rates without regard to its costs or revenue requirements. These limits are adjusted annually based on FCC-specified formulae, such as for inflation, as well as
through occasional regulatory proceedings, but will generally give a company flexibility to adjust its rates within these limits. In contrast, rate of return regulation permits a company to set rates
based upon its allowed costs and projected revenue requirement, including an authorized rate of return determined by the FCC. We have obtained permission to continue to operate our Legacy FairPoint
ILECs outside of Maine and Vermont under the rate-of-return regime until the FCC completes its general review of whether to modify or eliminate the
"all-or-nothing" rule. Without this permission, the
all-or-nothing rule would require that all of our regulated operations be operated under the price cap model for federal regulatory purposes. In addition, while all of our
operations generally are subject to obligations that apply to all LECs, our non-rural operations are subject to additional requirements concerning interconnection,
non-discriminatory network access for competitive communications providers and other matters, subject to substantial oversight by state regulatory commissions. In addition, the FCC has
ruled that our Northern New England operations must comply with the regulations applicable to the Bell Operating Companies. The rural and non-rural operations are also subject to different
regimes concerning universal service.



We are required to comply with the Communications Act which requires, among other things, that telecommunications carriers offer
telecommunications services at just and reasonable rates and on terms and conditions that are not unreasonably discriminatory. The Communications Act was amended in 1996 by the addition of provisions
intended to promote competition in the provision of local services, and to lead to deregulation as markets become more competitive.

On
March 16, 2010, the FCC submitted the National Broadband Plan (the "NBP") to the United States Congress ("Congress"). The NBP is a plan to bring high speed Internet services to
the entire country, including remote and high-cost areas. In accordance with the NBP, the FCC has commenced several rulemakings that concern, among other things, reforming
high-cost and low-income programs to promote universal service, to make those funds more efficient while promoting broadband communications in areas that otherwise would be
unserved. We also expect the FCC to undertake new rulemakings addressing changes to interstate access charges and other forms of intercarrier compensation, classification of broadband providers and
other obligations under federal law. We cannot predict the outcome of these proceedings or the effect that resulting decisions may have on our business.

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Our local exchange subsidiaries receive compensation from long-distance telecommunications providers for the use of their
network to originate and terminate interstate inter-exchange traffic. With respect to interstate traffic, the FCC regulates the prices we may charge for this purpose, referred to as access charges, as
a combination of flat monthly charges paid by end-users, usage-sensitive charges paid by long-distance carriers, and recurring monthly charges for use of dedicated facilities
paid by long-distance carriers. The amount of access charge revenue that we will receive is subject to change.

Our
ILEC operations in Maine, New Hampshire and Vermont are subject to price cap regulation of access charges. Under price cap regulation, limits are imposed on a company's interstate
rates without regard to its costs or revenue requirements. These limits are adjusted annually based on FCC-specified formulae, such as for inflation, as well as through occasional
regulatory proceedings, but will generally give us flexibility to adjust our rates within these limits. In contrast, our rural operations are subject to interstate rate of return regulation,
permitting us to set rates for those operations based upon our allowed costs and projected revenue requirement, including an authorized rate of return of 11.25%. In an order dated January 25,
2008, the FCC granted our request for a waiver
of the "all or nothing" rule, which will allow us to continue to operate under both of these regimes until the FCC completes its general review of whether to modify or eliminate the all or nothing
rule, or makes other comprehensive changes to its access charge rules.

The
FCC has made various reforms to the existing rate structure for access charges, which, combined with the development of competition, have generally caused the aggregate amount of
access charges paid by long-distance carriers to decrease over time. Other reform proposals are now pending, and additional reforms were recommended in the NBP. These proposals could
require ILECs to convert all rate-of-return operations to price caps, or to restructure, reduce, or eliminate access charges and recover the lost revenue through
end-user charges or Universal Service Support. The FCC has also sought comment on whether access charges should apply to VoIP or other IP-based service providers. The FCC also
is considering whether to restrict some of the pricing flexibility enjoyed by price cap ILECs, which includes some of our Northern New England operations. We cannot predict what changes, if any, the
FCC may eventually adopt and the effect that any of these changes may have on our business.



Current FCC rules provide different methodologies for the determination of universal service payments to rural and
non-rural carriers. In general, the rules provide high-cost support to rural carriers where the company's actual costs exceed a nationwide benchmark level.
High-cost support for non-rural carriers, on the other hand, is determined by nationwide cost proxy model. Under the current FCC rules, our non-rural operations
receive support under the non-rural model methodology in Maine and Vermont. The FCC's current rules for support to high-cost areas served by non-rural LECs were
remanded by the U.S. Court of Appeals for the Tenth Circuit, which had found that the FCC had not adequately justified these rules. In 2010, in response to the Tenth Circuit remand, the FCC issued an
order which justified its prior conclusion. The FCC is also considering proposals to update the proxy model upon which non-rural high-cost funding is determined, as well as
other possible reforms to the high-cost support mechanisms for rural and non-rural carriers, including redirecting the fund over time to support broadband communications in
areas that otherwise would be unserved.

The
high-cost support payments that are received from the Universal Service Fund are intended to support our operations in rural and high cost markets. Under current FCC
regulations, the total Universal Service Fund support available for high-cost loops operated by rural carriers is subject to a cap. The FCC prescribes the "national average cost per loop"
each year to keep the total available funding within the cap. Payments from the Universal Service Fund will fluctuate based upon our average cost per loop compared with the national average cost per
loop. For example, if the national

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average
cost per loop increases and our operating costs and average cost per loop remain constant or decrease, the payments we will receive from the Universal Service Fund will decline. Based on
historical trends, we believe the total high-cost support payments from the Universal Service Fund to our rural operations likely will continue to decline. Universal Service Support
revenue accounted for approximately 3% of our total revenue in the year ended December 31, 2009.

Universal
Service Fund disbursements may be distributed only to carriers that are designated as "eligible telecommunications carriers" ("ETCs") by a state regulatory commission. All of
our non-rural and rural LECs are designated as ETCs

On
May 1, 2008, the FCC adopted an interim emergency cap on the amount of high-cost support that competitive ETCs may receive, pending the FCC's adoption of
comprehensive reform. Such support for each state was capped at the level of support that competitive ETCs were eligible to receive during March 2008 on an annualized basis. The cap became effective
on August 1, 2008 and is expected to constrain growth in the total amount of high-cost support available to competitive ETCs. The FCC is currently considering other revisions to the
distribution mechanisms for Universal Service Fund high-cost support. The proposals under consideration include using "reverse auctions" to determine recipients of rural
high-cost support, using a model to determine the appropriate level of support in all areas where there is no private sector business case for providing voice and broadband services, and
accelerating targeted funding toward broadband deployment in unserved areas. The FCC is also seeking comment on near-term proposals to reduce current high-cost fund payments.
These and other proposed rule changes could reduce our support in the future, reduce the support available to our competitors or provide for new support, such as for broadband services. We cannot
predict what course the FCC will take on universal service distribution reform, but it is possible that the remedy selected by the FCC could materially affect the amount of universal service funding
we will receive. If our rural LECs were unable to receive Universal Service Fund payments, or if those payments were reduced, many of our rural LECs would be unable to operate as profitably as they
have historically in the absence of the implementation of increases in charges for other services. Moreover, if we raise prices for services to offset loss of Universal Service Fund payments, the
increased pricing of our services may disadvantage us competitively in the marketplace, resulting in additional potential revenue loss.

We
receive additional support under the FCC's rules in the forms of Interstate Access Support ("IAS") and Interstate Common Line Support ("ICLS"). We receive IAS support in all three of
our federal price cap study areas (Maine, New Hampshire and Vermont). We also continue to receive ICLS
support in our rate-of-return study areas. These forms of support replace revenues previously collected through interstate access charges. The FCC is seeking comment on a
proposal to eliminate IAS and transfer the funding to a "Connect America Fund" for broadband. We have no assurance that either of these support programs will remain unchanged if the FCC revises its
rules governing universal service and inter-carrier compensation.

We
also benefit indirectly from support to low-income users under the Lifeline and Link-Up universal service programs. The FCC has asked the Federal-State Joint
Board for Universal Service to recommend changes to these low-income programs to address, among other things, access to broadband and eligibility for support. We have no assurance whether
we or our competitors will be affected by any such changes.



Federal universal service programs are currently funded through a surcharge on interstate and international end-user
telecommunications revenues. Declining long-distance revenues, the popularity of service bundles that include local and long-distance services, and the growth in size of the
fund, due primarily to increased funding to competitive ETCs, all prompted the FCC to consider alternative means for collecting this funding. As an interim step, the FCC has ordered that providers of
certain

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VoIP
services must contribute to federal universal service funding. The FCC also increased the percentage of revenues subject to federal universal service contribution obligations that wireless
providers may use as their methodology for funding universal service. One alternative under consideration would be to impose surcharges on telephone numbers or network connections instead of carrier
revenues. Any further change in the current assessment mechanism could result in a change in the total contribution that LECs, wireless carriers or others must make and that would be collected from
customers. We cannot predict whether the FCC or Congress will require modification to any of the universal contribution rules, or the ultimate impact that any such modification might have on us or our
customers.



The 1996 Act provides, in general, for the removal of barriers to market entry in order to promote competition in the provision of
local telecommunications and information services. As a result, competition in our local exchange service areas will continue to increase from
competitive LECs, wireless providers, cable companies, Internet service providers, electric companies and other providers of network services. Many of these competitors have a significant market
presence and brand recognition, which could lead to more competition and a greater challenge to our future revenue growth.

Under
the 1996 Act, all LECs, including both incumbents and competitive LECs, are required to: (i) allow others to resell their services; (ii) ensure that customers can
keep their telephone numbers when changing carriers, referred to as local number portability; (iii) ensure that competitors' customers can use the same number of digits when dialing and receive
nondiscriminatory access to telephone numbers, operator service, directory assistance and directory listing; (iv) ensure competitive access to telephone poles, ducts, conduits and rights of
way; and (v) compensate competitors for the cost of completing calls to competitors' customers from the other carrier's customers.

In
addition to these obligations, ILECs are subject to additional requirements to: (i) interconnect their facilities and equipment with any requesting telecommunications carrier
at any technically feasible point; (ii) unbundle and provide nondiscriminatory access to certain network elements, referred to as unbundled network elements ("UNEs"), including some types of
local loops and transport facilities, at regulated rates and on nondiscriminatory terms and conditions, to competing carriers that would be "impaired" without them; (iii) offer their retail
services for resale at wholesale rates; (iv) provide reasonable notice of changes in the information necessary for transmission and routing of services over the ILEC's facilities or in the
information necessary for interoperability; and (v) provide, at rates, terms and conditions that are just, reasonable and nondiscriminatory, for the physical co-location of
equipment necessary for interconnection or access to UNEs at the ILEC's premises. Competitors are required to compensate the ILEC for the cost of providing these services.

Our
non-rural operations are subject to all of the above requirements. In addition, our non-rural operations are subject to additional unbundling obligations that
apply only to Bell Operating Companies. In contrast to the unbundling obligations that apply generally to ILECs, these Bell Operating Company-specific requirements mandate access to certain facilities
(such as certain types of local loops and inter-office transport, and local circuit switching) even where other carriers would not be "impaired" without them.

Our
Legacy FairPoint rural operations are exempt from the additional ILEC requirements until the applicable rural carrier receives a bona fide request for these additional services and
the applicable state authority determines that the request is not unduly economically burdensome, is technically feasible, and is consistent with the universal service objectives set forth in the 1996
Act. This exemption will be effective for all of our existing Legacy FairPoint rural ILEC operations, except in Florida where the legislature has determined that all ILECs are required to provide the
additional services as prescribed in the 1996 Act. If a request for any of these additional services is filed by a potential

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competitor
with respect to one of our other existing rural operating territories, we will likely ask the relevant state regulatory commission to retain the exemption. If a state regulatory commission
rescinds
an exemption in whole or in part and does not allow us adequate compensation for the costs of providing the interconnection, our costs could increase significantly; we could face new competitors in
that state; and we could suffer a significant loss of customers and incur a material adverse effect on our business, financial condition, results of operations and liquidity. In addition, we could
incur additional administrative and regulatory expenses as a result of the interconnection requirements. Any of these could result in a material adverse effect on our results of operations and
financial condition.

Under
the 1996 Act, rural LECs may request from state regulatory commissions suspension or modification of any or all of the requirements described above. A state regulatory commission
may grant such a request if it determines that doing so is consistent with the public interest and is necessary to avoid a significant adverse economic impact on communications users, and where
imposing the requirement would be technically infeasible or unduly economically burdensome. If a state regulatory commission denies all or a portion of a request made by one of our rural LECs, or does
not allow us adequate compensation for the costs of providing interconnection, our costs could increase and our revenues could decline. In addition, with such a denial, competitors could enjoy
benefits that would make their services more attractive than if they did not receive interconnection rights. With the exception of certain requests by us to modify the May 24, 2004
implementation date for local number portability in certain states, we have not encountered a need to file any requests for suspension or modification of the interconnection requirements.



The FCC has required that ILECs that provide interstate long-distance services originating from their local exchange
service territories must do so in accordance with "non-structural separation" rules. These rules have required that our long-distance affiliates (i) maintain separate
books of account, (ii) not own transmission or switching facilities jointly with the local exchange affiliate, and (iii) acquire any services from their affiliated LEC at tariffed rates,
terms and conditions. The Bell Operating Companies are subject to a different set of rules allowing them to offer both long-distance and local exchange services in the regions where they
operate as Bell Operating Companies, subject to certain conditions with which we comply. In addition, our operations have been obligated under the FCC's "equal access" scripting requirement to read
new customers a list of all available long-distance carriers presented in random order. Not all of our competitors must comply with these requirements. Therefore, these requirements may
put us at a competitive disadvantage in the interstate long-distance market. The FCC recently ruled that the Bell Operating Companies need no longer comply with these rules for their
long-distance services in order to avoid classification as a dominant carrier, and that their ILEC affiliates need no longer comply with the separation rules for their long distance
services, provided that they comply with certain existing and additional safeguards, such as providing special access performance metrics, offering low-volume calling plans, and making
available certain monthly usage information on customers' bills. The FCC also has ruled that the Bell Operating Companies and their ILEC affiliates are no longer required to comply with the equal
access scripting requirement. However, until similar relief is granted in each state by the state PUC, FairPoint will continue to comply with the equal access scripting requirements.



We are subject to a number of other statutory and regulatory obligations at the federal level. For example, the Communications
Assistance for Law Enforcement Act, or CALEA, requires telecommunications carriers to modify equipment, facilities and services to allow for authorized electronic surveillance based on either industry
or FCC standards. Under CALEA and other federal laws, we may be required to provide law enforcement officials with call records, content or call identifying information, pursuant to an appropriate
warrant or subpoena.

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The
FCC limits how carriers may use or disclose customer proprietary network information, referred to as CPNI, and specifies what carriers must do to safeguard CPNI provided to third
parties. Congress has enacted, and state legislatures are considering, legislation to criminalize the unauthorized sale of call detail records and to further restrict the manner in which carriers make
such information available.

Prior
to the Effective Date, we will be required to obtain FCC approval that the ownership and control of FairPoint as proposed under the Plan will be in the public interest. With
respect thereto, an opportunity will be provided for public comment. We cannot predict that we will obtain FCC approval, whether the FCC will impose any conditions on its approval of the Plan and
related transfer of control or the timing of its approval.

In
addition, if we seek in the future to acquire companies that hold FCC authorizations, in most instances we will be required to seek approval from the FCC prior to completing those
acquisitions. The FCC has broad authority to condition, modify, cancel, terminate or revoke operating authority for failure to comply with applicable federal laws or rules, regulations and policies of
the FCC. Fines or other penalties also may be imposed for such violations.



The FCC has adopted a series of orders that recognize the competitive nature of certain services that utilize advanced technologies.

With
respect to our local network facilities, the FCC has determined that certain unbundling requirements do not apply to certain fiber facilities such as certain types of loops and
packet switches.

The
FCC has ruled that dedicated broadband Internet access services offered by telephone companies (using DSL technology), cable operators, electric utilities and terrestrial wireless
providers qualify as largely deregulated information services. LECs or their affiliates may offer the underlying broadband transmission services that are used as an input to dedicated broadband
Internet access services through private carriage arrangements on negotiated commercial terms. The FCC order also allows rural rate-of-return carriers, including our Legacy
FairPoint operations, the option to continue providing DSL service as a common carrier (status quo) offering. The FCC also has concluded that broadband Internet access service providers must comply
with CALEA. Despite the FCC's previous ruling that broadband Internet access is an information service, the FCC continues to evaluate this finding and is expected to issue a Notice of Proposed
Rulemaking ("NPRM") that could re-regulate broadband Internet access. We can provide no assurance about the outcome of such NPRM and how it may affect our business.

In
addition, a Verizon petition asking the FCC to forbear from applying common carrier regulation to certain broadband services sold primarily to larger business customers was deemed
granted by operation of law on March 19, 2006 when the FCC did not deny the petition by the statutory deadline. The U.S. Court of Appeals for the District of Columbia Circuit has rejected a
challenge to that outcome. The forbearance deemed granted to Verizon has been extended to our Northern New England operations by the FCC in its order approving the transaction. In October 2007, the
FCC stated its intention to define more precisely the scope of forbearance obtained by Verizon, but it has not yet done so.

The
FCC has imposed particular regulatory obligations on IP-based telephony. It has concluded that interconnected VoIP providers must comply with CALEA; provide enhanced 911
emergency calling capabilities; comply with certain disability access requirements; comply with the FCC's rules protecting CPNI; provide local number portability; and pay regulatory fees. Recently
there have also been discussions among policymakers concerning "net neutrality," or the potential requirement for non-discriminatory treatment of traffic over broadband networks. The FCC
released a statement of principles favoring customer choice of content and services available over broadband networks. It has

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proposed
to adopt open Internet access rules applicable to all broadband Internet access providers. However, we cannot predict what impact, if any, this may have on our business. The FCC has preempted
some state regulation of VoIP.

Because
our non-rural operations are classified as a Bell Operating Company, they are subject to additional requirements in connection with their provision of enhanced
services. Specifically,
our non-rural operations generally must provide enhanced services consistent with the FCC's so-calledComputer Inquiryrules,
which require each Bell Operating Company to ensure that unaffiliated enhanced service providers have nondiscriminatory access to the telecommunications transmission capability underlying any enhanced
services provided by the Bell Operating Company, except for where the FCC specifically has provided relief from some or all of these requirements.

Additional
rules and regulations may be extended to the Internet and to broadband Internet access. A variety of proposals are under consideration in both federal and state legislative
and regulatory bodies. For example, the FCC is considering reclassifying the transport component of broadband service as a "telecommunications service." We cannot predict whether the outcome of
pending or future proceedings will prove beneficial or detrimental to our competitive position.

On
February 17, 2009, Congress enacted the American Recovery and Reinvestment Act of 2009 which, among other programs, provides for $7.2 billion for broadband development
in unserved and underserved areas of the United States. We applied for stimulus funding during round one of the application process, but did not receive any grant funding. We have also applied for
stimulus funding in the second and final round of the application process, but we cannot predict whether we will receive any grant funding. To the extent that our competitors have received, or will
receive, stimulus funding under this program, we may face more significant competition from such competitors.



The local service rates and intrastate access charges of substantially all of our telephone subsidiaries are regulated by state
regulatory commissions which typically have the power to grant and revoke franchises authorizing companies to provide communications services. In some states, our intrastate long-distance
rates are also subject to state regulation. States typically regulate local service quality, billing practices and other aspects of our business as well.

Most
state commissions have traditionally regulated LEC pricing through cost-based "rate-of-return" regulation. In recent years, however, state
legislatures and regulatory commissions in most of the states in which our telephone companies operate have either reduced the regulation of LECs or have announced their intention to do so, and we
expect this trend will continue. Such relief may take the form of mandatory deregulation of particular services or rates; or it may consist of optional alternative forms of regulation ("AFOR"), which
may involve price caps or other flexible pricing arrangements. Some of these deregulatory measures are described in greater detail below. We believe that some AFOR plans allow us to offer new and
competitive services faster than under the traditional regulatory regimes.

The
following summary addresses significant regulatory actions by regulatory agencies in Maine, New Hampshire and Vermont that have affected or are expected to affect our Northern New
England operations:

Regulatory Conditions to the Merger, as Modified in Connection with the Plan

We are subject to certain orders issued by the state regulatory authorities in Maine, New Hampshire and Vermont in connection with the
Merger. We have entered into settlement negotiations with respect to these orders in connection with the Plan, as described below.

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After extensive negotiations with a representative appointed by the Maine PUC (the "MPUC") and with the Maine Office of the Public
Advocate (together, the "Maine Regulatory Parties"), we reached an agreement with the Maine Regulatory Parties on a settlement (the "Maine Regulatory Settlement"). The Maine Regulatory Settlement sets
forth changes to the ME 2008 Order (as defined below) issued in connection with the Merger. The Maine Regulatory Settlement, which is subject to the approval of the MPUC, provides for, among other
things, the following:







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We
are in the process of seeking approval of the Maine Regulatory Settlement in connection with the confirmation of the Plan.

The
foregoing summary of the Maine Regulatory Settlement is qualified in its entirety by reference to the full text of the Maine Regulatory Settlement which is filed as an exhibit to the
Plan.



In the proceedings before the NHPUC relating to approval of the Merger, we had entered into a January 23, 2008 settlement
agreement (the "NH 2008 Settlement") among Verizon, us and the staff of the NHPUC, which was approved with modifications in the NHPUC's order dated February 25, 2008 approving the Merger with
conditions (the "NH 2008 Order"). Following the commencement of the Chapter 11 Cases, we engaged in extensive negotiations with certain members of the staff of the NHPUC (the "Staff Advocates")
and we and the Staff Advocates have agreed to a settlement (the

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"New
Hampshire Regulatory Settlement") under which we have agreed to meet the broadband build-out, capital investment and service quality requirements of the NH 2008 Order
subject to modifications described in the New Hampshire Regulatory Settlement. The New Hampshire Consumer Advocate has agreed not to oppose the terms of the New Hampshire Regulatory Settlement. The
terms of the New Hampshire Regulatory Settlement include the following:







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We
are in the process of seeking approval of the New Hampshire Regulatory Settlement in connection with the confirmation of the Plan.

The
foregoing summary of the New Hampshire Regulatory Settlement is qualified in its entirety by reference to the full text of the New Hampshire Regulatory Settlement which is filed as
an exhibit to the Plan.



After extensive negotiations with the Vermont Department of Public Service (the "Vermont DPS"), we reached an agreement with the
Vermont DPS on a regulatory settlement (the "Vermont Regulatory Settlement"). The Vermont Regulatory Settlement sets forth changes to the VT 2008 Order (as defined below) entered into in connection
with the Merger. The Vermont DPS will use reasonably practicable efforts to request that the Vermont Public Service Board (the "Vermont Board") approve the Vermont Regulatory Settlement. The Vermont
Regulatory Settlement provides for, among other things, the following:





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The Vermont Regulatory Settlement is conditioned on Vermont DPS receiving and finding acceptable a business plan demonstrating our ability to meet our
obligations under the Vermont Regulatory Settlement and our feasibility to operate as a going concern over the long term in a manner consistent with Vermont utility regulation.

We
are in the process of seeking approval of the Vermont Regulatory Settlement in connection with the confirmation of the Plan.

The
foregoing summary of the Vermont Regulatory Settlement is qualified in its entirety by reference to the full text of the Vermont Regulatory Settlement which is filed as an exhibit to
the Plan.

Other Regulatory Matters



Our Northern New England operations in Maine currently operate under an AFOR implemented upon the Merger. The AFOR provides for the
capping of rates for basic local exchange services and allows pricing flexibility for other services, including intrastate long distance, optional services and bundled packages. Under the terms of the
ME 2008 Order, among other things, we reduced the caps on monthly basic exchange rates effective as of August 1, 2008 by an amount designed to decrease revenues by approximately
$1.5 million per month (depending on the applicable number of access lines). The current AFOR caps basic exchange rates in Maine at the new level for five years after August 1, 2008. The
AFOR also includes an SQI requirement for our Northern New England operations in Maine, which establishes benchmarks for certain performance categories and imposes penalties for the failure to meet
the benchmarks. Our rural LECs in Maine currently operate under traditional rate of return regulation and have limited forms of pricing flexibility. All telephone companies in Maine are required to
establish intrastate access rates which do not exceed their interstate access rates as they existed on January 1, 2003. Certain intrastate wholesale services are also subject to tariff
requirements of the MPUC. In addition to the regulation of rates and service, telephone companies are generally subject to regulation by the MPUC in other areas, including transactions with
affiliates, financing and reorganizations.



In orders issued in 2004 and 2005, the MPUC ruled that it had the authority under federal law to regulate compliance with certain
conditions that our Northern New England operations must satisfy to sell long-distance services, and in particular to define the elements that our Northern New England operations must
provide on a wholesale basis to competitive carriers under Section 271 of the Communications Act. The MPUC ruled that it had the authority to set rates for Section 271 elements and
interpreted Section 271 to require our Northern New England operations to provide access to elements that the FCC had held are not required to be proved as UNEs under Section 251 of the
Communications Act. Prior to the Merger, Verizon New England challenged the ruling in the U.S. District Court of Maine. Following an unfavorable ruling, Verizon New England appealed to the First
Circuit Court of Appeals. The First Circuit vacated the District Court's decision and held that the MPUC has no such authority. The court remanded the matter for further proceedings by the District
Court, which subsequently dismissed the case at our and the MPUC's request. On November 25, 2009, the MPUC petitioned the FCC for a declaratory ruling requiring us to provide certain UNEs,
which is now pending.



Our ILEC business operations in New Hampshire are subject to rate of return regulation. We have adopted the contractual and tariffed
rates and terms and conditions that were in effect for the Verizon Northern New England business prior to the Merger. No rate proceeding is pending. Within this

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regulatory
structure, the NHPUC has instituted rules and policies to expedite offerings of new services, but we are subject to regulations, such as tariff filing and cost allocation requirements, that
are not applicable to our competitors. In addition to our access tariff, we maintain two New Hampshire wholesale tariffs, one for interconnection, co-location and UNEs and another for
services offered to carriers for resale. The order of the NHPUC approving the spin-off and the Merger includes conditions generally limiting rates for existing retail, wholesale and DSL
services during the three years following the closing of the Merger to those in effect as of the close date of the Merger.

In
a case similar to that of the MPUC described under "MaineUnbundling of Network Elements," the NHPUC had entered orders asserting authority under federal law
to require the Verizon Northern New England business to continue offering certain network elements no longer required to be offered pursuant to Section 251 of the 1996 Act, and at existing
total element long run incremental cost rates until the NHPUC decided otherwise. The Verizon Northern New England business challenged the orders in the United States District Court for the District of
New Hampshire and obtained an order enjoining the NHPUC from enforcing the orders. The recent First Circuit decision that considered the MPUC order also considered this New Hampshire decision and
affirmed the District Court's opinion.

In
2008, the NHPUC issued an order determining that intra-LATA carrier common line switched access charges did not apply to certain interexchange calls where neither the
calling nor the called party is served by our Northern New England operations. This decision was reversed by the New Hampshire Supreme Court on appeal. Following this decision, the NHPUC directed us
to file tariff revisions to remove such charges prospectively, and we objected to this requirement. The matter remains pending before the NHPUC.



In April 2006, the Vermont Board issued a final order adopting an amended alternative regulatory plan (the "Amended Incentive
Regulation Plan") for the Verizon Northern New England business to replace a plan adopted in 2000. The Amended Incentive Regulation Plan is retroactive to July 1, 2005, and runs through
December 31, 2010. Under the amended plan, the Verizon Northern New England business committed to make broadband capability available to 75% of its access lines in Vermont by 2008 and 80% of
its access lines in Vermont by 2010 with milestones of 65% and 77% for 2007 and 2009, respectively. The Amended Incentive Regulation Plan provides pricing flexibility for all new services, and no
price increases are permitted for existing services such as basic exchange service, message toll service and most vertical services. The final order also continues a service quality plan with a
$10.5 million penalty cap. Other provisions of the order include lifeline credits for qualified customers that subscribe to bundled services and a requirement to separately publish and
distribute white and Yellow Pages directories. The VT 2008 Order was conditioned on our being subject to the terms and conditions of the Amended Incentive Regulation Plan. As a part of our settlement
with the Vermont DPS, and as ordered by the Vermont Board as a condition of approval of the Merger, we have agreed to exceed the existing Amended Incentive Regulation Plan's broadband build-out
milestones and have agreed to a condition that requires us to reach 100% broadband availability in 50% of our exchanges in Vermont by December 31, 2010. This requirement has been adopted by the
Vermont Board as a condition of approval and is in addition to the broadband expansion requirements contained in the existing Amended Incentive Regulation Plan. We have also agreed in our settlement
with the Vermont DPS to implement a performance enhancement plan, which was adopted by the Vermont Board as a condition of approval (in addition to the retail service quality plan required under the
Amended Incentive Regulation Plan). As noted above, some of these matters are subject to modifications as part of the Vermont Regulatory Settlement, for which we are seeking approval from the Vermont
Board.

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We may be required to obtain from municipal authorities permits for street opening and construction or operating franchises to install
and expand facilities in certain communities. If we enter into the video markets, municipal franchises may be required for us to operate as a cable television provider. Some of these franchises may
require the payment of franchise fees. We have historically obtained municipal franchises as required. In some areas, we will not need to obtain permits or franchises because the subcontractors or
electric utilities with which we will have contracts already possess the requisite authorizations to construct or expand our networks. In association with the American Recovery and Reinvestment Act of
2009, there may be an increase in
our requirements associated with road move requests pursuant to new funding for roads. It is not certain whether funding will be available to us for this potential obligation.



Like all other local telephone companies, our 33 LEC subsidiaries are subject to federal, state and local laws and regulations
governing the use, storage, disposal of and exposure to hazardous materials, the release of pollutants into the environment and the remediation of contamination. As an owner of property, we could be
subject to environmental laws that impose liability for the entire cost of cleanup at contaminated sites, regardless of fault or the lawfulness of the activity that resulted in contamination. We
believe, however, that our operations are in substantial compliance with applicable environmental laws and regulations.

Other Information

We make available on our website, www.fairpoint.com, our Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and all amendments to such reports as soon as reasonably practical after we file such material with, or furnish such
material to, the SEC. Our filings with the SEC are available to the public over the Internet at the SEC's website atwww.sec.gov, or at the SEC's public
reference room located at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the
public reference room.

ITEM 1A.    RISK FACTORS

Any of the following risks could materially adversely affect our business, consolidated financial condition, results of operations or
liquidity or the market price of our common stock. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to
be immaterial may also materially and adversely affect our business operations.



For the duration of the Chapter 11 Cases, our operations, including our ability to execute our business plan, will be subject to the risks and uncertainties
associated with bankruptcy, which could have a material adverse effect on our business, financial condition, results of operations and liquidity.

Risks and uncertainties associated with the Chapter 11 Cases include the following:



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These
risks and uncertainties could affect our business and operations in various ways. For example, negative events or publicity associated with the Chapter 11 Cases could
adversely affect our revenues and the relationship with our customers which in turn could have a material adverse effect on our business, financial condition, results of operations and liquidity,
particularly if the Chapter 11 Cases are unexpectedly protracted. In addition, for the duration of the Chapter 11 Cases, transactions outside the ordinary course of business are subject
to the prior approval of the Bankruptcy Court, which may limit our ability to respond timely to certain events or take advantage of certain business opportunities.

Furthermore,
as a result of the Chapter 11 Cases, realization of assets and liquidation of liabilities are subject to uncertainty. While operating as a
debtor-in-possession under the protection of the Bankruptcy Code, we may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those
reflected in our financial statements, subject to Bankruptcy Court approval or otherwise as permitted in the normal course of business. Further, a Chapter 11 plan of reorganization could
materially change the amounts and classifications reported in our consolidated historical financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts
of liabilities that might be necessary as a consequence of confirmation of a Chapter 11 plan of reorganization and the discharge of such liabilities.

Because
of the risks and uncertainties associated with the Chapter 11 Cases, the ultimate impact of events that occur during these proceedings on our business, financial
condition, results of operations and liquidity cannot be accurately predicted or quantified. Additionally, the Plan will result in cancellation of our common stock, which is expected to cause an
investment in the Company to become worthless.

In
light of the foregoing, trading in our securities during the Chapter 11 Cases is highly speculative and poses substantial risks. Holders of our securities may have their
securities cancelled and in return receive no payment or other consideration, or a payment or other consideration that is less than the par value or the purchase price of such securities.

Operating under Bankruptcy Court protection for a long period of time may harm our business.

A long period of operations under Bankruptcy Court protection could have a material adverse effect on our business, financial
condition, results of operations and liquidity. So long as the Chapter 11 Cases continue, our senior management will be required to spend a
significant amount of time and effort dealing with the reorganization instead of focusing exclusively on our business operations. A prolonged period of operating under Bankruptcy Court protection may
also make it more difficult to retain management and other key personnel necessary to the success and growth of our business. In addition, the longer the Chapter 11 Cases continue, the more
likely it is that our customers and suppliers will lose confidence in our ability to successfully reorganize our businesses and seek to establish alternative commercial relationships.

Furthermore,
so long as the Chapter 11 Cases continue, we will be required to incur substantial costs for professional fees and other expenses associated with the administration
of the Chapter 11 Cases. A prolonged continuation of the Chapter 11 Cases may also require us to seek additional financing. If we require additional financing during the
Chapter 11 Cases and we are unable to obtain the financing on favorable terms or at all, our chances of successfully reorganizing our business may be seriously jeopardized, and, as a result,
any securities in the Company could become further devalued or become worthless.

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We may not be able to obtain confirmation of the Plan.

Even though the requisite majorities of impaired creditors have voted to accept the Plan, it is possible that the Bankruptcy Court will
not confirm the Plan or that other conditions, including, without limitation, approval by certain regulatory authorities, will not be met. Furthermore, the Plan contemplates numerous operating
assumptions, including, without limitation, certain concessions by state public utility commissions, which may not be obtained.

Pursuant
to the Plan Support Agreement, we committed to the achievement of certain milestones, including obtaining an order by the Bankruptcy Court confirming a Chapter 11 plan of
reorganization reflecting the proposed financial restructuring described in the Plan Term Sheet on or before 5:00 P.M. Eastern Time on July 8, 2010. Our failure to achieve these
milestones by the dates required under the Plan Support Agreement would (unless duly waived or extended) constitute a termination event under the Plan Support Agreement, pursuant to which the
Consenting Lenders agreed to support such a plan, that could allow the Consenting Lenders to terminate their obligations to support the Plan.

If
the Plan is not confirmed by the Bankruptcy Court and certain other conditions precedent to the Plan are not met and/or waived, it is unclear whether we would be able to reorganize
our business and what, if anything, holders of claims against us would ultimately receive with respect to their claims.

The Plan results in holders of our common stock receiving no distribution on account of their interests and cancellation of their common stock.

Under
the priority scheme established by the Bankruptcy Code, unless creditors agree otherwise, post-petition liabilities and
pre-petition liabilities must be satisfied in full before stockholders are entitled to receive any distribution or retain any property under a Chapter 11 plan of reorganization. The
ultimate recovery to creditors and/or stockholders, if any, will not be determined until confirmation of such a plan. No assurance can be given as to what values, if any, will be ascribed in the
Chapter 11 Cases to each of these constituencies or what types or amounts of distributions, if any, they would receive. The Plan results in holders of our common stock receiving no distribution
on account of their interests and in the cancellation and extinguishment of their existing stock. If certain requirements of the Bankruptcy Code are met, the Plan can be confirmed notwithstanding its
rejection by the class comprising the interests of our equity security holders. Therefore, an investment in our common stock is highly speculative and will become worthless (or be cancelled) in the
future without any required approval or consent of our stockholders.

Even if the Plan is consummated, we will continue to face risks.

Even if the Plan is consummated, we will continue to face a number of risks, including certain risks that are beyond our control, such
as further deterioration or other changes in economic conditions, changes in our industry, changes in consumer demand for, and acceptance of, our services and increasing expenses. Some of these
concerns and effects typically become more acute when a case under the Bankruptcy Code continues for a protracted period without indication of how or when the case may be completed. As a result of
these risks and others, there is no guarantee that the Plan will achieve our stated goals.

Furthermore,
even if our debts are reduced or discharged through the Plan, we may need to raise additional funds through public or private debt or equity financing or other various means
to fund our business after the completion of the Chapter 11 Cases. Irrespective of the Exit Facility, adequate funds may not be available when needed or may not be available on favorable terms.

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The DIP Credit Agreement contains restrictions that could significantly restrict our ability to operate our business.

The DIP Credit Agreement contains a number of covenants which, among other things, limit the incurrence of additional debt, capital
expenditures, capitalized leases, issuance of capital stock, issuance of guarantees, liens, investments, disposition of assets, dividends, certain payments, mergers, change of business, transactions
with affiliates, prepayments of debt, repurchases of stock and redemptions of certain other indebtedness and other matters customarily restricted in such agreements. Our ability to comply with the
covenants, agreements and restrictions contained in the DIP Credit Agreement may be affected by events beyond our control, including prevailing economic, financial and industry conditions. There can
be no assurance that we will be able to comply with such covenants, agreements or restrictions in the future. Additionally, breach of any of the covenants imposed on us by the terms of the DIP Credit
Agreement could result in a default under the DIP Credit Agreement. In the event of a default, the DIP Lenders could terminate their commitments to us and could accelerate the repayment of all of our
indebtedness under the DIP Credit Agreement, if any. In such case, we may not have sufficient funds to pay the total amount of accelerated obligations, if any, and our DIP Lenders under the DIP Credit
Agreement could proceed against the collateral securing the DIP Credit Agreement. Any acceleration in the repayment of our outstanding indebtedness, if any, or related foreclosure could adversely
affect our business.

Because our financial statements will reflect adjustments based on our application of the Reorganizations Topic of the ASC ("Fresh Start Accounting"), information reflecting
our results of operations and financial condition will not be comparable to prior periods and may vary significantly from the Fresh Start Accounting adjustments.

Upon our emergence from bankruptcy, we will apply fresh start accounting. As a result, the book value of our long-lived
assets and the related depreciation and amortization schedules, among other things, will change. Following our emergence from bankruptcy, you will not be able to compare certain information reflecting
our results of operations and financial condition to those for historical periods prior to emergence from bankruptcy.

Under
Fresh Start Accounting, our calculated enterprise value will be allocated to our assets based on their respective fair values. Any portion not attributed to specific tangible or
identified intangible assets will be an indefinite-lived intangible asset referred to as "reorganization value in excess of value" and reported as goodwill.



Our stock is no longer listed on a national securities exchange. It will likely be more difficult for stockholders and investors to sell our common stock or to obtain
accurate quotations of the share price of our common stock.

Effective October 26, 2009, the NYSE suspended trading in our common stock and, effective November 16, 2009, the NYSE
completed its application to the SEC to delist our common stock. Our common stock is now traded on the Pink Sheets under the symbol "FRCMQ." We can provide no assurance that our common stock will
continue to be traded on the Pink Sheets. The trading of our common stock on the Pink Sheets may negatively impact the trading price of our common stock and the levels of liquidity available to our
stockholders.

We have substantial indebtedness which could have a negative impact on our financing options and liquidity position.

We had approximately $2,515.4 million of total debt outstanding as of December 31, 2009. In addition, as of
December 31, 2009, we had $18.4 million, net of outstanding letters of credit, available

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for
additional borrowing under our DIP Credit Agreement. On March 11, 2010, the Bankruptcy Court entered a final order in connection with the DIP Credit Agreement, permitting the DIP Borrowers
access to the total $75.0 million of the DIP Financing, subject to the terms and conditions of the DIP Credit Agreement and related orders of the Bankruptcy Court. As of December 31,
2009, the Company had not borrowed any amounts under the DIP Credit Agreement and letters of credit totaling $1.6 million had been issued under the DIP Credit Agreement.

Our
overall leverage and the terms of our financing arrangements could:



Our
ability to continue to fund our debt requirements and to reduce debt may be affected by general economic, financial market, competitive, legislative and regulatory factors, among
other things. An inability to fund our debt requirements, reduce debt or satisfy debt covenant requirements could have a material adverse effect on our business, financial condition, results of
operations and liquidity.

In
addition, a substantial portion of our indebtedness bears interest at variable rates. If market interest rates increase, variable-rate debt will create higher debt service
requirements, which could adversely affect our cash flow. While we may enter into agreements limiting our exposure to higher interest rates, these agreements may not offer complete protection from
this risk.

We are a holding company and rely on dividends, interest and other payments, advances and transfers of funds from our operating subsidiaries and investments, to meet our
debt service and other obligations, and to pay dividends, if any, on our common stock.

We are a holding company and conduct no operations. Accordingly, our cash flow and our ability to make payments on, or repay or
refinance, our indebtedness, and to fund planned capital expenditures, dividends and other cash needs will depend largely upon the cash flows of our operating subsidiaries and the payment of funds by
those subsidiaries to us in the form of repayment of loans, dividends, management fees or otherwise. Distributions to us from our subsidiaries will depend on their respective operating results and
will be subject to restrictions under, among other things,



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Our subsidiaries have no obligation, contingent or otherwise, to pay amounts pursuant to the Notes or to make funds available therefore, whether in the form of
loans, dividends or other distributions.

To operate and expand our business, service our indebtedness and meet our other cash needs, we will require a significant amount of cash, which may not be available to us.
We may not generate sufficient funds from operations to repay or refinance our indebtedness at maturity or otherwise, to fund our operations or to pay dividends, if any, on our common stock in the
future.

Our ability to make payments on, or repay or refinance, our indebtedness, and to fund planned capital expenditures, unanticipated
capital expenditures, dividends, if any, on our common stock in the future and other cash needs will depend largely upon our future operating performance, including our ability to execute on our
business plan. Our future operating performance, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. In
addition, our ability to borrow funds in the future to make payments on our indebtedness will depend on the satisfaction of the covenants in the agreements governing our indebtedness. Specifically, we
will need to maintain specified financial ratios and satisfy financial condition tests. In addition, the limitations imposed by any financing arrangements on our ability to incur additional debt and
to take other actions might significantly impair our ability to obtain other financing.

In
addition, we cannot assure you that we would be able to refinance any of our indebtedness on commercially reasonable terms, or at all. If we are unable to make payments or refinance
our debt or obtain new financing under these circumstances, we would have to consider other options, including:



The
agreements governing our indebtedness may restrict, or market or business conditions may limit, our ability to take some of these actions or the effectiveness of these actions. In
addition, the orders of the state regulatory authorities approving the spin-off and the Merger and certain tax related agreements limit our ability to engage in certain of these actions
following the completion of the spin-off.

Our financing arrangements subject us to various restrictions that could limit our operating flexibility, our ability to make payment on our debt and to fund dividends on
our common stock.

Our financing arrangements contain restrictions, covenants and events of default that, among other things, require us to satisfy
certain financial tests and maintain certain financial ratios and restrict our ability to incur additional indebtedness and to refinance our existing indebtedness. The terms of these financing
arrangements impose, and any future indebtedness may impose, various restrictions and covenants on us that could limit our ability to respond to market conditions, provide for capital investment
needs, pay dividends in the future or take advantage of business opportunities by limiting the amount of additional borrowings we may incur. These restrictions may include compliance with, or
maintenance of, certain financial tests and ratios and may limit or prohibit our ability to, among other things:



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These
restrictions on our ability to operate our business could seriously harm our business by, among other things, limiting our ability to take advantage of financing, merger and
acquisition and other corporate opportunities.

Various
risks, uncertainties and events beyond our control could affect our ability to comply with these covenants and maintain these financial tests and ratios. Failure to comply with
any of the covenants in our existing or future financing arrangements could result in a default under those arrangements and under other arrangements containing cross-default provisions. In addition,
the limitations imposed by any financing arrangements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain other financing.

Limitations on our ability to use NOL carryforwards, and other factors requiring us to pay cash to satisfy our tax liabilities in future periods, may affect our ability to
repay our indebtedness and pay dividends to our stockholders in the future.

Our initial public offering in February 2005 resulted in an "ownership change" within the meaning of the U.S. federal income tax laws
addressing NOL carryforwards, alternative minimum tax credits and other similar tax attributes. Moreover, the Merger with Spinco resulted in a further ownership change for these purposes. As a result
of these ownership changes, there are specific limitations on our ability to use these NOL carryforwards and other tax attributes from periods prior to the initial public offering and the Merger.
Although we do not expect that these limitations will materially affect our U.S. federal and state income tax liability in the near term, it is possible in the future if we were to generate taxable
income in excess of the limitation on usage of NOL carryforwards that these limitations could limit our ability to utilize the carryforwards and, therefore, result in an increase in our U.S. federal
and state income tax payments. In addition, in the future we will be required to pay cash to satisfy our tax liabilities when all of our NOL carryforwards have been used or have expired. Limitations
on our usage of NOL carryforwards, and other factors requiring us to pay cash taxes in the future, would reduce the funds available to service our debt and pay dividends in the future.

The price of our common stock has fluctuated and may continue to fluctuate substantially, which could negatively affect holders of our common stock.

The market price of our common stock may fluctuate widely as a result of various factors, such as the Chapter 11 Cases,
period-to-period fluctuations in our operating results, the volume of sales of our common stock, our dividend policy, dilution, developments in the communications industry, the
failure of securities analysts to cover our common stock or changes in financial estimates by analysts, competitive factors, regulatory developments, economic and other external factors, general
market conditions and market conditions affecting the stock of communications companies in particular. Communications companies have in the past experienced extreme volatility in the trading prices
and volumes of their securities, which has often been unrelated to operating performance. High levels of market volatility may have a significant adverse effect on the market price of our common
stock. In addition, in the past, securities class action litigation has often been instituted against companies

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following
periods of volatility in their stock prices. This type of litigation could result in substantial costs and divert management's attention and resources.

Future sales or the possibility of future sales of a substantial amount of our common stock may depress the price of our common stock.

Future sales, or the availability for sale in the public market, of substantial amounts of our common stock could adversely affect the
prevailing market price of our common stock, and could impair our ability to raise capital through future sales of equity securities. The market price of our common stock could decline as a result of
sales of a large number of shares of our common stock in the market or the perception that these sales could occur. These sales, or the possibility that these sales may occur, may also make it more
difficult for us to obtain additional capital by selling equity securities in the future at a time and at a price that we deem appropriate.

We
may issue shares of our common stock, or other securities, from time to time as consideration for future acquisitions and investments. In the event any such acquisition or investment
is significant, the number of shares of our common stock, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be significant. We may also
grant registration rights covering those shares or other securities in connection with any such acquisitions and investments.

Our stockholders may not receive the same level of dividends as historically paid by us or any dividends at all.

On March 4, 2009, our board of directors voted to suspend our quarterly dividend. We currently do not expect to reinstate the
payment of such dividends. Future dividends with respect to shares of our common stock, if any, will depend on, among other things, our cash flows, cash requirements, financial condition, contractual
restrictions, provisions of applicable law and other factors that our board of directors may deem relevant. In addition, our ability to make dividend payments in the future is expected to be limited
by the orders of the state regulatory authorities approving the Merger as modified in connection with the Plan and the agreements governing our indebtedness.



Since the Cutover, we have experienced certain systems functionality issues that have had, and may continue to have, a material impact on our business, financial condition,
results of operations and liquidity.

On January 30, 2009, we began the Cutover from Verizon's systems to our new, fully integrated systems platform. On
February 9, 2009, we began to independently operate our business on the new systems. Following the Cutover, a number of the key back-office systems, such as order entry, order
management and billing, have experienced certain functionality issues as well as issues with communication between the systems. Although we have made measurable progress in remedying these
functionality issues, a number of issues still remain. In particular, our efforts to collect unpaid bills are hampered by a lack of systems functionality, and we have incurred significant incremental
third party contractor expenses as a result of these functionality issues, both of which have had a material impact on our business, financial condition, results of operations and liquidity. At this
time, we expect that the delay in cash collections and the incurrence of incremental costs will continue during 2010. In addition, these functionality related issues may continue to have a material
impact on our business, financial condition, results of operations and liquidity beyond 2010, and additional issues related to the Cutover, including the accounting error and the billing and other
adjustments that necessitated the Restatement, have arisen and may continue to arise, which could have a further negative impact our business, financial condition, results of operations and liquidity.

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We provide services to customers over access lines, and if we lose access lines, our business, financial condition, results of operations and liquidity may be adversely
affected.

We generate revenue primarily by delivering voice and data services over access lines. Legacy FairPoint and our Northern New England
operations have both experienced net voice access line losses in the past few years. Legacy FairPoint experienced a 27.0% decline in the number of voice access lines (adjusted for acquisitions and
divestitures) for the period from January 1, 2005 through December 31, 2009 and an 8.1% decline for the period from January 1, 2009 through December 31, 2009. Our Northern
New England operations experienced a 37.0% decline in number of voice access lines for the period from January 1, 2005 through December 31, 2009 and a 12.2% decline for the period from
January 1, 2009 through December 31, 2009. These losses resulted mainly from competition, including competition from bundled offerings by cable companies, the use of alternate
technologies as well as challenging economic conditions and the offering of DSL services, which prompts some customers to cancel second line service. We believe that the long period between the
announcement of the Merger in January 2007 and the closing of the Merger also may have contributed to our Northern New England operations' voice access line losses. Additionally, the Chapter 11
Cases may have an adverse effect on our ability to retain customers.

We
expect to continue to experience net access line losses. Our inability to retain access lines could adversely affect our business, financial condition, results of operations and
liquidity.

We provide access services to other communications companies, and if these companies were to become insolvent or experience substantial financial difficulties, our business,
financial condition, results of operations and liquidity may be adversely affected.

We originate and terminate calls on behalf of long distance carriers and other interexchange carriers over our network in exchange for
access charges. Interstate and intrastate access charges represented approximately 33.9% of our total revenues in 2009. Should one or more of the carriers that we do business with become insolvent or
experience substantial financial difficulties, our inability to timely collect access charges from them could have a material adverse impact on our business, financial condition, results of operations
and liquidity.

We are subject to competition that may adversely impact our business, financial condition, results of operations and liquidity.

We face intense competition from a variety of sources for our local calling, long distance and Internet services in a majority of the
areas we now serve. Regulations and technology change quickly in the communications industry, and changes in these factors historically
have had, and may in the future have, a significant impact on competitive dynamics. In most of our services areas, we face competition from wireless carriers for both local calling and long distance
services. As technology and economies of scale improve, competition from wireless carriers is expected to increase. We also face increasing competition from wireline and cable television companies for
our local calling, long distance and Internet services. For example, we estimate that as of December 31, 2009, a majority of the customers that we serve had access to local calling, long
distance and Internet services through a cable television company. Wireline and cable television companies have the ability to bundle their services, which has and is expected to continue to intensify
the competition we face from these providers. VoIP providers, Internet service providers, satellite companies and electric utilities also compete with our services, and such competition is expected to
continue to increase in the future. In addition, many of our competitors have access to a larger workforce and have substantially greater name-brand recognition and financial,
technological and other resources than we do.

In
addition, consolidation and strategic alliances within the communications industry or the development of new technologies have had and may continue to have an effect on our
competitive

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position.
We cannot predict the number of competitors that will emerge, particularly in light of possible regulatory or legislative actions that could facilitate or impede market entry, but increased
competition from existing and new entities could have a material adverse effect on our business, financial condition, results of operations and liquidity.

Competition
may lead to loss of revenues and profitability as a result of numerous factors, including:



We may not be able to successfully integrate new technologies, respond effectively to customer requirements or provide new services.

Rapid and significant changes in technology and new service introductions occur frequently in the communications industry and industry
standards evolve continually. We cannot predict the effect of these changes on our competitive position, profitability or industry. Technological developments may reduce the competitiveness of our
networks and require unbudgeted upgrades or the procurement of additional products that could be expensive and time consuming. In addition, new products and services arising out of technological
developments may reduce the attractiveness of our services. If we fail to adapt successfully to technological changes or obsolescence or fail to obtain access to important new technologies, we could
lose customers and be limited in our ability to attract new customers and sell new services to our existing customers. Our ability to respond to new technological developments may be diminished or
delayed while our management devotes significant effort and resources to integrating Legacy FairPoint's business and our Northern New England operations.

The geographic concentration of our operations in Maine, New Hampshire and Vermont make our business susceptible to local economic and regulatory conditions and consumer
trends, and an economic downturn, recession or unfavorable regulatory action in any of those states may adversely affect our business, financial condition, results of operations and liquidity.

As of December 31, 2009, approximately 86% of our access line equivalents were located in Maine, New Hampshire and Vermont. As a
result of this geographic concentration, our financial results will depend significantly upon economic conditions and consumer trends in these markets. From January 1, 2009 through
December 31, 2009, our Northern New England operations experienced a 12.2% decline in total voice access lines in service, compared to a decline of 8.1% for Legacy FairPoint during the same
period. A deterioration in economic conditions in any of these markets could result in a further decrease in demand for our services and resulting loss of access line equivalents which could have a
material adverse effect on our business, financial condition, results of operations and liquidity.

In
addition, if state regulators in Maine, New Hampshire or Vermont were to take an action that is adverse to our operations in those states, we could suffer greater harm from that
action by state regulators than we would from action in other states because of the concentration of our operations in those states.

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We outsource a portion of our billing function. If our service provider inadequately performs or experiences a significant degradation or failure with respect to the
services it provides or the applicable agreement is terminated, it could have a significant impact on the operation of our business.

We have an agreement with an outside service provider to perform a portion of our billing functions. If our service provider is unable
to adequately perform such services or if it experiences a significant degradation or failure with respect to such services, it could result in disruptions in our billing, which could harm our
business, financial condition, results of operations and liquidity. Furthermore, if the agreement with our service provider is terminated for any reason, we may be unable to find an alternative
service provider in a timely manner or on terms acceptable to us, and may be unable to perform the services provided ourselves resulting in billing disruptions and/or increased costs to us.

A network disruption could cause delays or interruptions of service, which could cause us to lose customers.

To be successful, we will need to continue to provide our customers reliable service over our expanded network. Some of the risks to
our network and infrastructure include:



Disruptions
may cause interruptions in service or reduced capacity for customers, either of which could cause us to lose customers and incur expenses.

We depend on third parties for our provision of long distance and bandwidth services.

Our provision of long distance and bandwidth services are dependent on underlying agreements with other carriers that provide us with
transport and termination services. These agreements are based, in part, on our estimate of future supply and demand and may contain minimum volume commitments. If we overestimate demand, we may be
forced to pay for services we do not need. If we underestimate demand, we may need to acquire additional capacity on a short-term basis at unfavorable prices, assuming additional capacity
is available. If additional capacity is not available, we will not be able to meet this demand. In addition, if we cannot meet any minimum volume commitments, we may be subject to underutilization
charges, termination charges, or rate increases that may adversely affect our business, financial condition, results of operations and liquidity.

Our success will depend on our ability to attract and retain qualified management and other personnel.

Our success depends upon the talents and efforts of our senior management team. None of our senior executives, with the exception of
David L. Hauser, our Chairman and Chief Executive Officer, are employed pursuant to an employment agreement. Mr. Hauser's current employment agreement expires on June 30, 2012. The loss
of any member of our senior management team, due to retirement or otherwise, and the inability to attract and retain highly qualified technical and management personnel in the future, could have a
material adverse effect on our business, financial condition, results of operations and liquidity.

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We will be exposed to risks relating to evaluations of internal control systems required by Section 404 of the Sarbanes-Oxley Act.

As a public reporting company, we are required to comply with the Sarbanes-Oxley Act and the related rules and regulations of the SEC,
including accelerated reporting requirements and expanded disclosures regarding evaluations of internal control systems. With respect to internal control over financial reporting, standards
established by the Public Company Accounting Oversight Board define a material weakness as a deficiency in internal controls over financial reporting that results in a reasonable possibility that a
material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis. If our management identifies one or more material weaknesses in
internal control over financial reporting in the future in accordance with the annual assessments and quarterly evaluations required by the Sarbanes-Oxley Act, we will be unable to assert that our
internal controls are effective which could result in sanctions or investigation by regulatory authorities. In addition, any such material weakness could result in material misstatements in our
financial statements and cause investors to lose confidence in our reported financial information.

We
note that we have identified material weaknesses in our internal controls over financial reporting which existed as of December 31, 2009, which material weaknesses are
discussed in greater detail in "Part IIItem 9A.Controls and Procedures" and "We have identified material weaknesses in our internal controls over financial
reporting which existed as of December 31, 2009. If the steps we have taken to remedy these material weaknesses are not successful or we otherwise fail to maintain an effective system of
internal controls, such a failure could result in additional material misstatements in our financial statements, prevent us from providing timely financial statements or meeting our reporting
requirements both with the SEC and under our debt obligations, cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our common
stock."

We have identified material weaknesses in our internal controls over financial reporting which existed as of December 31, 2009. If the steps we have taken to remedy
these material weaknesses are not successful or we otherwise fail to maintain an effective system of internal controls, such a failure could result in additional material misstatements in our
financial statements, prevent us from providing timely financial statements or meeting our reporting requirements both with the SEC and under our debt obligations, cause investors to lose confidence
in our reported financial information and have a negative effect on the trading price of our common stock.

As discussed in "Part IIItem 9A.Controls and Procedures," in connection with the Restatement, we concluded
that the following material weaknesses in our internal controls over financial reporting existed as of December 31, 2009:



As
a result of these material weaknesses, our management concluded that our disclosure controls were not effective as of December 31, 2009. Effective in February 2010, our
management has taken steps to remediate these issues. If the steps we have taken to remedy these material weaknesses are not successful or we otherwise fail to maintain an effective system of internal
controls, such a failure could

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result
in additional material misstatements in our financial statements, prevent us from providing timely financial statements or meeting our reporting requirements both with the SEC and under our
debt obligations, cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our common stock.

Our financial condition and results of operations could be adversely affected if assets held in our Company sponsored pension plans suffer significant losses in market
value.

We sponsor pension and post-retirement healthcare plans for certain employees. During the year ended December 31,
2009, we experienced actual gains on pension plan assets totaling 17.3%. Since the actuarial value of plan assets is dependent on the value of the assets held by each plan, a significant decline in
the market value of such assets could have a detrimental impact on our pension plans and could result in us making additional contributions to these plans, as required under the Employee Retirement
Income Security Act of 1974, as amended. Furthermore, if the third party trustee who holds these plan assets were to become insolvent, access to the plan assets could be limited, and we could be
required to pay participant benefits from our assets. Such required contributions could have a negative impact on our financial condition and results of operations.



We are subject to significant regulations that could change in a manner adverse to us.

We operate in a heavily regulated industry. Laws and regulations applicable to us and our competitors may be, and have been, challenged
in the courts, and could be changed by Congress or regulators. In addition, the following factors could have a significant impact on us:

Risk of loss or reduction of network access charge revenues.A portion of our revenues comes from network access charges, which are
paid to us by
intrastate and interstate interexchange carriers for originating and terminating communications in the regions served. This also includes Universal Service Support payments for local switching
support, long-term support, and ICLS. In recent years, several of these long-distance carriers have declared bankruptcy. Future declarations of bankruptcy by a carrier that
utilizes our access services could negatively affect our business, financial condition, results of operations and liquidity.

The
amount of access charge revenues that we receive is based on rates set by federal and state regulatory bodies, and those rates could change in the future. Further, from time to time
federal and state regulatory bodies conduct rate cases, "earnings" reviews, or make adjustments to price cap formulas that may result in rate changes. In addition, reforms of the federal and state
access charge systems, combined with the development of competition, have caused the aggregate amount of access charges paid by long-distance carriers to decrease. Additional reforms have
been proposed. If any of the currently proposed reforms were adopted by the FCC it would likely involve significant changes in the access charge system and, if not offset by a revenue replacement
mechanism, could potentially result in a significant decrease in or elimination of access charges. Decreases in or loss of access charges may or may not result in offsetting increases in local,
subscriber line or Universal Service Support revenues. Regulatory developments of this type could adversely affect our business, financial condition, results of operations and liquidity.

Risk of loss or reduction of Universal Service Fund support.We receive federal Universal Service Support, referred to as the Universal
Service Fund,
and in some cases, state universal support, to support our operations in high-cost areas. These federal revenues include Universal Service Support payments for local switching support,
ICLS, or IAS. High-cost support for the operations conducted by our Northern New England operations, referred to as our non-rural operations or non-rural LECs, and
for FairPoint's traditional, rural local exchange operations, referred to as our rural operations or rural LECs, is determined pursuant to different methodologies, aspects of which are now under
review. The

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FCC
has proposed changes to the Universal Service Fund. Any changes to the existing rules could reduce the Universal Service Fund revenues we receive. If we were unable to receive such support, or if
that support was reduced, our Northern New England operations would be unable to operate as profitably as they have historically. Moreover, if we raise prices for services to offset these losses of
Universal Service Fund payments, the increased pricing of our services may disadvantage us competitively in the marketplace, resulting in additional potential revenue loss.

Further,
the total payments from the Universal Service Fund to our rural operations will fluctuate based upon our rural company average cost per loop compared to the national average
cost per loop and are likely to decline based on historical trends. We receive IAS in all of our price cap study areas (Maine, New Hampshire and Vermont) and ICLS in our
rate-of-return study areas. The FCC also is considering changes to its rules governing who contributes to the Universal Service Support mechanisms, and on what basis. Any
changes in the FCC's rules governing the distribution of such support or the manner in which entities contribute to Universal Service could have a material adverse effect on our business, financial
condition, results of operations and liquidity.

Risk of loss of statutory exemption from burdensome interconnection rules imposed on ILECs.Our rural LECs generally are exempt from
the more
burdensome requirements of the 1996 Act governing the
rights of competitors to interconnect to ILEC networks and to utilize discrete network elements of the incumbent's network at favorable rates. To the extent state regulators decide that it is in the
public interest to extend some or all of these requirements to our rural LECs, we would be required to provide UNEs to competitors in our rural telephone company areas. As a result, more competitors
could enter our traditional telephone markets than are currently expected, which could have a material adverse effect on our business, financial condition, results of operations and liquidity.

Risks posed by costs of regulatory compliance.Regulations create significant compliance costs for us. Subsidiaries that provide
intrastate services
are generally subject to certification, tariff filing, and other ongoing regulatory requirements by state regulators. Our interstate and intrastate access services are currently provided in accordance
with tariffs filed with the FCC and state regulatory authorities, respectively. Challenges in the future to our tariffs by regulators or third parties or delays in obtaining certifications and
regulatory approvals could cause us to incur substantial legal and administrative expenses, and, if successful, these challenges could adversely affect the rates that we are able to charge our
customers.

In
addition, our non-rural operations are subject to regulations not applicable to our rural operations, including but not limited to requirements relating to
interconnection, the provision of UNEs, and the other market-opening obligations set forth in the 1996 Act. In approving the transfer of authorizations to us, the FCC determined that our
non-rural operations would be regulated as a Bell Operating Company following the completion of the Merger, subject to the same regulatory requirements that currently apply to the other
Bell Operating Companies. The FCC also stated that we would be entitled to the same regulatory relief that Verizon New England has obtained in the region. Any changes made in connection with these
obligations could increase our non-rural operations' costs or otherwise have a material adverse effect on our business, financial condition, results of operations and liquidity. Moreover,
we cannot predict the precise manner in which the FCC will apply the Bell Operating Company regulatory framework to us.

State
regulators have also imposed conditions on their approval of the transactions that could adversely affect our business, financial condition, results of operations and liquidity.

Our
business also may be affected by legislation and regulation imposing new or greater obligations related to open Internet access, assisting law enforcement, bolstering homeland
security, minimizing environmental impacts, protecting customer privacy, or addressing other issues that affect our business. We cannot predict whether or to what extent the FCC might modify its rules
or what compliance with those new rules might cost. Similarly, we cannot predict whether or to what extent

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federal
or state legislators or regulators might impose new network access, security, environmental, or other obligations on our business.

Risk of losses from rate reduction.Our local exchange companies that operate pursuant to intrastate rate of return regulation are
subject to state
regulatory authority over their intrastate telecommunications service rates. State review of these rates could lead to rate reductions, which in turn could have a material adverse effect on our
business, financial condition, results of operations and liquidity.

For
a more thorough discussion of the regulatory issues that may affect our business, see "Item 1. BusinessRegulatory Environment."

ITEM 1B.    UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.    PROPERTIES

We own or lease all of the properties material to our business. Our headquarters is located in Charlotte, North Carolina, in a leased
facility. We also have administrative offices, maintenance facilities, rolling stock, central office and remote switching platforms and transport and distribution network facilities in each of the 18
states in which we operate our LEC business. Our administrative and maintenance facilities are generally located in or near the communities served by our LECs and our central offices are often within
the administrative building. Auxiliary battery or other non-utility power sources are at each central office to provide uninterrupted service in the event of an electrical power failure.
Transport and distribution network facilities include fiber optic backbone and copper wire distribution facilities, which connect customers to remote switch locations or to the central office and to
points of presence or interconnection with the long distance carriers. These facilities are located on land pursuant to permits, easements or other agreements. Our rolling stock includes service
vehicles, construction equipment and other required maintenance equipment.

We
believe each of our respective properties is suitable and adequate for the business conducted therein, is being appropriately used consistent with past practice and has sufficient
capacity for the present intended purposes.

ITEM 3.    LEGAL PROCEEDINGS

From time to time, we are involved in litigation and regulatory proceedings arising out of our operations. With the exception of the
Chapter 11 Cases, management believes that we are not currently a party to any legal or regulatory proceedings, the adverse outcome of which, individually or in the aggregate, would have a
material adverse effect on our financial position or results of operations. To the extent we are currently involved in any litigation, such proceedings have been generally stayed as a result of the
filing of the Chapter 11 Cases. For a discussion of the Chapter 11 Cases, see "Item. 1BusinessChapter 11 Cases."

We
are subject to certain service quality requirements in the states of Maine, New Hampshire and Vermont. Failure to meet these requirements in any of these states may result in
penalties being assessed by the appropriate state regulatory body. As of December 31, 2009, we have recognized an estimated liability of $27.5 million for service quality penalties based
on metrics defined by PUCs in Maine, New Hampshire and Vermont. However, at this time, it is unclear what effect the filing of the Chapter 11 Cases will have on the requirements, including
service quality penalties, imposed by the PUCs in Maine, New Hampshire and Vermont as a condition to the approval of the Merger and whether such requirements will be enforceable against us in the
future.

ITEM 4.    (REMOVED AND RESERVED)

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

General

Our common stock began trading on the NYSE under the symbol "FRP" on February 4, 2005. Prior to that time, there was no trading
market for our common stock. As a result of the filing of the Chapter 11 Cases, on October 26, 2009, the NYSE notified us that it had determined that the listing of our common stock
should be suspended immediately.

The
last day that our common stock traded on the NYSE was October 23, 2009. On November 16, 2009, the NYSE completed its application to the SEC to delist our common stock.

Our
common stock is currently trading under the symbol "FRCMQ" on the Pink Sheets.

The
following table shows the high and low closing sales prices per share of our common stock as reported on the NYSE from January 1, 2009 to October 23, 2009 and
January 1, 2008 to December 31, 2008, and on the Pink Sheets from October 24, 2009 to December 31, 2009. The stock price information is based on published financial
sources. Pink Sheets quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily reflect actual transactions:

Year Ended December 31, 2009

High

LowFirst quarter

$
3.07

$
0.36Second quarter


1.82


0.52Third quarter


0.92


0.41Fourth quarter


0.44


0.03




Year Ended December 31, 2008

High

LowFirst quarter

$
13.45

$
9.00Second quarter


9.78


7.05Third quarter


8.98


6.01Fourth quarter


8.55


1.87


The
following table shows the dividends which have been declared and/or paid on our common stock during 2008:

Year Ended
December 31, 2008

Per Share
Dividend
Declared

Date Declared

Record Date

Date PaidFirst quarter

$
0.39781

March 5, 2008

March 30, 2008

April 16, 2008Second quarter


0.25750

June 18, 2008

July 2, 2008

July 18, 2008Third quarter


0.25750

September 4, 2008

September 30, 2008

October 17, 2008Fourth quarter


0.25750

December 5, 2008

December 31, 2008

January 16, 2009


On
March 4, 2009, our board of directors voted to suspend our quarterly dividend. Accordingly, no dividends were declared on our common stock in 2009. We currently do not expect
to reinstate the payment of dividends.

As
of April 30, 2010, there were approximately 467,317 holders of record of our common stock.

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Performance Graph

Set forth below is a line graph comparing the yearly percentage change in the cumulative total stockholder return on shares of our
common stock against (i) the cumulative total return of all companies listed on the S&P 500 and (ii) the cumulative total return of the S&P 500 Telcom sector. The period
compared commences on February 4, 2005 and ends on December 31, 2009. This graph assumes that $100 was invested on February 4, 2005 (the date of the initial public offering of our
common stock) in our common stock and in each of the market index and the sector index at the closing price for the Company and the other companies, and that all cash distributions were reinvested.
Our common stock price performance shown on the graph is not necessarily indicative of future price performance.

Comparison of Cumulative Total Return Among FairPoint  Communications, Inc., S&P 500, and S&P 500 Telcom

GRAPHIC

Dividend Policy

Our board of directors had adopted a dividend policy which reflected our intent to return cash to stockholders. On March 4,
2009, our board of directors voted to suspend our quarterly dividend. We currently do not expect to reinstate the payment of such dividends. Future dividends with respect to shares of our common
stock, if any, will depend on, among other things, our cash flows, cash requirements, financial condition, contractual restrictions, provisions of applicable law and other factors that our board of
directors may deem relevant. In addition, our ability to make dividend payments in the future is expected to be limited by the orders of the state regulatory authorities approving the Merger as
modified in connection with the Plan and the agreements governing our indebtedness.

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Securities Authorized for Issuance under Equity Compensation Plans

The table below provides information, as of the end of the most recently completed fiscal year, concerning securities authorized for
issuance under our equity compensation plans.

Equity Compensation Plan Information

Plan Category

Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights(1)

Weighted average
exercise price of
outstanding options,
warrants and rights(1)

Number of securities
remaining available
for future issuance
under equity
compensation plans
excluding securities
reflected in column (a)(2)Equity compensation plans approved by our stockholders


433,441

$
15.20


8,955,363Equity compensation plans not approved by our stockholders


1,600,000

$
0.95


11,476,190Total


2,033,441

$
3.99


20,431,553


(1)Includes
47,373 options to purchase shares of our common stock under the FairPoint Communications, Inc. (formerly MJD Communications, Inc.)
1998 Stock Incentive Plan, 130,935 options to purchase shares of our common stock under the FairPoint Communications, Inc. 2000 Employee Stock Incentive Plan, 1,600,000 options to purchase
shares of our common stock under the FairPoint Communications, Inc. 2009 CEO Compensation Plan, 79,781 restricted units granted under the FairPoint Communications, Inc. 2005 Stock
Incentive Plan and 175,352 restricted units granted under the FairPoint Communications, Inc. 2008 Long Term Incentive Plan.(2)Includes
8,955,363 shares under the FairPoint Communications, Inc. 2008 Long Term Incentive Plan and 11,476,190 shares under the FairPoint
Communications, Inc. 2009 CEO Compensation Plan.


Repurchase of Equity Securities

We did not repurchase equity securities during the three months ended December 31, 2009.

Unregistered Sales of Equity Securities

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

We
did not receive any proceeds in connection with the issuance of the Inducement Options and the Inducement Restricted Stock to Mr. Hauser. The Inducement Options and the
Inducement Restricted Stock were issued pursuant to an exemption from registration provided under Section 4(2) of the Securities Act.

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ITEM 6.    SELECTED FINANCIAL DATA

On March 31, 2008, Legacy FairPoint completed the acquisition of Spinco, pursuant to which Spinco merged with and into Legacy
FairPoint, with Legacy FairPoint continuing as the surviving corporation for legal purposes. Spinco was a wholly-owned subsidiary of Verizon and prior to the Merger the Verizon Group transferred
certain specified assets and liabilities of the local exchange businesses of Verizon New England in Maine, New Hampshire and Vermont and the customers of the related long distance and Internet service
provider businesses in those states to subsidiaries of Spinco. The Merger was accounted for as a "reverse acquisition" of Legacy FairPoint by Spinco under the purchase method of accounting because
Verizon stockholders owned a majority of the shares of the consolidated Company following the Merger and, therefore, Spinco is treated as the acquirer for accounting purposes. The following financial
information reflects the transaction as if Spinco had issued consideration to Legacy FairPoint shareholders. As a result, for the year ended December 31, 2008, financial information derived
from the statement of operations reflects the consolidated financial results of the Company by including the financial results of the Verizon Northern New England business for the three months ended
March 31, 2008, the financial results of Spinco for the nine months ended December 31, 2008 and the financial results of Legacy FairPoint for the nine months ended December 31,
2008. Financial information derived from the statement of operations for all periods prior to April 1, 2008 reflects the actual results of the Verizon Northern New England business for such
periods. Financial information derived from the balance sheet reflects the consolidated assets and liabilities of Legacy FairPoint and Spinco at December 31, 2008. Financial information derived
from the balance sheet reflects the balance sheet of the Verizon Northern New England business at December 31, 2007 and for all prior periods.

The
following financial information should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and notes thereto contained elsewhere in this Annual Report. Amounts are in thousands, except access lines and per share data.

Year Ended December 31,2009

2008

2007

2006

2005Statement of Operations:Revenues

$
1,126,761

$
1,274,619

$
1,197,465

$
1,193,392

$
1,206,100Operating expenses:Cost of services and sales


514,935


576,786


555,954


540,305


528,075Selling, general and administrative expense


425,642


384,388


288,762


283,089


282,931Depreciation and amortization


275,334


255,032


233,231


258,515


267,416Total operating expenses


1,215,911


1,216,206


1,077,947


1,081,909


1,078,423Income (loss) from operations


(89,150
)

58,413


119,518


111,483


127,677Interest expense(1)


(204,919
)

(162,040
)

(70,581
)

(65,741
)

(59,540
)Gain (loss) on derivative instruments


12,320


(11,800
)







Gain on early retirement of debt


12,357











Other income (expense), net


2,000


3,494


3,350


3,531


1,369Income (loss) before reorganization items and income taxes


(267,392
)

(111,933
)

52,287


49,273


69,506Reorganization items


(53,018
)










Income (loss) before income taxes


(320,410
)

(111,933
)

52,287


49,273


69,506Income tax (expense) benefit


79,014


43,408


(19,459
)

(17,322
)

(25,896
)Net income (loss)


(241,396
)

(68,525
)

32,828


31,951


43,610Basic shares outstanding


89,271


80,443


53,761


53,761


53,761Diluted shares outstanding


89,271


80,443


53,761


53,761


53,761Basic and diluted earnings (loss) per share

$
(2.70
)
$
(0.85
)
$
0.61

$
0.59

$
0.81Cash dividends per share

$
0.2575

$
0.773

$


$


$



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Table of Contents

Year Ended December 31,2009

2008

2007

2006

2005Operating Data:Capital expenditures

$
178,752

$
296,992

$
149,458

$
213,808

$
202,889Access line equivalents(2)


1,554,733


1,721,709


1,600,971


1,703,375


1,745,192Residential access lines


802,668


926,610


882,933


966,267


1,011,878Business access lines


364,897


392,496


371,041


390,379


406,377Wholesale access lines


97,161


107,243


124,123


149,998


189,865High Speed Data subscribers


290,007


295,360


222,874


196,731


137,072Summary Cash Flow Data:Net cash provided by operating activities

$
150,323

$
57,505

$
264,504

$
340,590

$
271,628Net cash used in investing activities


(177,391
)

(283,332
)

(137,216
)

(212,542
)

(210,298
)Net cash provided by (used in) financing activities


66,098


296,152


(127,288
)

(128,048
)

(61,330
)Balance Sheet Data (at period end):Cash, excluding restricted cash of $4,036 and $68,503 at December 31, 2009 and 2008

$
109,355

$
70,325

$


$


$
Property, plant and equipment, net


1,950,435


2,013,515


1,628,066


1,701,425


1,738,448Total assets


3,172,122


3,335,940


1,938,172


2,044,796


2,181,826Total long term debt


2,515,446


2,470,253








Total stockholders' equity (deficit)


(218,427
)

23,786


1,119,162


1,211,913


1,267,694


(1)Interest
expense includes amortization of debt issue costs aggregating $3.8 million and $3.2 million for the fiscal years ended
December 31, 2009 and 2008, respectively, as well as amortization of debt discount of $0.5 million and $0.4 million for the fiscal years ended December 31, 2009 and 2008,
respectively. Debt issue costs of $23.8 million on the Pre-petition Credit Facility and $9.9 million of discount on the Notes were written off following the filing of the
Chapter 11 Cases in order to adjust the carrying amount of our pre-petition debt to the Bankruptcy Court approved amount of the allowed claims for our pre-petition debt.
These write-offs are included in Reorganization items.(2)Total
access line equivalents includes voice access lines and high speed data lines, which include DSL lines, wireless broadband, cable modem and
fiber-to-the-premises.


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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our financial statements and the notes thereto included elsewhere in this
Annual Report. The following discussion includes certain forward-looking statements. For a discussion of important factors, including the continuing development of our business, actions of regulatory
authorities and competitors and other factors which could cause actual results to differ materially from the results referred to in the forward-looking statements, see
"Item 1A.Risk Factors" in this Annual Report.

On
October 26, 2009, the Company filed the Chapter 11 Cases. For a description of the Chapter 11 Cases and the Plan, see "Item.
1BusinessChapter 11 Cases."



We are a leading provider of communications services in rural and small urban communities, offering an array of services, including
local and long distance voice, data, Internet, television and broadband product offerings. We operate in 18 states with 1.6 million access line equivalents (including voice access lines and
high speed data lines, which include DSL, wireless broadband, cable modem and fiber-to-the-premises) in service as of December 31, 2009.

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

As
our primary source of revenues, access lines are an important element of our business. Over the past several years, communications companies, including FairPoint, have experienced a
decline in access lines due to increased competition, including competition from wireless carriers and cable television operators, the introduction of DSL services (resulting in customers substituting
DSL for a second line) and challenging economic conditions. In addition, while we were operating under the Transition Services Agreement, we had limited ability to change current product offerings.
Upon completion of the Cutover from the Verizon systems to the new FairPoint systems, we expected to be able to modify bundles and prices to be more competitive in the marketplace. However, due to
certain systems functionality issues (as described herein), we have had limited ability during 2009 to make changes to our product offerings. In late June 2009, we began actively marketing and
promoting our DSL product for the first time since the Cutover.

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

Legacy
FairPoint's operations and our Northern New England operations operate under different regulatory regimes in certain respects. For example, concerning interstate access, all of
the pre-Merger regulated interstate services of FairPoint were regulated under a rate-of-return model, while all of the rate-regulated interstate
services provided by the Verizon Northern New England business were regulated under a price cap model. On May 10, 2010, we received FCC approval to convert our Legacy FairPoint operations in
Maine and Vermont to the price cap model. Our Legacy FairPoint operations in Maine and Vermont will convert to price cap regulation on July 1, 2010. We have obtained permission to continue to
operate our Legacy FairPoint ILECs outside of Maine and Vermont under the rate-of-return regime until the FCC completes its general review of whether to modify or eliminate the

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"all-or-nothing"
rule. Without this permission, the all-or-nothing rule would require that all of our regulated operations be operated under the price
cap model for federal regulatory purposes. In addition, while all of our operations generally are subject to obligations that apply to all LECs, our non-rural operations are subject to
additional requirements concerning interconnection, non-discriminatory network access for competitive communications providers and other matters, subject to substantial oversight by state
regulatory commissions. In addition, the FCC has ruled that our Northern New England operations must comply with the regulations applicable to the Bell Operating Companies. Our rural and
non-rural operations are also subject to different regimes concerning universal service.

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

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

We
have since worked diligently to remedy these issues. The order backlog has been reduced significantly and order handle times continue to be reduced. Provisioning of new orders has
steadily improved and call volumes into the customer service centers have returned to pre-Cutover levels. In addition, systems functionality supporting our collection efforts continues to
improve, but certain functionality is not fully operational. As a result of these functionality issues and past billing issues, our efforts to collect past due amounts continue to be hampered. During
the third quarter of 2009, we revised the methodology of calculating the allowance for doubtful accounts based on recent collections experience. The issues discussed above and the change in
methodology resulted in a significant increase in our allowance for doubtful accounts during the third quarter of 2009. Overall, delays in implementing the collections software functionality, together
with other Cutover issues, have caused an increase in accounts receivable, which has adversely impacted our liquidity.

Because
of these Cutover issues, during the year ended December 31, 2009 we incurred $28.8 million of incremental expenses in order to operate our business, including
third-party contractor costs and internal labor costs in the form of overtime pay. The Cutover issues also required significant staff and senior management attention, diverting their focus from other
efforts.

In
addition to the significant incremental expenses we incurred as a result of these Cutover issues, we were unable to fully implement our operating plan for 2009 and effectively compete
in the marketplace, which we believe had an adverse effect on our business, financial condition, results of operations and liquidity.

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As
a result of the Restatement, the Company determined that the Company was not in compliance with the interest coverage ratio maintenance covenant and the leverage ratio maintenance
covenant under the Pre-petition Credit Facility for the measurement period ended June 30, 2009, which constituted an event of default under each of the Pre-petition
Credit Facility and the Swaps, and may have constituted an event of default under the Notes, in each case at June 30, 2009.



On March 31, 2008, the Merger between Spinco and Legacy FairPoint was completed. In connection with the Merger and in accordance
with the terms of the Merger Agreement, Legacy FairPoint issued 53,760,623 shares of common stock to Verizon stockholders. Prior to the
Merger, the Verizon Group engaged in a series of restructuring transactions to effect the transfer of specified assets and liabilities of the Verizon Northern New England business to Spinco and the
entities that became Spinco's subsidiaries. Spinco was then spun off from Verizon immediately prior to the Merger. While FairPoint was the surviving entity in the Merger, for accounting purposes
Spinco is deemed to be the acquirer. As a result, for the year ended December 31, 2008, the statement of operations and the financial information derived from the statement of operations in
this Annual Report reflect the consolidated financial results of the Company by including the financial results of the Verizon Northern New England business for the three months ended March 31,
2008, the financial results of Spinco for the nine months ended December 31, 2008 and the financial results of Legacy FairPoint for the nine months ended December 31, 2008. The statement
of operations and the financial information derived from the statement of operations for the nine months ended December 31, 2008 in this Annual Report reflects the actual results of the
consolidated Company (FairPoint and Spinco) for such period. The balance sheet and financial information derived from the balance sheet in this Annual Report reflect the consolidated assets and
liabilities of Legacy FairPoint and Spinco at December 31, 2009 and 2008. Certain assets and liabilities of the Verizon Northern New England business (principally related to pension, other
post-employment benefits and associated deferred taxes) were not distributed to Spinco prior to the Merger. The statements of operations in this Annual Report may not be indicative of the
Company's future results. For more information, see note 1 to the "Consolidated Financial Statements."

Management
views our business of providing voice, data and communication services to residential and business customers as one business segment as defined in the Segment Reporting Topic
of the ASC.

The
accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern and contemplate the realization of assets and the satisfaction of
liabilities in the normal course of business. For further discussion, see note 1 to the "Consolidated Financial Statements."

Revenues

We derive our revenues from:



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The
following summarizes our revenues and percentage of revenues from these sources:

Year Ended December 31,

Year Ended
December 31,2009

2008

2007

2009

2008

2007Revenue (In thousands)

% of RevenueLocal calling services

$
440,731

$
560,791

$
569,061


39
%

44
%

48
%Access


381,423


370,809


326,974


34


29


27Long distance services


147,672


186,830


176,397


13


15


15Data and Internet services


109,942


114,906


83,214


10


9


7Other services


46,993


41,283


41,819


4


3


3Total

$
1,126,761

$
1,274,619

$
1,197,465


100
%

100
%

100
%


Operating Expenses

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



62

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Because
the Verizon Northern New England business had been operating as the LEC of Verizon in Maine, New Hampshire and Vermont, and not as a standalone telecommunications provider, the
historical operating results of the Verizon Northern New England business for the three months ended March 31, 2008 and the year ended December 31, 2007 include approximately
$58 million and $259 million, respectively, of expenses for services provided by the Verizon Group, including information systems and information technology, shared assets including
office space outside of New England, supplemental customer sales and service and operations. During the one month ended January 2009 and nine months ended December 31, 2008, we operated under
the Transition Services Agreement, under which we incurred $15.9 million and $148.6 million of expenses, respectively. Subsequent to January 30, 2009, we have performed these
services internally or obtained them from third-party service providers and not from Verizon.

Acquisitions and Dispositions

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

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Results of Operations

The following table sets forth the percentages of revenues represented by selected items reflected in our consolidated statements of
operations. The year to year comparisons of financial results are not necessarily indicative of future results:

Year Ended
December 31,

Year Ended
December 31,

Year Ended
December 31,2009

% of
revenue

2008

% of
revenue

2007

% of
revenueRevenues

$
1,126,761


100.0
%
$
1,274,619


100.0
%
$
1,197,465


100.0
%Operating expensesCost of services and sales


514,935


45.7


576,786


45.3


555,954


46.4Selling, general and administrative expense


425,642


37.8


384,388


30.2


288,762


24.1Depreciation and amortization


275,334


24.4


255,032


20.0


233,231


19.5Total operating expenses


1,215,911


107.9


1,216,206


95.5


1,077,947


90.0Income (loss) from operations


(89,150
)

(7.9
)

58,413


4.5


119,518


10.0Other income (expense):Interest expense


(204,919
)

(18.2
)

(162,040
)

(12.7
)

(70,581
)

(5.9
)Gain (loss) on derivative instruments


12,320


1.1


(11,800
)

(0.9
)




Gain on early retirement of debt


12,357


1.1











Other nonoperating, net


2,000


0.2


3,494


0.3


3,350


0.3Total other expense


(178,242
)

(15.8
)

(170,346
)

(13.3
)

(67,231
)

(5.6
)Income (loss) before reorganization items and income taxes


(267,392
)

(23.7
)

(111,933
)

(8.8
)

52,287


4.4Reorganization items


(53,018
)

(4.7
)










Income (loss) before income taxes


(320,410
)

(28.4
)

(111,933
)

(8.8
)

52,287


4.4Income tax benefit (expense)


79,014


7.0


43,408


3.4


(19,459
)

(1.6
)Net income (loss)

$
(241,396
)

(21.4
)%
$
(68,525
)

(5.4
)%
$
32,828


2.8
%


Year Ended December 31, 2009 Compared with Year Ended December 31, 2008



Revenues decreased $147.9 million to $1,126.8 million in 2009 compared to 2008. The acquisition of Legacy FairPoint
contributed $245.5 million and $196.7 million to total revenues in the years ended December 31, 2009 and 2008, respectively. Excluding the impact of the Merger, combined total
revenue would have decreased $196.7 million. Revenues in each of our revenue categories have been impacted by the weakness of the economy during 2008 and 2009, which has caused a decrease in
discretionary consumer spending and resulted in an increase in access line losses and a decrease in usage. Our revenues have also been adversely impacted by the effects of competition and the use of
alternative technologies. Additionally, because of Cutover issues that prevented us from executing fully on our operating plan for 2009, as well as detrimental effects of the Chapter 11 Cases,
our revenue has continued to decline. We derived our revenues from the following sources:

Local calling services.Local calling service revenues decreased $120.1 million to $440.7 million in 2009. This decrease is
partially
attributable to a reduction in revenue totaling $26.0 million for the year ended December 31, 2009 for service quality penalties incurred in the northern New England states coupled with
an 11.3% decline in total voice access lines in service at December 31, 2009 compared to

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December 31,
2008. The revenue decline was mainly driven by the effects of competition and technology substitution. Legacy FairPoint contributed $72.2 million and $62.0 million to
local revenue for the years ended December 31, 2009 and 2008, respectively. Excluding the impact of the Merger, local calling service revenues would have decreased $130.3 million.

Access.Access revenues increased $10.6 million to $381.4 million in 2009 compared to 2008. Legacy FairPoint contributed
$93.5 million and $71.4 million to access revenues for the years ended December 31, 2009 and 2008, respectively. Excluding the impact of the Merger, access revenues would have
decreased $11.5 million. Of this decrease, $9.5 million is attributable to a decrease in interstate access revenues and $2.0 million is attributable to a decrease in intrastate
access revenues. Decreases in interstate and intrastate access revenues are attributable to decreases in access rates and minutes of use compared to 2008, reflecting the impact of access line loss and
technology substitution as well as weakness of the economy.

Long distance services.Long distance services revenues decreased $39.2 million to $147.7 million in 2009 compared to 2008.
Legacy
FairPoint contributed $26.2 million and $22.6 million to long distance revenues in the years ended December 31, 2009 and 2008, respectively. Excluding the impact of the Merger,
long distance revenues would have decreased $42.8 million. The decrease is primarily attributable to a decrease in the number of subscriber lines in 2009 due to technology substitution and the
weakness of the economy, partially offset by increased revenue from bundled product offerings designed to retain customers and generate more revenue.

Data and Internet services.Data and Internet services revenues decreased $5.0 million to $109.9 million in 2009 compared to
2008.
Legacy FairPoint contributed $36.6 million and $27.6 million to data and Internet services revenues in the years ended December 31, 2009 and 2008, respectively. Excluding the
impact of the Merger, data and Internet services would have decreased $14.0 million. This decrease is primarily due to a slowing in our high speed data subscriber growth, caused by the absence
of promotional advertising on our data and Internet products due to Cutover issues as well as the weakness of the economy.

Other services.Other services revenues increased $5.7 million to $47.0 million in 2009 compared to 2008. Legacy FairPoint
contributed
$16.9 million and $13.1 million to other services revenues in the years ended December 31, 2009 and 2008, respectively. Excluding the impact of the Merger, other services revenue
would have increased $1.9 million.



Cost of services and sales.Cost of services and sales decreased $61.9 million to $514.9 million in 2009 compared to 2008.
Legacy
FairPoint contributed $88.7 million and $80.5 million to cost of services and sales in the years ended December 31, 2009 and 2008, respectively. Also included in cost of services
and sales for the years ended December 31, 2009 and 2008 are $6.1 million and $56.7 million, respectively, of expenses related to the Transition Services Agreement, which was
terminated on January 30, 2009. Excluding the impact of the Merger and the Transition Services Agreement, cost of services and sales would have declined $19.5 million. The decline
reflects the elimination of costs allocated from Verizon affiliates prior to the closing of the Merger and the methodology utilized by Verizon to allocate certain expenses to cost of services and
sales prior to the Cutover to our own operating systems, which has more than offset direct costs incurred by us to operate our Northern New England operations.

Selling, general and administrative.Selling, general and administrative expenses increased $41.3 million to $425.6 million in
2009
compared to 2008. Legacy FairPoint contributed $79.2 million and $38.1 million to selling, general and administrative expenses in the years ended December 31, 2009 and 2008,
respectively. Included in selling, general and administrative expenses in the years ended December 31, 2009 and 2008 are $9.8 million and $91.9 million, respectively, of expenses
related to the

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Transition
Services Agreement, and $28.0 million and $52.2 million, respectively of non-recurring Cutover related costs. Excluding the impact of the Merger and the Transition
Services Agreement, selling, general and administrative expenses would have increased $106.4 million. The increase is primarily due to a $30.8 million increase in bad debt expense,
increases in other operating expenses, some of which is attributable to the methodology utilized by Verizon to allocate certain expenses to selling, general and administrative expenses prior to the
Cutover to our own operating systems, as well as $11.1 million in costs incurred to effect a restructuring of our capital structure prior to filing bankruptcy.

Depreciation and amortization.Depreciation and amortization increased $20.3 million to $275.3 million in 2009 compared to
2008. Legacy
FairPoint contributed $36.7 million and $27.8 million to depreciation and amortization expense in the years ended December 31, 2009 and 2008, respectively. Excluding the impact of
the Merger, depreciation and amortization expense would have increased $11.4 million, due primarily to increased gross plant asset balances, including capitalized software placed into service
upon termination of the Transition Services Agreement. Also contributing to the increase in depreciation and amortization expense is an increase of $5.6 million in amortization expense on
intangible assets acquired in the Merger, as no such amortization was recognized during the first quarter of 2008, prior to the Merger.

Included
in operating expenses are non-cash stock based compensation expenses associated with the award of restricted stock and restricted units. Stock based compensation
expenses totaled $2.1 million and $4.4 million for the years ended December 31, 2009 and 2008, respectively.



Interest expense.Interest expense increased $42.9 million to $204.9 million in 2009 compared to 2008. This increase is due to
the debt
that we incurred upon and subsequent to the closing of the Merger. Accrued and unpaid interest on the Old Notes exchanged in the Exchange Offer through July 28, 2009 was paid on July 29,
2009 in the form of additional New Notes totaling $18.9 million. Accrued and unpaid interest on the New Notes from July 29, 2009 through September 30, 2009 is payable in the form
of additional New Notes totaling $12.2 million. This $31.1 million interest expense paid or payable in the form of New Notes has been treated as non-cash for purposes of our
financial debt covenants under the Pre-petition Credit Facility. Additionally, upon the filing of the Chapter 11 Cases, in accordance with the Reorganizations Topic of the ASC, we
ceased the accrual of interest expense on the Notes and the Swaps in accordance with the Reorganizations Topic of the ASC as it is unlikely that such interest expense will be paid or will become an
allowed priority, secured or unsecured claim. We have continued to accrue interest expense on the Pre-petition Credit Facility, as such interest is considered an allowed claim pursuant to
the Plan.

Gain (loss) on derivative instruments.Gain (loss) on derivative instruments represents net gains and losses recognized on the change
in fair market
value of interest rate swap derivatives. During the years ended December 31, 2009 and 2008, respectively, we recognized a net non-cash gain of
$12.3 million and a net non-cash loss of $11.8 million related to our derivative financial instruments. In connection with the filing of the Chapter 11 Cases, the
Swaps were terminated by the counterparties and have been recorded on the consolidated balance sheet at the termination values provided by the counterparties.

Gain on early retirement of debt.Gain on early retirement of debt represents $13.2 million net gains recognized on the repurchase
of
$19.9 million aggregate principal amount of the Old Notes during the year ended December 31, 2009, partially offset by a loss of $0.8 million attributable to writing off a portion
of the unamortized debt issue costs associated with the Pre-petition Credit Facility.

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Other income (expense).Other income (expense) includes non-operating gains and losses such as those incurred on sale of equipment.
Other
income decreased $1.5 million to $2.0 million in 2009 compared to 2008.

Reorganization items.Reorganization items represent expense or income amounts that have been recognized as a direct result of the
Chapter 11
Cases.

Income taxes.The effective income tax rate is the provision for income taxes stated as a percentage of income before the provision for
income taxes.
The effective income tax rate for the year ended December 31, 2009 and 2008 was 24.7% benefit and 38.8% benefit, respectively. The significant decrease in the effective tax rate is due
primarily to an increase in our deferred tax valuation allowance, as well as non-deductible restructuring charges and post-petition interest.

Net income (loss).Net loss for the year ended December 31, 2009 was $(241.4) million compared to net loss of $(68.5) million for
the year
ended December 31, 2008. The difference in net loss between 2009 and 2008 is a result of the factors discussed above.

Year Ended December 31, 2008 Compared with Year Ended December 31, 2007



Revenues increased $77.2 million to $1,274.6 million in 2008 compared to 2007. The acquisition of Legacy FairPoint
contributed $196.7 million to total revenues in the year ended December 31, 2008. Excluding the impact of the Merger, combined total revenue would have decreased $119.5 million.
We derived our revenues from the following sources:

Local calling services.Local calling service revenues decreased $8.3 million to $560.8 million in 2008. This decrease is
primarily due
to a 12.3% decline in total voice access lines in service at December 31, 2008 compared to December 31, 2007. The revenue decline was mainly driven by the effects of competition and
technology substitution. Legacy FairPoint contributed $62.0 million to local revenue for the year ended December 31, 2008. Excluding the impact of the Merger, local calling service
revenues would have decreased $70.3 million compared to 2007.

Access.Access revenues increased $43.8 million to $370.8 million in 2008 compared to 2007. Legacy FairPoint contributed
$71.4 million to access revenues for the year ended December 31, 2008. Excluding the impact of the Merger, access revenues would have decreased by $27.6 million. Of this decrease,
$22.9 million is attributable to a decrease in interstate access revenues and $4.7 million is attributable to a decrease in intrastate access revenues. Decreases in interstate and
intrastate access revenues are attributable to decreases in access rates and minutes of use compared to 2007. Interstate and intrastate switched minutes of use declined 13.7% and 5.0%, respectively,
in the year ended December 31, 2008 compared to the year ended December 31, 2007, reflecting the impact of access line loss and technology substitution.

Long distance services.Long distance services revenues increased $10.4 million to $186.8 million in 2008 compared to 2007.
Legacy
FairPoint contributed $22.6 million to long distance revenues in the year
ended December 31, 2008. Excluding the impact of the Merger, long distance revenues would have decreased $12.2 million. The decrease is primarily attributable to a decrease in the number
of subscriber lines in 2008, partially offset by increased revenue from bundled product offerings designed to retain customers and generate more revenue.

Data and Internet services.Data and Internet services revenues increased $31.7 million to $114.9 million in 2008 compared to
2007.
Legacy FairPoint contributed $27.6 million to data and Internet services revenues in the year ended December 31, 2008. Excluding the impact of the Merger, data and Internet services
would have increased $4.1 million. A decrease of 2,032 in our high speed data subscriber base was offset by increases in pricing of high speed data services.

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Other services.Other services revenues decreased $0.5 million to $41.3 million in 2008 compared to 2007. Legacy FairPoint
contributed
$13.1 million to other services revenues in the year ended December 31, 2008. Excluding the impact of the Merger, other services revenue would have decreased $13.6 million.



Cost of services and sales.Cost of services and sales increased $20.8 million to $576.8 million in 2008 compared to 2007.
Legacy
FairPoint contributed $80.5 million to cost of services and sales in the year ended December 31, 2008. Also included in cost of services and sales for the year ended December 31,
2008 are $56.7 million of Transition Services Agreement expenses. Excluding the impact of the Merger and the Transition Services Agreement, cost of services and sales would have decreased
$116.4 million. The decline reflects the elimination of costs allocated from Verizon affiliates prior to the closing of the Merger, which has more than offset direct costs incurred by us to
operate our Northern New England operations.

Selling, general and administrative.Selling, general and administrative expenses increased $95.6 million to $384.4 million
in 2008
compared to 2007. Legacy FairPoint contributed $38.1 million to selling, general and administrative expenses in the year ended December 31, 2008. Included in selling, general and
administrative expenses in the year ended December 31, 2008 are $91.9 million of Transition Services Agreement expenses, and $52.2 million of non-recurring related
costs (which the Company is allowed to add back to adjusted EBITDA under its Pre-petition Credit Facility). Excluding the impact of the Merger and the Transition Services Agreement,
selling, general and administrative expenses would have decreased $86.6 million. The decline reflects the elimination of costs allocated from Verizon affiliates prior to the closing of the
Merger, which has more than offset direct costs incurred by us to operate our Northern New England operations.

Depreciation and amortization.Depreciation and amortization increased $21.8 million to $255.0 million in 2008 compared to
2007. Legacy
FairPoint contributed $27.8 million to depreciation and amortization expense in the year ended December 31, 2008. Excluding the impact of the Merger, depreciation and amortization
expense would have decreased $6.0 million. The decrease is due to the maturing nature of our plant assets.

Included
in operating expenses are non-cash stock based compensation expenses associated with the award of restricted stock and restricted units. Stock based compensation
expenses totaled $4.4 million and $11.0 million for the years ended December 31, 2008 and 2007, respectively.



Interest expense.Interest expense increased $91.5 million to $162.0 million in 2008 compared to 2007. This increase is due
to the debt
that we incurred upon and subsequent to the closing of the Merger.

Loss on derivative instruments.Loss on derivative instruments represents net gains and losses recognized on the change in fair market
value of
interest rate swap derivatives. During the year ended December 31, 2008, we recognized non-cash losses of $11.8 million related to our derivative financial instruments.

Other income (expense)Other income (expense) includes non-operating gains and losses such as those incurred on sale of equipment.
Other
income increased $0.1 million to $3.5 million in 2008 compared to 2007.

Income taxes.The effective income tax rate is the provision for income taxes stated as a percentage of income before the provision for
income taxes.
The effective income tax rate for the year ended December 31, 2008 and 2007 was 38.8% benefit and 37.2% expense, respectively.

Net income (loss).Net loss for the year ended December 31, 2008 was $(68.5) million compared to net income of $32.8 million
for the
year ended December 31, 2007. The difference in net income (loss) between 2008 and 2007 is a result of the factors discussed above.

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Liquidity and Capital Resources

On October 26, 2009, we filed the Chapter 11 Cases. The matters described herein, to the extent that they relate to
future events or expectations, may be significantly affected by the Chapter 11 Cases. The Chapter 11 Cases involve various restrictions on our activities, limitations on financing, the
need to obtain Bankruptcy Court approval for various matters and uncertainty as to relationships with others with whom we may conduct or seek to conduct business. As a result of the risks and
uncertainties associated with the Chapter 11 Cases, the value of our securities and how our liabilities will ultimately be treated is highly speculative. We urge that appropriate caution be
exercised with respect to existing and future investments in any of the liabilities and/or securities of the Company. See "Part 1Item 1.
BusinessChapter 11 Cases" for a further description of the Chapter 11 Cases, the impact of the Chapter 11 Cases, the proceedings in Bankruptcy Court and our status as
a going concern. In addition, see "Part IItem 1A. Risk Factors."

Our
short term and long term liquidity needs arise primarily from: (i) interest and principal payments on our indebtedness; (ii) capital expenditures; and
(iii) working capital requirements as may be needed to support and grow our business. Notwithstanding the direct impact of the Chapter 11 Cases on our liquidity, including the stay of
payments on our indebtedness, our current and future liquidity is greatly dependent upon our operating results. We expect that our primary sources of liquidity during the pendency of the
Chapter 11 Cases will be cash flow from operations, cash on hand and funds available
under the DIP Credit Agreement. We expect that after the Effective Date, our short term and long term liquidity needs will continue to arise primarily from: (i) interest and principal payments
on our indebtedness; (ii) capital expenditures; and (iii) working capital requirements as may be needed to support and grow our business. We expect that our primary sources of liquidity
after the Effective Date will be cash flow from operations, cash on hand and funds available under the Exit Facility Loans.

The
Chapter 11 Cases were filed to gain liquidity for our continuing operations while we restructure our balance sheet to allow us to be a viable going concern. Our continuation
as a going concern is contingent upon, among other things, our ability: (i) to comply with the terms and conditions of the DIP Credit Agreement; (ii) to obtain confirmation of the Plan
under the Bankruptcy Code; (iii) to generate sufficient cash flow from operations; and (iv) to obtain financing sources to meet our future obligations. We believe the consummation of a
successful restructuring under the Bankruptcy Code is critical to our continued viability and long-term liquidity. While we believe we will be able to achieve these objectives through the
Chapter 11 reorganization process, there can be no certainty that we will be successful in doing so.

In
connection with the Chapter 11 Cases, the DIP Borrowers entered into the DIP Credit Agreement. The DIP Credit Agreement provides for a revolving facility in an aggregate
principal amount of up to $75 million, of which up to $30 million is also available in the form of one or more letters of credit that may be issued to third parties for the account of
the Company and its subsidiaries. Pursuant to the Interim Order, the DIP Borrowers were authorized to enter into and immediately draw upon the DIP Credit Agreement on an interim basis, pending a final
hearing before the Bankruptcy Court on November 18, 2009, in an aggregate amount of $20 million. On March 11, 2010 the Bankruptcy Court entered a final order in connection with
the DIP Credit Agreement, permitting the DIP Borrowers access to the total $75 million of the DIP Financing, subject to the terms and conditions of the DIP Credit Agreement and related orders
of the Bankruptcy Court. For a further description of the DIP Credit Agreement and the terms thereof, see "Part 1Item 1. BusinessChapter 11
CasesDebtor-in-Possession Financing." Upon satisfaction of certain conditions precedent, including the Company successfully exiting from the Chapter 11
Cases, the DIP Financing will roll into a new revolving credit facility with a five-year term. As of December 31, 2009, the Company had not borrowed any amounts under the DIP Credit
Agreement and letters of credit totaling $1.6 million had been issued under the DIP Credit Agreement.

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Cash
and cash equivalents at December 31, 2009 totaled $109.4 million compared to $70.3 million at December 31, 2008, excluding restricted cash of
$4.0 million and $68.5 million, respectively.

Net
cash provided by operating activities was $150.3 million, $57.5 million and $264.5 million for the years ended December 31, 2009, 2008 and 2007,
respectively.

Net
cash used in investing activities was $177.4 million, $283.3 million and $137.2 million for the years ended December 31, 2009, 2008 and 2007,
respectively. These cash flows primarily reflect capital expenditures of $178.8 million, $297.0 million and $149.5 million for the years ended December 31, 2009, 2008 and
2007, respectively. Net cash used in investing activities also includes acquired cash of $11.4 million for the year ended December 31, 2008.

Net
cash provided by (used in) financing activities was $66.1 million, $296.2 million and $(127.3) million for the years ended December 31, 2009, 2008 and 2007,
respectively. For the year ended December 31, 2009, net proceeds from FairPoint's issuance of long term debt were $50.0 million, repayment of long term debt was $20.8 million and
dividends paid to stockholders was $23.0 million. Additionally, $65.1 million was released from restricted cash during the year ended December 31, 2009. For the year ended
December 31, 2008, net proceeds from FairPoint's issuance of long-term debt were $1,930.0 million, repayment of long-term debt was $687.5 million and
dividends to stockholders was $1,220.0 million, of which $1,160.0 million was paid to Verizon by Spinco in connection with the Merger.

We
expect our capital expenditures will be approximately $190 million to $210 million in 2010. However, this expectation does not take into account the effect that the
filing of the Chapter 11 Cases will have on the capital expenditure requirements imposed by the PUCs in Maine, New Hampshire and Vermont as a condition to the to the approval of the Merger and
whether such requirements will be enforceable against us in the future. We anticipate that we will fund these expenditures through cash flows from operations, cash on hand and funds available under
the DIP Credit Agreement and, after the Effective Date, the Exit Facility.

We
expect our contributions to our Company sponsored employee pension plans and post-retirement medical plans will be approximately $1.0 million in 2010.

For
a further description of the background to the filing of the Chapter 11 Cases, see "Part 1Item 1. BusinessChapter 11
CasesBackground to the Filing of the Chapter 11 Cases."

Our Pre-petition Credit Facility

Our $2,030 million Pre-petition Credit Facility consists of a non-amortizing revolving facility in an
aggregate principal amount of $200 million, a senior secured term loan A facility in an aggregate principal amount of $500 million (the "Term Loan A Facility"), a senior secured term
loan B facility in the aggregate principal amount of $1,130 million (the "Term Loan B Facility" and, together with the Term Loan A Facility, the "Term Loan") and a delayed
draw term loan facility in an aggregate principal amount of $200 million (the "Delayed Draw Term Loan"). Spinco drew $1,160 million under the Term Loan immediately prior to being spun
off by Verizon, and then FairPoint drew $470 million under the Term Loan and $5.5 million under the Delayed Draw Term Loan concurrently with the closing of the Merger.

Subsequent
to the Merger, we borrowed the remaining $194.5 million available under the Delayed Draw Term Loan. These funds were used for certain capital expenditures and other
expenses associated with the Merger.

On
October 5, 2008, the administrative agent under our Pre-petition Credit Facility (the "administrative agent") filed for bankruptcy. The administrative agent
accounted for thirty percent of the loan commitments under the Revolving Credit Facility. On January 21, 2009, we entered into an

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amendment
to our Pre-petition Credit Facility (the "Pre-petition Credit Facility Amendment") under which, among other things, the administrative agent resigned and was replaced
by a new administrative agent. In addition, the resigning administrative agent's undrawn commitments under the Revolving Credit Facility, totaling $30.0 million, were terminated and are no
longer available to us.

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

As
of December 31, 2009, we had borrowed $150.0 million under the Revolving Credit Facility and letters of credit had been issued for $18.6 million. Upon the event
of default under the Pre-petition Credit Facility relating to the Chapter 11 Cases described herein, the commitments under the Revolving Credit Facility were automatically
terminated. Accordingly, as of December 31, 2009, no funds remained available under the Revolving Credit Facility.

The
Term Loan B Facility and the Delayed Draw Term Loan will mature in March 2015 and the Revolving Credit Facility and the Term Loan A Facility will mature in March 2014. Each of the
Term Loan A Facility, the Term Loan B Facility and the Delayed Draw Term Loan are repayable in quarterly installments in the manner set forth in our Pre-petition Credit Facility.

Borrowings
under our Pre-petition Credit Facility bear interest at variable interest rates. Interest rates for borrowings under our Pre-petition Credit Facility
are, at our option,
for the Revolving Credit Facility and for the Term Loans at either (a) the Eurodollar rate, as defined in the Pre-petition Credit Facility, plus an applicable margin or
(b) the base rate, as defined in the Pre-petition Credit Facility, plus an applicable margin.

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

Scheduled
amortization payments on our Pre-petition Credit Facility began in 2009. No principal payments are due on the Notes prior to their maturity. As a result of the
Chapter 11 Cases, we do not expect to make any additional principal or interest payments on our pre-petition debt.

For
the year ended December 31, 2009, we repaid $8.4 million of principal under the Term Loan A Facility and $6.1 million of principal under the Term Loan B
Facility.

Prior
to the filing of the Chapter 11 Cases, we failed to make principal and interest payments due under our Pre-petition Credit Facility on September 30, 2009.
The failure to make the principal payment on the due date and failure to make the interest payment within five days of the due date constituted events of default under our Pre-petition
Credit Facility. An event of default under our Pre-petition Credit Facility permits the lenders under our Pre-petition Credit Facility to accelerate the maturity of the loans
outstanding thereunder, seek foreclosure upon any collateral securing such loans and terminate any remaining commitments to lend to us. The occurrence of an event of default under the
Pre-petition Credit Facility constituted an event of default under the Swaps. In addition, we failed to make payments due under the Swaps on September 30, 2009, which failure
resulted in an event of default under the Swaps upon the expiration of a three business day grace period.

In
addition, as a result of the Restatement, we determined that we were not in compliance with the interest coverage ratio maintenance covenant and the leverage ratio maintenance
covenant under our Pre-petition Credit Facility for the measurement period ended June 30, 2009, which constituted an

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event
of default under each of the Pre-petition Credit Facility and the Swaps, and may have constituted an event of default under the Notes, in each case at June 30, 2009.

Our Pre-petition Notes

Spinco issued, and we assumed in the Merger, $551.0 million aggregate principal amount of the Old Notes. The Old Notes mature on
April 1, 2018 and are not redeemable at our option prior to April 1, 2013. Interest is payable on the Old Notes semi-annually, in cash, on April 1 and
October 1. The Old Notes bear interest at a fixed rate of 131/8% and principal is due at maturity. The Old Notes were issued at a discount and, accordingly, at the date of their
distribution, the Old Notes had a carrying value of $539.8 million (principal amount at maturity of $551.0 million less discount of $11.2 million). $9.9 million of discount
on the Notes was written off following the filing of the Chapter 11 Cases in order to adjust the carrying amount of our pre-petition debt to the Bankruptcy Court approved amount of the allowed
claims for our pre-petition debt.

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

Pursuant
to the Exchange Offer, on July 29, 2009, we exchanged $439.6 million in aggregate principal amount of the Old Notes (which amount was equal to approximately 83% of
the then outstanding Old Notes) for $458.5 million in aggregate principal amount of the New Notes (which amount includes New Notes issued to tendering noteholders as payment for accrued and
unpaid interest on the exchanged Old Notes up to, but not including, the Settlement Date). The New Notes mature on April 2, 2018 and bear interest at a fixed rate of 131/8%,
payable in cash, except that the New Notes bore interest at a rate of 15% for the period from July 29, 2009 through and including September 30, 2009. In addition, we were permitted to
pay the interest payable on the New Notes for the Initial Interest Payment Period in the form of cash, by capitalizing such interest and adding it to the principal amount of the New Notes or a
combination of both cash and such capitalization of interest, at our option.

In
connection with the Exchange Offer and the corresponding consent solicitation, we also paid a cash consent fee of $1.6 million in the aggregate to holders of Old Notes who
validly delivered and did not revoke consents in the consent solicitation prior to a specified early consent deadline.

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

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

During
the year ended December 31, 2009, we repurchased $19.9 million in aggregate principal amount of the Old Notes for an aggregate purchase price of $6.3 million
in cash. In total, including amounts repaid under the Term Loan A Facility and Term Loan B Facility, we retired $34.5 million of outstanding debt during the year ended December 31, 2009.

Prior
to the filing of the Chapter 11 Cases, we failed to make the October 1, 2009 interest payment on the Notes. The failure to make the interest payment on the Notes
constituted an event of default under the Notes upon the expiration of a thirty day grace period. An event of default under the Notes permits the holders of the Notes to accelerate the maturity of the
Notes. In addition, the filing of the Chapter 11 Cases constituted an event of default under the New Notes. See "Part 1Item 1. BusinessChapter 11
CasesDefaults Under Outstanding Debt Instruments."

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In addition, as a result of the Restatement, we determined that we were not in compliance with the interest coverage ratio maintenance covenant and the leverage
ratio maintenance covenant under our Pre-petition Credit Facility for the measurement period ended June 30, 2009, which constituted an event of default under each of the
Pre-petition Credit Facility and the Swaps, and may have constituted an event of default under the Notes, in each case at June 30, 2009.

Other Pre-petition Agreements

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

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

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

We
also had the availability of $49.2 million contributed to us by the Verizon Group, and $1.1 million in interest earned thereon, to make capital and operating
expenditures in New Hampshire in addition to those described above for unexpected infrastructure improvements proposed by us and approved by the NHPUC. These funds were reflected on the Company's
March 31, 2009 balance sheet as restricted cash to be used only in accordance with the NH 2008 Settlement. During the three months ended June 30, 2009, we requested that these funds be
made available for general working capital purposes. By letter, dated as of May 12, 2009, the NHPUC approved our request, conditioned upon our commitment to invest funds on certain NHPUC
approved network improvements in New

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Hampshire
on the following schedule: $15 million by the end of 2010, an additional $20 million by the end of 2011 and an additional $30 million by the end of 2012. This investment
commitment is inclusive of the $50 million previously required by the NHPUC.

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

At
this time, it is unclear what effect the filing of the Chapter 11 Cases will have on the requirements, including service quality penalties, imposed by the PUCs in Maine, New
Hampshire and Vermont as a condition to the approval of the Merger and whether such requirements will be enforceable against us in the future.

We
expect that the orders by the PUCs in Maine, New Hampshire and Vermont will be amended based on regulatory settlements that we negotiated in connection with the Chapter 11
Cases and the Plan. See "Item. 1BusinessChapter 11 Cases."

On
January 30, 2009, we entered into the Transition Agreement with Verizon in connection with the Cutover of certain back-office systems, as contemplated by the
Transition Services Agreement. The Transition Services Agreement and related agreements had required us to make payments totaling approximately $45.4 million to Verizon in the first quarter of
2009, including a one-time fee of $34.0 million due at Cutover, with the balance related to the purchase of certain internet access hardware. The settlement set forth in the
Transition Agreement resulted in a $22.7 million improvement in our cash flow for the year ended December 31, 2009.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Summary of Contractual Obligations

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

The
following table discloses aggregate information about our contractual obligations as of December 31, 2009 and the periods in which payments are due:

Payments due by periodTotal

Less than
1 year

1-3
years

3-5
years

More than
5 years(Dollars in thousands)Contractual obligations:Long-term debt, including current maturities(a)


2,515,446


45,000


122,025


391,050


1,957,371Interest payments on long-term debt obligations(b)(c)


639,573


135,201


259,568


220,175


24,629Capital lease obligations


9,982


3,033


3,749


3,095


105Operating leases


45,584


11,007


16,728


10,198


7,651Total obligations


3,210,585


194,241


402,070


624,518


1,989,756


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The
following table discloses aggregate information about our derivative financial instruments as of December 31, 2009, the source of carrying value of these instruments and their
maturities.

Carrying Value of Contracts at Period EndTotal

Less than 1 year

1-3 years

3-5 years

More than 5 years(Dollars in thousands)Source of fair value:Derivative financial instruments(1)(2)

$
(98,833
)

(98,833
)










---

Critical Accounting Policies

Our critical accounting policies are as follows:



Revenue Recognition.We recognize service revenues based upon usage of our local exchange network and facilities and contract
fees. Fixed fees for
local telephone, long distance, Internet services and certain other services are recognized in the month the service is provided. Revenue from other services that are not fixed fee or that exceed
contracted amounts is recognized when those services are provided. Non-recurring customer activation fees, along with the related costs up to, but not exceeding the activation fees, are
deferred and amortized over the customer relationship period. We make estimated adjustments, as necessary, to revenue or accounts receivable for known billing errors. At December 31, 2009, we
recorded revenue reserves of $22.6 million.

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

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

Accounting for Income Taxes.Our current and deferred income taxes are affected by events and
transactions arising in the normal course of business, as well as in connection with the adoption of new accounting standards and non-recurring items. Assessment of the appropriate amount
and classification of income taxes is dependent on several factors, including estimates of the timing and realization of deferred income tax assets and the timing of income tax payments. Actual
payments may differ from these estimates as a result of changes in tax laws, as well as unanticipated future transactions affecting related income tax balances. We account for tax benefits taken or
expected to be taken in our tax returns in accordance with the Income Taxes Topic of the ASC, which requires the use of a two step approach for recognizing and measuring tax benefits taken or expected
to be taken in a tax return and disclosures regarding uncertainties in income tax positions.

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

Valuation of Long-lived Assets, Including Goodwill.We review our long-lived assets, including goodwill, for impairment
whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In addition, we review goodwill and non-amortizable intangible assets for impairment on
an annual basis. Several factors could trigger an impairment review such as:



Goodwill
was $595.1 million at December 31, 2009. We have recorded intangible assets related to the acquired companies' customer relationships and trade name of
$251.7 million as of December 31, 2009. As of December 31, 2009, there was $39.9 million of accumulated amortization recorded. The customer relationships are being
amortized over a weighted average life of approximately 9.7 years. The

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trade
name has an indefinite life and is, therefore, not amortized. The intangible assets are included in intangible assets on our consolidated balance sheet.

We
are required to perform an impairment review of goodwill and non-amortizable intangible assets as required by the Intangibles-Goodwill and Other Topic of the ASC annually
or when impairment indicators are noted. Goodwill impairment is determined using a two-step process. Step one compares the estimated fair value of our single wireline reporting unit
(calculated using the market approach and the income approach) to its carrying amount, including goodwill. The market approach compares our fair value, as measured by our market capitalization, to our
carrying amount, which represents our shareholders' equity balance. As of December 31, 2009, shareholders' deficit totaled $218.4 million. The income approach compares our fair value, as
measured by discounted expected future cash flows, to our carrying amount. If our carrying amount exceeds our estimated fair value, there is a potential impairment and step two must be performed.

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

We
performed step one of our annual goodwill impairment assessment as of October 1, 2009 and concluded that there was no indication of impairment at that time. In light of the
Chapter 11 Cases, we performed an interim goodwill impairment assessment as of December 31, 2009 and determined that goodwill was not impaired.

Our
only non-amortizable intangible asset is the trade name of Legacy FairPoint acquired in the Merger. Consistent with the valuation methodology used to value the trade name
at the Merger, we assess the fair value of the trade name based on the relief from royalty method. If the carrying amount of our trade name exceeds its estimated fair value, the asset is considered
impaired. We performed our annual non-amortizable intangible asset impairment assessment as of October 1, 2009 and concluded that there was no indication of impairment at that time.
In light of the
Chapter 11 Cases, we performed an interim non-amortizable intangible asset impairment assessment as of December 31, 2009 and determined that our trade name was not impaired.

For
our non-amortizable intangible asset impairment assessments at October 1, and December 31, 2009, we made certain assumptions including an estimated royalty
rate, an effective tax rate and a discount rate, and applied these assumptions to projected future cash flows of our consolidated FairPoint Communications, Inc. business, exclusive of cash
flows associated with wholesale revenues as these revenues are not generated through brand recognition. Changes in one or more of these assumptions may have resulted in the recognition of an
impairment loss.

We
determined as of December 31, 2009 that a possible impairment of long-lived assets was indicated by the filing of the Chapter 11 Cases as well as a
significant decline in the fair value of our common stock. In accordance with the Property, Plant, and Equipment Topic of the ASC, we performed a recoverability test, based on undiscounted projected
future cash flows associated with our long-lived assets, and determined that long-lived assets were not impaired at that time.

While
no impairment charges resulted from the analyses performed at October 1, and December 31, 2009, asset values may be adjusted in the future due to the outcome of the
Chapter 11 Cases or the application of "fresh start" accounting upon the Company's emergence from Chapter 11.

Accounting for Software Development Costs.We capitalize certain costs incurred in connection with developing or obtaining
internal use software in
accordance with the Intangibles-Goodwill and Other Topic of the ASC. Capitalized costs include direct development costs associated with internal use software, including direct labor costs and external
costs of materials and services. Costs incurred during the preliminary project stage, as well as maintenance and training costs, are expensed as incurred.

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

New Accounting Standards

On July 1, 2009, we adopted the FASB ASC. The FASB has established the ASC as the source of authoritative principles and
standards recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The adoption of the ASC had no impact on our consolidated results of operations and financial position.

On
January 1, 2009, we adopted the accounting standard relating to business combinations. This standard establishes principles and requirements for how an acquirer in a business
combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures the goodwill acquired
in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of
the business combination. This standard is to be applied prospectively to business combinations for which the acquisition date is on or after an entity's fiscal year that begins after
December 15, 2008. We will assess the impact of this standard if and when a future acquisition occurs.

On
January 1, 2009, we adopted the accounting standard relating to disclosures about derivative instruments and hedging activities. This standard requires companies with
derivative instruments to disclose information that should enable financial statement users to understand how and why a company uses derivative instruments, how derivative instruments and related
hedged items are accounted for under the Derivatives and Hedging Topic of the ASC and how derivative instruments and related hedged items affect a company's financial position, financial performance
and cash flows. This standard is effective for financial statements issued for fiscal years beginning after November 15, 2008. The adoption of this standard had no impact on our consolidated
results of operations and financial position.

On
June 15, 2009, we adopted the accounting standard relating to interim disclosures about fair value of financial instruments. This standard extends financial instrument fair
value disclosure to interim financial statements of publicly traded companies. This standard is effective for interim reporting periods ending after June 15, 2009. The adoption of this standard
had no impact on our consolidated results of operations and financial position.

On
June 15, 2009, we adopted the accounting standard relating to subsequent events. This standard establishes principles and requirements for identifying, recognizing and
disclosing subsequent events. This standard requires that an entity identify the type of subsequent event as either recognized or unrecognized, and disclose the date through which the entity has
evaluated subsequent events. This
standard is effective for interim or annual financial periods ending after June 15, 2009. The adoption of this standard had no impact on the Company's consolidated results of operations and
financial position.

On
August 28, 2009, we adopted the accounting standard update regarding the measurement of liabilities at fair value. This update clarifies the valuation techniques that should be
used to measure liabilities that are carried at fair value on a company's statement of financial position. This update is effective for interim or annual financial periods beginning after
August 28, 2009. The adoption of this update had no impact on our consolidated results of operations and financial position.

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On
December 15, 2009, we adopted the update to the accounting standard regarding employers' disclosures about postretirement benefit plan assets which requires the Company, as a
plan sponsor, to provide disclosures about plan assets, including categories of plan assets, the nature of concentrations of risk and disclosures about fair value measurements of plan assets. This
standard is effective for fiscal years ending after December 15, 2009. The adoption of this standard had no impact on our consolidated results of operations and financial position.

Inflation

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

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of December 31, 2009, we had total debt of $2,515.4 million, consisting of both fixed rate and variable rate debt with
interest rates ranging from 6.750% to 13.125% per annum, including applicable margins. As of December 31, 2009, the fair value of our debt was approximately $1,619.9 million. Our Term
Loan A Facility and Revolving Credit Facility mature in 2014, our Term Loan B Facility and Delayed Draw Term Loan mature in 2015 and the Notes mature in 2018.

We
use variable and fixed rate debt to finance our operations, capital expenditures and acquisitions. The variable rate debt obligations expose us to variability in interest payments due
to changes in interest rates. We believe it is prudent to limit the variability of a portion of our interest payments. To meet this objective, from time to time, we entered into interest rate swap
agreements to manage fluctuations in cash flows resulting from interest rate risk. These Swaps effectively changed the variable rate on the debt obligations to a fixed rate. Under the terms of the
Swaps, we made a payment if the variable rate was below the fixed rate, or we received a payment if the variable rate was above the fixed rate. Pursuant to our Pre-petition Credit
Facility, we were required to reduce the risk of interest rate volatility with respect to at least 50% of our Term Loan borrowings.

In
connection with the Chapter 11 Cases, all of the Swaps were terminated by the respective counterparties thereto.

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS



PageFAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES:Report of Management on Internal Control Over Financial
Reporting

81Reports of Independent Registered Public Accounting Firm

82CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007:Consolidated Balance Sheets as of December 31, 2009 and 2008

85Consolidated Statements of Operations for the Years Ended December 31, 2009, 2008 and 2007

86Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 2009, 2008 and
2007

87Consolidated Statements of Comprehensive (Loss) Income for the Years Ended December 31, 2009, 2008 and
2007

88Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007

89Notes to Consolidated Financial Statements for the Years Ended December 31, 2009, 2008 and 2007

90


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Report of Management on Internal Control Over Financial Reporting

We, the management of FairPoint Communications, Inc., are responsible for establishing and maintaining adequate internal control
over financial reporting of the Company. Management has evaluated internal control over financial reporting of the Company using the criteria for effective internal control established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based
on such evaluation, management determined that the Company's internal control over financial reporting was not effective as of December 31, 2009 because the following
material weaknesses in internal control over financial reporting existed during 2009:



The
Company's financial statements included in this annual report have been audited by Ernst & Young LLP, independent registered public accounting firm. Ernst &
Young LLP has also provided an attestation report on the Company's internal control over financial reporting.

/s/ DAVID L. HAUSERDavid L. HauserChairman and Chief Executive Officer




/s/ LISA R. HOODLisa R. HoodSenior Vice President and Corporate Controller,Interim Chief Financial Officer


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Report of Independent Registered Public Accounting Firm

The
Board of Directors and Stockholders of FairPoint Communications, Inc. (Debtors-in-Possession):

We
have audited FairPoint Communications, Inc.'s (Debtors-in-Possession) (the "Company") internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company's management
is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the
accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our
audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A
material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in
management's assessment.

Management
has identified material weaknesses in its information technology controls, including revenue transactions, and the oversight and review procedures designed to monitor its
period-end accounting activities. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets
of the Company as of December 31, 2009 and 2008 and the related consolidated statements of operations, stockholders' equity (deficit), comprehensive (loss) income and cash flows for each of the
three years in the period ended December 31, 2009. These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2009
financial statements and this report does not affect our report dated May 27, 2010, which expressed an unqualified opinion on those

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financial
statements that included an explanatory paragraph regarding the Company's ability to continue as a going concern.

In
our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, FairPoint Communications, Inc.
(Debtors-in-Possession) has not maintained effective internal control over financial reporting as of December 31, 2009 based on the COSO criteria.

/s/ERNST & YOUNG LLP

Charlotte,
North Carolina
May 27, 2010

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Report of Independent Registered Public Accounting Firm

The
Board of Directors and Stockholders of FairPoint Communications, Inc. (Debtors-in-Possession):

We
have audited the accompanying consolidated balance sheets of FairPoint Communications, Inc. (Debtors-in-Possession) (the "Company") as of December 31, 2009 and 2008, and
the related consolidated statements of operations, stockholders' equity (deficit), comprehensive (loss) income and cash flows for each of the three years in the period ended December 31, 2009.
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2009 and
2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting
principles.

The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company
has defaulted on loan obligations and has filed voluntary petitions for relief under Chapter 11 of title 11 of the United States Code in the United States Bankruptcy Court for the Southern
District of New York. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this uncertainty.

As
discussed in Note 3, the Company changed its method of accounting for uncertainty in income taxes effective January 1, 2007.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), FairPoint Communications, Inc.'s (Debtors-in-Possession)
internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated May 27, 2010 expressed an adverse opinion thereon.

/s/ERNST & YOUNG LLP

Charlotte,
North Carolina
May 27, 2010

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES        (Debtors In Possession)        Consolidated Balance Sheets        December 31, 2009 and
2008        (in thousands, except share data)

2009

2008AssetsCurrent assets:Cash

$
109,355

$
70,325Restricted cash


2,558


8,144Accounts receivable, net


154,095


175,036Materials and supplies


18,884


38,694Other


24,042


28,747Deferred income tax, net


75,713


31,418Total current assets


384,647


352,364Property, plant, and equipment, net


1,950,435


2,013,515Intangibles assets, net


211,819


234,481Prepaid pension asset


8,808


8,708Debt issue costs, net


680


26,047Restricted cash


1,478


60,359Other assets


19,135


21,094Goodwill


595,120


619,372Total assets

$
3,172,122

$
3,335,940Liabilities and Stockholders' Equity (Deficit)Liabilities not subject to compromise:Current portion of long-term debt

$


$
45,000Current portion of capital lease obligations





2,231Accounts payable


61,681


147,778Dividends payable





23,008Accrued interest payable


36


18,844Interest rate swaps





41,274Other non-operating accrued liability





19,000Other accrued liabilities


44,004


72,334Total current liabilities


105,721


369,469Capital lease obligations





7,522Accrued pension obligation


51,438


46,801Employee benefit obligations


261,420


225,840Deferred income taxes


115,742


154,757Unamortized investment tax credits


4,788


5,339Other long-term liabilities


15,100


35,492Long-term debt, net of current portion





2,425,253Interest rate swap agreements





41,681Total long-term liabilities


448,488


2,942,685Total liabilities not subject to compromise


554,209


3,312,154Liabilities subject to compromise


2,836,340


Total liabilities


3,390,549


3,312,154Stockholders' equity (deficit):Common stock, $0.01 par value, 200,000,000 shares authorized, issued and outstanding 90,002,026 and 88,995,572 shares at December 31, 2009 and 2008,
respectively


900


890Additional paid-in capital


725,312


735,719Retained deficit


(819,715
)

(578,319
)Accumulated other comprehensive loss


(124,924
)

(134,504
)Total stockholders' equity (deficit)


(218,427
)

23,786Total liabilities and stockholders' equity (deficit)

$
3,172,122

$
3,335,940


See accompanying notes to consolidated financial statements.

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES        (Debtors In Possession)        Consolidated Statements of Operations        Years ended
December 31, 2009, 2008 and 2007        (in thousands, except per share data)

2009

2008

2007Revenues

$
1,126,761

$
1,274,619

$
1,197,465Operating expenses:Cost of services and sales, excluding depreciation and amortization


514,935


576,786


555,954Selling, general and administrative expense, excluding depreciation and amortization


425,642


384,388


288,762Depreciation and amortization


275,334


255,032


233,231Total operating expenses


1,215,911


1,216,206


1,077,947Income (loss) from operations


(89,150
)

58,413


119,518Other income (expense):Interest expense


(204,919
)

(162,040
)

(70,581
)Gain (loss) on derivative instruments


12,320


(11,800
)

Gain on early retirement of debt


12,357





Other


2,000


3,494


3,350Total other expense


(178,242
)

(170,346
)

(67,231
)Income (loss) before reorganization items and income taxes


(267,392
)

(111,933
)

52,287Reorganization items


(53,018
)




Income (loss) before income taxes


(320,410
)

(111,933
)

52,287Income tax (expense) benefit


79,014


43,408


(19,459
)Net income (loss)

$
(241,396
)
$
(68,525
)
$
32,828Weighted average shares outstanding:Basic


89,271


80,443


53,761Diluted


89,271


80,443


53,761Earnings per share:Basic

$
(2.70
)
$
(0.85
)
$
0.61Diluted


(2.70
)

(0.85
)

0.61


See
accompanying notes to consolidated financial statements.

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES        (Debtors In Possession)        Consolidated Statements of Stockholders' Equity (Deficit)    
Years ended December 31, 2009, 2008 and 2007        (in thousands)

Common Stock





Accumulated
other
comprehensive
income (loss)

Total
stockholders'
equity
(deficit)Additional
paid-in
capital

Retained
earnings
(deficit)Shares

AmountBalance at December 31, 2006


53,761

$
538

$
484,383

$
726,992

$


$
1,211,913Net income











32,828





32,828Net change in parent funding











(125,579
)




(125,579
)Balance at December 31, 2007


53,761

$
538

$
484,383

$
634,241

$


$
1,119,162Net loss











(68,525
)




(68,525
)Acquisition of FairPoint


35,265


352


315,938








316,290Exercise of restricted units


6














Issuance of restricted shares


50














Restricted stock cancelled for withholding tax


(15
)













Forfeiture of restricted shares


(71
)













Stock based compensation expense








4,408








4,408Dividends declared








(69,010
)







(69,010
)Return of capital to Verizon











(1,160,000
)




(1,160,000
)Issuance of bonds to Verizon











(539,831
)




(539,831
)Contributions by Verizon











381,890





381,890Net liabilities contributed back to Verizon











124,439





124,439Employee benefit adjustment to comprehensive income











49,467


(134,504
)

(85,037
)Balance at December 31, 2008


88,996

$
890

$
735,719

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











(241,396
)




(241,396
)Exercise of restricted units


502


5


(5
)







Issuance of restricted shares


524


5


(5
)







Restricted stock cancelled for withholding tax


(20
)













Restricted units cancelled for withholding tax








(430
)







(430
)Stock based compensation expense








2,052








2,052Net assets contributed back to Verizon








(12,019
)







(12,019
)Employee benefit adjustment to comprehensive income














9,580


9,580Balance at December 31, 2009


90,002

$
900

$
725,312

$
(819,715
)
$
(124,924
)
$
(218,427
)


See
accompanying notes to consolidated financial statements.

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES        (Debtors In Possession)        Consolidated Statements of Comprehensive (Loss) Income    
Years ended December 31, 2009, 2008 and 2007        (in thousands, except per share data)

2009

2008

2007Net (loss) income

$
(241,396
)
$
(68,525
)
$
32,828Other comprehensive income (loss), net of taxes:Defined benefit pension and post-retirement plans (net of $5.4 million tax expense and $56.4 million tax benefit, respectively)


9,580


(85,037
)

Total other comprehensive income (loss)


9,580


(85,037
)

Comprehensive (loss) income

$
(231,816
)
$
(153,562
)
$
32,828


See
accompanying notes to consolidated financial statements.

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES        (Debtors In Possession)        Consolidated Statements of Cash Flows        Years ended
December 31, 2009, 2008 and 2007        (in thousands)

2009

2008

2007Cash flows from operating activities:Net (loss) income

$
(241,396
)
$
(68,525
)
$
32,828Adjustments to reconcile net income (loss) to net cash provided by operating activities excluding impact of acquisitions:Deferred income taxes


(78,722
)

(33,466
)

(38,928
)Provision for uncollectible revenue


56,073


25,234


21,765Depreciation and amortization


275,334


255,032


233,231Non-cash interest expense


31,137





Post-retirement accruals


34,151


37,782


90,035(Gain) loss on derivative instruments


(12,320
)

11,800


Gain on early retirement of debt, excluding cash fees


(12,477
)




Non-cash reorganization costs


43,964





Other non cash items


28,742


(19,671
)

904Changes in assets and liabilities arising from operations:Accounts receivable


(32,470
)

(34,693
)

(1,477
)Prepaid and other assets


19,063


(12,713
)

9,642Accounts payable and accrued liabilities


(12,435
)

(110,264
)

(11,159
)Accrued interest payable


61,312


18,562


Other assets and liabilities, net


(9,633
)

4,648


(72,337
)Other





(16,221
)

Total adjustments


391,719


126,030


231,676Net cash provided by operating activities


150,323


57,505


264,504Cash flows from investing activities:Acquired cash balance, net





11,401


Net capital additions


(178,752
)

(296,992
)

(149,458
)Net proceeds from sales of investments and other assets


1,361


2,259


12,242Net cash used in investing activities


(177,391
)

(283,332
)

(137,216
)Cash flows from financing activities:Loan origination costs


(3,046
)

(29,238
)

Proceeds from issuance of long-term debt


50,000


1,930,000


Repayments of long-term debt


(20,848
)

(687,491
)

Contributions from (to) Verizon





373,590


(125,579
)Restricted cash


65,114


(68,503
)

Repayment of capital lease obligations


(2,126
)

(2,247
)

(1,709
)Dividends paid to stockholders


(22,996
)

(1,219,959
)

Net cash provided by (used in) financing activities


66,098


296,152


(127,288
)Net increase in cash


39,030


70,325


Cash, beginning of period


70,325





Cash, end of period

$
109,355

$
70,325

$
Supplemental disclosure of cash flow information:Interest paid, net of capitalized interest

$
106,861

$
124,721

$
Income taxes paid, net of refunds


(563
)

(9,313
)

56,028Non-cash equity consideration





316,290


Non-cash issuance of senior notes


18,911


551,000


Capital additions included in accounts payable or liabilities subject to compromise at period-end


31,621





Reorganization costs paid


1,182








See accompanying notes to consolidated financial statements.

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FairPoint Communications, Inc. and Subsidiaries        (DEBTORS-IN-POSSESSION)        Notes to Consolidated Financial Statements

(1) Organization, Principles of Consolidation & Liquidity; Chapter 11 Cases

(a) Organization

FairPoint is a leading provider of communications services in rural and small urban communities, primarily in northern New England,
offering an array of services, including local and long distance voice, data, Internet and broadband product offerings, to both residential and business customers. FairPoint is the seventh largest
telephone company in the United States based on the number of access lines as of December 31, 2009. FairPoint operates in 18 states with approximately 1.6 million access line equivalents
(including voice access lines and high speed data lines, which include DSL, wireless broadband, cable modem and fiber-to-the-premises) as of December 31,
2009.

(b) Principles of Consolidation and Basis of Presentation

On March 31, 2008, FairPoint completed the acquisition of Spinco, pursuant to which Spinco merged with and into FairPoint, with
FairPoint continuing as the surviving corporation for legal purposes. Spinco was a wholly-owned subsidiary of Verizon and prior to the Merger the Verizon Group transferred certain specified assets and
liabilities of the local exchange businesses of Verizon New England in Maine, New Hampshire and Vermont and the customers of the related long distance and Internet service provider businesses in those
states to subsidiaries of Spinco. The Merger was accounted for as a "reverse acquisition" of Legacy FairPoint by Spinco under the purchase method of accounting because Verizon stockholders owned a
majority of the shares of the consolidated Company following the Merger and, therefore, Spinco is treated as the acquirer for accounting purposes. The financial statements reflect the transaction as
if Spinco had issued consideration to FairPoint shareholders. As a result, for the year ended December 31, 2008, the statement of operations and the financial information derived from the
statement of operations in this Annual Report reflect the consolidated financial results of the Company by including the financial results of the Verizon Northern New England business for the three
months ended March 31, 2008 and the combined financial results of Spinco and Legacy FairPoint for the nine months ended December 31, 2008. The statement of operations and the financial
information derived from the statement of operations for the three months ended December 31, September 30, and June 30, 2008 in this Annual Report reflect the actual results of
the consolidated Company (Legacy FairPoint and Spinco) for such periods. The statement of operations and the financial information derived from the statement of operations for all periods prior to
April 1, 2008 in this Annual Report reflect the actual results of the Verizon Northern New England business for such periods. The balance sheet and financial information derived from the
balance sheet in this Annual Report reflect the consolidated assets and liabilities of Legacy FairPoint and Spinco at December 31, 2009 and 2008. Certain assets and liabilities of the Verizon
Northern New England business (principally related to pension, other post-employment benefits, and associated deferred taxes) were not distributed to Spinco prior to the Merger and for
accounting purposes were effectively contributed back to Verizon. The assets and liabilities of the Verizon Northern New England business that were effectively contributed back to Verizon are
reflected as net liabilities contributed back to Verizon on the statement of stockholders' equity contained herein. The statement of operations in this Annual Report may not be indicative of the
Company's future results.

In
order to effect the Merger described above, the Company issued 53,760,623 shares to Verizon stockholders for their interest in Spinco. Accordingly the number of common shares
outstanding, par

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Notes to Consolidated Financial Statements (Continued)

(1) Organization, Principles of Consolidation & Liquidity; Chapter 11 Cases (Continued)

value,
paid in capital and per share information included herein has been retroactively restated to give effect to the Merger.



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

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

The
Verizon Northern New England business financial statements for all periods prior to the Merger include the wireline-related businesses, Internet access, long distance and customer
premises equipment services provided by the Verizon Northern New England business to customers in the states of Maine, New Hampshire and Vermont. All significant intercompany transactions have been
eliminated. The financial statements prior to the Merger also include the assets, liabilities and expenses related to employees who support the Verizon Northern New England business, some of whom
remain employees of the Verizon Northern New England business following the acquisition of the Verizon Northern New England business by FairPoint.

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

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

VLD:For the balance sheet, receivables were allocated based on the applicable operating revenues and accounts payable were allocated
based on
applicable operating expenses. For the statements of operations, operating revenues were determined using applicable billing system data; cost

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(1) Organization, Principles of Consolidation & Liquidity; Chapter 11 Cases (Continued)

of
services and sales and selling, general and administrative expenses were allocated based on the percentage of the Verizon Northern New England business revenues related to the VLD component to the
total VLD revenues applied to operating expenses for total VLD.

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

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

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



The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern and
contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. The Company's ability to continue as a going concern is contingent upon its ability to
comply with the financial and other covenants contained in the DIP Credit Agreement and, after the Effective Date, the Exit Facility and the Bankruptcy Court's approval of the Plan, among other
things. As a result of the Chapter 11 Cases, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as
debtor-in-possession under the Bankruptcy Code, the Company may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the
Bankruptcy Court or as otherwise permitted in the ordinary course of business (and subject to restrictions contained in the DIP Credit Agreement), in amounts other than those reflected in the
accompanying consolidated financial statements. Further, a plan of reorganization could materially change the amounts and classifications in the historical consolidated financial statements. The
accompanying consolidated financial statements do not include any direct adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities or any
other adjustments that might be necessary should the Company be unable to continue as a going concern or as a consequence of the Chapter 11 Cases.

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Notes to Consolidated Financial Statements (Continued)

(1) Organization, Principles of Consolidation & Liquidity; Chapter 11 Cases (Continued)

The
Reorganizations Topic of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification (the "ASC"), which is applicable to companies in Chapter 11,
generally does not change the manner in which financial statements are prepared. However, it does require that the financial statements for periods subsequent to the filing of the Chapter 11
Cases distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Amounts that can be directly associated with the
reorganization and restructuring of the business must be reported separately as reorganization items in the statements of operations beginning in the quarter ending December 31, 2009. The
balance sheet must distinguish pre-petition liabilities subject to compromise from both those pre-petition liabilities that are not subject to compromise and from
post-petition liabilities. Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be allowed, even if they may be settled for lesser
amounts. In addition, cash provided by and used for reorganization items must be disclosed. The Company has applied the Reorganizations Topic of the ASC effective as of the Petition Date, and has
segregated those items as outlined above for all reporting periods subsequent to such date.

(c) Liquidity

The Company's short term and long term liquidity needs arise primarily from: (i) interest and principal payments on
indebtedness; (ii) capital expenditures and (iii) working capital requirements as may be needed to support and grow the Company's business. The Company expects that after the Effective
Date, its short term and long term liquidity needs will continue to arise primarily from: (i) interest and principal payments on indebtedness; (ii) capital expenditures; and
(iii) working capital requirements as may be needed to support and grow the Company's business. The Company expects that its primary sources of liquidity after the Effective Date will be cash
flow from operations, cash on hand and funds available under the Exit Facility Loans.

On
March 4, 2009, the Board of Directors suspended the payment of dividends on the Company's common stock.

The
Company's $2,030 million Pre-petition Credit Facility consists of a non-amortizing revolving facility in an aggregate principal amount of
$200 million, the Term Loan A Facility, the Term Loan B Facility and the Delayed Draw Term Loan. Spinco drew $1,160 million under the Term Loan immediately prior to being spun off by
Verizon, and then FairPoint drew $470 million under the Term Loan and $5.5 million under the Delayed Draw Term Loan concurrently with the closing of the Merger. Subsequent to the Merger,
the Company borrowed the remaining $194.5 million available under the Delayed Draw Term Loan. These funds were used for certain capital expenditures and other expenses associated with the
Merger.

On
October 5, 2008 the administrative agent under the Pre-petition Credit Facility filed for bankruptcy. The administrative agent accounted for thirty percent of the
loan commitments under the Revolving Credit Facility. On January 21, 2009 the Company entered into the Pre-petition Credit Facility Amendment under which, among other things, the
administrative agent resigned and was replaced by a new administrative agent. In addition, the resigning administrative agent's undrawn loan commitments under the Revolving Credit Facility, totaling
$30.0 million, were terminated and are no longer available to the Company. On January 27, 2009, the Company borrowed an additional

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(1) Organization, Principles of Consolidation & Liquidity; Chapter 11 Cases (Continued)

$50 million
under the Revolving Credit Facility. Upon the event of default under the Pre-petition Credit Facility relating to the Chapter 11 Cases described herein, the
commitments under the Revolving Credit Facility were automatically terminated. Accordingly, as of December 31, 2009, no funds remained available under the Revolving Credit Facility.

The
Revolving Credit Facility has a swingline subfacility in the amount of $10 million and a letter of credit subfacility in the amount of $30 million, which allows for
issuances of standby letters of credit for the Company's account. The Pre-petition Credit Facility also permits interest rate and currency exchange swaps and similar arrangements that the
Company may enter into with the lenders under the Pre-petition Credit Facility and/or their affiliates.

The
Term Loan B Facility and the Delayed Draw Term Loan will mature in March 2015 and the Revolving Credit Facility and the Term Loan A Facility will mature in March 2014. Each of the
Term Loan A Facility, the Term Loan B Facility and the Delayed Draw Term Loan are repayable in quarterly installments in the manner set forth in the Pre-petition Credit Facility.

Interest
rates for borrowings under the Pre-petition Credit Facility are, at the Company's option, for the Revolving Credit Facility and for the Term Loans at either
(a) the Eurodollar rate, as defined in the Pre-petition Credit Facility, plus an applicable margin or (b) the base rate, as defined in the Pre-petition Credit
Facility, plus an applicable margin.

The
existing Pre-petition Credit Facility contains customary affirmative covenants and also contains negative covenants and restrictions, including, among others, with
respect to the redemption or repurchase of the Company's other indebtedness, loans and investments, additional indebtedness, liens, capital expenditures, changes in the nature of the Company's
business, mergers, acquisitions, asset sales and transactions with affiliates.

Borrowings
under the Pre-petition Credit Facility bear interest at variable interest rates. Interest rates for borrowings under the Pre-petition Credit Facility
are, at the Company's option, for the Revolving Credit Facility and for the Term Loans at either (a) the Eurodollar rate, as defined in the Pre-petition Credit Facility, plus an
applicable margin or (b) the base rate, as defined in the Pre-petition Credit Facility, plus an applicable margin.

The
Pre-petition Credit Facility contains customary affirmative covenants and also contains negative covenants and restrictions, including, among others, with respect to the
redemption or repurchase of the Company's other indebtedness, loans and investments, additional indebtedness, liens, capital expenditures, changes in the nature of the Company's business, mergers,
acquisitions, asset sales and transactions with affiliates.

Scheduled
amortization payments on the Pre-petition Credit Facility began in 2009. No principal payments are due on the Notes prior to their maturity. As a result of the
Chapter 11 Cases, the Company does not expect to make any additional principal or interest payments on the pre-petition debt.

For
the year ended December 31, 2009, the Company repaid $8.4 million of principal under the Term Loan A Facility and $6.1 million of principal under the Term Loan B
Facility.

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Notes to Consolidated Financial Statements (Continued)

(1) Organization, Principles of Consolidation & Liquidity; Chapter 11 Cases (Continued)

Prior
to the filing of the Chapter 11 Cases, the Company failed to make principal and interest payments due under the Pre-petition Credit Facility on
September 30, 2009. The failure to make the principal payment on the due date and failure to make the interest payment within five days of the due date constituted events of default under the
Pre-petition Credit Facility. An event of default under the Pre-petition Credit Facility permits the lenders under the Pre-petition Credit Facility to accelerate
the maturity of the loans outstanding thereunder, seek foreclosure upon any collateral securing such loans and terminate any remaining commitments to lend to the Company. The occurrence of an event of
default under the Pre-petition Credit Facility constituted an event of default under the Swaps. In addition, the Company failed to make payments due under the Swaps on September 30,
2009, which failure resulted in an event of default under the Swaps upon the expiration of a three business day grace period.

In
addition, as a result of the Restatement, the Company determined that the Company was not in compliance with the interest coverage ratio maintenance covenant and the leverage ratio
maintenance covenant under the Pre-petition Credit Facility for the measurement period ended June 30, 2009, which constituted an event of default under each of the
Pre-petition Credit Facility and the Swaps, and may have constituted an event of default under the Notes, in each case at June 30, 2009.

Borrowings
under the Pre-petition Credit Facility bear interest at variable interest rates. The Company entered into various interest rate swap agreements which are detailed
in note 8, but the Swaps were terminated by the respective counterparties thereto in connection with the Chapter 11 Cases.

Spinco
issued, and the Company assumed in the Merger, $551.0 million aggregate principal amount of the Old Notes. The Old Notes mature on April 1, 2018 and are not
redeemable at the Company's option prior to April 1, 2013. Interest is payable on the Old Notes semi-annually, in cash, on April 1 and October 1. The Old Notes bear
interest at a fixed rate of 131/8% and principal is due at maturity. The Old Notes were issued at a discount and, accordingly, at the date of their distribution, the Old Notes had a
carrying value of $539.8 million (principal amount at maturity of $551.0 million less discount of $11.2 million). $9.9 million of discount on the Notes was written off
following the filing of the Chapter 11 Cases in order to adjust the carrying amount of the Company's pre-petition debt to the Bankruptcy Court approved amount of the allowed claims for the
Company's pre-petition debt.

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

Pursuant
to the Exchange Offer, on July 29, 2009, the Company exchanged $439.6 million in aggregate principal amount of the Old Notes (which amount was equal to
approximately 83% of the then outstanding Old Notes) for $458.5 million in aggregate principal amount of the New Notes (which amount includes New Notes issued to tendering noteholders as
payment for accrued and unpaid interest on the exchanged Old Notes up to, but not including, the Settlement Date). The New Notes mature on April 2, 2018 and bear interest at a fixed rate of
131/8%, payable in cash, except that the New Notes bore interest at a rate of 15% for the period from July 29, 2009 through and including September 30, 2009. In addition,
the Company was permitted to pay the interest payable on the New

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(1) Organization, Principles of Consolidation & Liquidity; Chapter 11 Cases (Continued)

Notes
for the Initial Interest Payment Period in the form of cash, by capitalizing such interest and adding it to the principal amount of the New Notes or a combination of both cash and such
capitalization of interest, at the Company's option.

In
connection with the Exchange Offer and the corresponding consent solicitation, the Company also paid a cash consent fee of $1.6 million in the aggregate to holders of Old Notes
who validly delivered and did not revoke consents in the consent solicitation prior to a specified early consent deadline.

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

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

During
the year ended December 31, 2009, the Company repurchased $19.9 million in aggregate principal amount of the Old Notes for an aggregate purchase price of
$6.3 million in cash. In total, including amounts repaid under the Term Loan A Facility and Term Loan B Facility, the Company retired $34.5 million of outstanding debt during the year
ended December 31, 2009.

Prior
to the filing of the Chapter 11 Cases, the Company failed to make the October 1, 2009 interest payment on the Notes. The failure to make the interest payment on the
Notes constituted an event of default under the Notes upon the expiration of a thirty day grace period. An event of default under the Notes permits the holders of the Notes to accelerate the maturity
of the Notes. In addition, the filing of the Chapter 11 Cases constituted an event of default under the New Notes. See "Part 1Item 1.
BusinessChapter 11 CasesDefaults Under Outstanding Debt Instruments."

In
connection with the Chapter 11 Cases, the DIP Borrowers entered into the DIP Credit Agreement with the DIP Lenders and the Administrative Agent. The DIP Credit Agreement
provides for a revolving facility in an aggregate principal amount of up to $75.0 million, of which up to $30.0 million is also available in the form of one or more letters of credit
that may be issued to third parties for the account of the Company and its subsidiaries. Pursuant to the Interim Order, the DIP Borrowers were authorized to enter into and immediately draw upon the
DIP Credit Agreement on an interim basis in an aggregate amount of $20 million, pending a final hearing before the Bankruptcy Court. Pursuant to the Final DIP Order, the DIP Borrowers were
permitted access to the total $75 million of the DIP Financing, subject to the terms and conditions of the DIP Credit Agreement and related orders of the Bankruptcy Court. As of
December 31, 2009, the Company had not borrowed any amounts under the DIP Credit Agreement and letters of credit totaling $1.6 million had been issued under the DIP Credit Agreement.

The
DIP Financing matures and is repayable in full on the earlier to occur of (i) July 26, 2010, which date can be extended up to three months at the request of the DIP
Borrowers upon the prior written consent of the Required DIP Lenders with no fee payable by the DIP Borrowers in connection

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(1) Organization, Principles of Consolidation & Liquidity; Chapter 11 Cases (Continued)

with
any such extension, (ii) the Effective Date (iii) the voluntary reduction by the DIP Borrowers to zero of all commitments to lend under the DIP Credit Agreement or (iv) the
date on which the obligations under the DIP Financing are accelerated by the Required DIP Lenders upon the occurrence and during the continuance of certain events of default.

Other
material provisions of the DIP Credit Agreement include the following:

Interest Rate and Fees.Interest rates for borrowings under the DIP Credit Agreement are, at the DIP Borrowers' option, at either
(i) the
Eurodollar rate plus a margin of 4.5% or (ii) the base rate plus a margin of 3.5%, payable monthly in arrears on the last business day of each month.

Interest
accrues from and including the date of any borrowing up to but excluding the date of any repayment thereof and is payable (i) in respect of each base rate loan, monthly
in arrears on the last
business day of each month, (ii) in respect of each Eurodollar loan, on the last day of each interest period applicable thereto (which shall be a period of one month) and (iii) in
respect of each such loan, on any prepayment or conversion (on the amount prepaid or converted), at maturity (whether by acceleration or otherwise) and, after such maturity, on demand. The DIP Credit
Agreement provides for the payment to the Administrative Agent, for the pro rata benefit of the DIP Lenders, of an upfront fee in the aggregate principal amount of $1.5 million, which upfront
fee was payable in two installments: (1) the first installment of $400,000 was due and payable on October 28, 2009, the date on which the Interim Order was entered by the Bankruptcy
Court, and (2) the remainder of the upfront fee was due and payable on the date the Final DIP Order was entered by the Bankruptcy Court. The DIP Credit Agreement also provides for an unused
line fee of 0.50% on the unused revolving commitment, payable monthly in arrears on the last business day of each month (or on the date of maturity, whether by acceleration or otherwise), and a letter
of credit facing fee of 0.25% per annum calculated daily on the stated amount of all outstanding letters of credit, payable monthly in arrears on the last business day of each month (or on the date of
maturity, whether by acceleration or otherwise), as well as certain other fees.

Voluntary Prepayments.Voluntary prepayments of borrowings and optional reductions of the unutilized portion of the commitments are
permitted without
premium or penalty (subject to payment of breakage costs in the event Eurodollar loans are prepaid prior to the end of an applicable interest period).

Covenants.Under the DIP Credit Agreement, the DIP Borrowers are required to maintain compliance with certain covenants, including
maintaining
minimum EBITDAR (earnings before interest, taxes, depreciation, amortization, restructuring charges and certain other non-cash costs and charges, as set forth in the DIP Credit Agreement)
and not exceeding maximum permitted capital expenditure amounts. The DIP Credit Agreement also contains customary affirmative and negative covenants and restrictions, including, among others, with
respect to investments, additional indebtedness, liens, changes in the nature of the business, mergers, acquisitions, asset sales and transactions with affiliates. As of December 31, 2009, the
DIP Borrowers are is in compliance with all covenants under the DIP Credit Agreement.

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Notes to Consolidated Financial Statements (Continued)

(1) Organization, Principles of Consolidation & Liquidity; Chapter 11 Cases (Continued)

Events of Default.The DIP Credit Agreement contains customary events of default, including, but not limited to, failure to pay
principal, interest
or other amounts when due, breach of covenants, failure of any representations to have been true in all material respects when made, cross-defaults to certain other indebtedness in excess of specific
amounts (other than obligations and indebtedness created or incurred prior to the filing of the Chapter 11 Cases), judgment defaults in excess of specified amounts,
certain defaults under ERISA, and the failure of any guaranty or security document supporting the DIP Credit Agreement to be in full force and effect, the occurrence of a change of control and certain
matters related to the Interim Order, the Final DIP Order and other matters related to the Chapter 11 Cases.



The DIP Pledgors entered into the DIP Pledge Agreement with the DIP Collateral Agent, as required under the terms of the DIP Credit
Agreement. Pursuant to the DIP Pledge Agreement, the DIP Pledgors provided to the DIP Collateral Agent for the secured parties identified therein, a security interest in the Pledge Agreement
Collateral.



The DIP Guarantors entered into the DIP Subsidiary Guaranty, as required under the terms of the DIP Credit Agreement. Pursuant to the
DIP Subsidiary Guaranty, the DIP Guarantors agreed to jointly and severally guarantee the full and prompt payment of all fees, obligations, liabilities and indebtedness of the DIP Borrowers, as
borrowers under the DIP Financing. Pursuant to the terms of the DIP Subsidiary Guaranty, the DIP Guarantors further agreed to subordinate any indebtedness of the DIP Borrowers held by such DIP
Guarantor to the indebtedness of the DIP Borrowers held by the secured parties under the DIP Financing.



The DIP Grantors entered into the DIP Security Agreement, as required under the terms of the DIP Credit Agreement. Pursuant to the DIP
Security Agreement, the DIP Grantors provided to the DIP Collateral Agent for the benefit of the secured parties identified therein, a security interest in all assets other than the DIP Pledge
Agreement Collateral, any causes of action arising under Chapter 5 of the Bankruptcy Code and FCC licenses and authorizations by state regulatory authorities to the extent that any DIP Grantor
is prohibited from granting a lien and security interest therein pursuant to applicable law.

As
a condition to the approval of the Merger and related transactions by state regulatory authorities, the Company has agreed to make capital expenditures following the completion of the
Merger. As a condition to the approval of the transactions by the state regulatory authority in Maine, the Company agreed that, following the closing of the Merger, the Company will make capital
expenditures in Maine during the first three years after the closing of $48 million in the first year and an average of $48 million in the first two years and an average of
$47 million in the first three years. The Company is also required to expend over a five year period not less than $40 million on equipment and infrastructure to expand the availability
of broadband services in Maine, which is

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(1) Organization, Principles of Consolidation & Liquidity; Chapter 11 Cases (Continued)

expected
to result in capital expenditures in Maine in excess of the minimum capital expenditure requirements described above.

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

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

The
Company also had the availability of $49.2 million contributed to the Company by the Verizon Group, and $1.1 million in interest earned thereon, to make capital and
operating expenditures in New Hampshire in addition to those described above for unexpected infrastructure improvements proposed
by the Company and approved by the NHPUC. These funds were reflected on the Company's March 31, 2009 balance sheet as restricted cash to be used only in accordance with the NH 2008 Settlement.
During the three months ended June 30, 2009, we requested that these funds be made available for general working capital purposes. By letter, dated as of May 12, 2009, the NHPUC approved
the Company's request, conditioned upon the Company's commitment to invest funds on certain NHPUC approved network improvements in New Hampshire on the following schedule: $15 million by the
end of 2010, an additional $20 million by the end of 2011 and an additional $30 million by the end of 2012. This investment commitment is inclusive of the $50 million previously
required by the NHPUC.

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Notes to Consolidated Financial Statements (Continued)

(1) Organization, Principles of Consolidation & Liquidity; Chapter 11 Cases (Continued)

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

At
this time, it is unclear what effect the filing of the Chapter 11 Cases will have on the requirements, including service quality penalties, imposed by the PUCs in Maine, New
Hampshire and Vermont as a condition to the approval of the Merger and whether such requirements will be enforceable against us in the future.

The
Company expects that the orders by the PUCs in Maine, New Hampshire and Vermont will be amended based on regulatory settlements that were negotiated in connection with the
Chapter 11 Cases and the Plan. See "Item. 1BusinessChapter 11 Cases."

Chapter 11 Cases

For a description of the Chapter 11 Cases, see "Item. 1BusinessChapter 11 Cases."

(2) Reorganization

The Reorganizations Topic of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification (the "ASC"), which is applicable to companies in Chapter 11,
generally does not change the manner in which financial statements are prepared. However, it does require that the financial statements for periods subsequent to the filing of the Chapter 11
Cases distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Amounts that can be directly associated with the
reorganization and restructuring of the business must be reported separately as reorganization items in the statements of operations beginning in the quarter ending December 31, 2009. The
balance sheet must distinguish pre-petition liabilities subject to compromise from both those pre-petition liabilities that are not subject to compromise and from
post-petition liabilities. Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be allowed, even if they may be settled for lesser
amounts. In addition, cash provided by and used for reorganization items must be disclosed separately in the statement of cash flows.

The
accompanying consolidated financial statements have been prepared in accordance with the Reorganizations Topic of the ASC. All pre-petition liabilities subject to
compromise have been segregated in the consolidated balance sheets and classified as liabilities subject to compromise at the estimated amount of the allowable claims. Liabilities not subject to
compromise are separately classified as current or noncurrent. The Company's consolidated statements of operations for the year ended December 31, 2009 include the results of operations during
the Chapter 11 Cases. As such, any revenues, expenses, and gains and losses realized or incurred that are directly related to the bankruptcy case are reported separately as reorganization items
due to the bankruptcy.

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Notes to Consolidated Financial Statements (Continued)

(2) Reorganization (Continued)

The Company received approval from the Bankruptcy Court to pay or otherwise honor certain of its pre-petition obligations, including employee related obligations such as
accrued vacation and pension related benefits. As such, these obligations have been excluded from liabilities subject to compromise as of December 31, 2009.



Reorganization items represent expense or income amounts that have been recognized as a direct result of the Chapter 11 Cases
and are presented separately in the consolidated statements of operations pursuant to the Reorganizations Topic of the ASC. Such items consist of the following (amounts in thousands):

Year ended
December 31, 2009Non-cash debt adjustments(a)

$
33,680Non-cash interest rate swap adjustments(b)


10,284Professional fees(c)


8,365Employee retention(d)


689Total reorganization items

$
53,018


(a)This
amount includes the write-off of $23.8 million of deferred financing costs on the Pre-petition Credit Facility and
$9.9 million of discount on the Notes in order to adjust the carrying amount of the debt to the Bankruptcy Court approved amount of the allowed claims for the debt.(b)The
carrying value of the Swaps was adjusted to the termination value of the Swaps, as determined by the respective counterparties to the Swaps. The
termination of the Swaps resulted from the filing of the Chapter 11 Cases.(c)Professional
fees relate to legal, financial advisory and other professional costs directly associated with the reorganization process.(d)Employment
retention represents charges incurred relating to the execution of retention agreements with certain executives in accordance with the plan of
reorganization.


Liabilities Subject to Compromise

Liabilities subject to compromise refer to liabilities incurred prior to the Petition Date for which the Company has not received
approval from the Bankruptcy Court to pay or otherwise honor. The amounts of the various categories of liabilities that are subject to compromise are set forth below. These amounts represent the
estimates of known or potential pre-Petition Date claims that are likely to be resolved in connection with the Chapter 11 Cases. Such claims remain subject to future adjustments.
Adjustments may result from negotiations, actions of the Bankruptcy Court, rejection of the executory contracts and unexpired leases, the determination of the value securing claims, proofs of claim or
other events.

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Notes to Consolidated Financial Statements (Continued)

(2) Reorganization (Continued)

Liabilities
subject to compromise at December 31, 2009 consisted of the following (amounts in thousands):

December 31, 2009Senior secured credit facility

$
1,965,450Senior Notes


549,996Interest rate swap


98,833Accrued interest


74,406Accounts payable


93,049Other long-term liabilities


787Other accrued liabilities


42,461Capital lease obligations


7,627Employee benefit obligations


3,731Liabilities subject to compromise

$
2,836,340


Liabilities
not subject to compromise include: (1) liabilities incurred after the Petition Date; (2) pre-Petition Date liabilities that the Company expects to
pay in full such as medical or retirement benefits; and (3) pre-Petition Date liabilities that have been approved for payment by the Bankruptcy Court and that the Company expects to
pay (in advance of a plan of reorganization) in the ordinary course of business, including certain employee-related items (e.g., salaries, vacation, etc).

The
classification of liabilities not subject to compromise versus liabilities subject to compromise is based on currently available information and analysis. As the Chapter 11
Cases proceed and additional information and analysis is completed, or as the Bankruptcy Court rules on relevant matters, the classification of amounts between these two categories may change. The
amount of any such change could be significant.



The Company has filed with the Bankruptcy Court schedules and statements of financial affairs setting forth, among other things, the
Company's assets and liabilities, subject to the assumptions filed in connection therewith. All of the schedules are subject to amendment or modification.

Bankruptcy
Rule 3003(c)(3) requires the Bankruptcy Court to set the time within which proofs of claim must be filed in a Chapter 11 case. The Bankruptcy Court established
March 18, 2010 at 5:00 p.m. Eastern Time (the "General Bar Date") as the last date and time for all non-governmental entities to file a proof of claim against the
Debtors and April 26, 2010 at 5:00 p.m. Eastern Time (the "Governmental Bar Date", and together with the General Bar Date, the "Bar Dates") as the last date and time for all governmental
entities to file a proof of claim against the Company. Subject to certain exceptions, the Bar Dates apply to all claims against the Debtors that arose prior to the Petition Date.

As
of May 3, 2010, claims totaling $4.9 billion have been filed with the Bankruptcy Court against the Company, none of which have been withdrawn. We expect new and amended
claims to be filed in the future, including claims amended to assign values to claims originally filed with no designated value. The Company has identified, and expects to continue to identify, many
claims that we believe should be disallowed by the Bankruptcy Court because they are duplicative, have been later amended

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Notes to Consolidated Financial Statements (Continued)

(2) Reorganization (Continued)

or
superseded, are without merit, are overstated or for other reasons. As of May 3, 2010, the Bankruptcy Court has disallowed $1.0 billion of these claims and has not yet ruled on the
Company's other objections to claims, the disputed portions of which aggregate to an additional $2.4 million. We expect to continue to file objections in the future. Because the process of
analyzing and objecting to claims will be ongoing, the amount of disallowed claims may increase significantly in the future.

Through
the claims resolution process, differences in amounts scheduled by the Company and claims filed by creditors will be investigated and resolved, including through the filing of
objections with the Bankruptcy Court where appropriate. In light of the substantial number and amount of claims filed, the claims resolution process may take considerable time to complete, and we
expect that it will continue
after the Company's emergence from Chapter 11. Accordingly, the ultimate number and amount of allowed claims is not presently known, nor is the exact recovery with respect to allowed claims
presently known.

(3) Summary of Significant Accounting Policies

(a) Use of Estimates

The Company's management has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the
reported amounts of revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with U.S. generally accepted
accounting principles, or GAAP. Actual results could differ from those estimates.

(b) Revenue Recognition

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

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

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Notes to Consolidated Financial Statements (Continued)

(3) Summary of Significant Accounting Policies (Continued)

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

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

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

Revenue
is recognized net of tax collected from customers and remitted to governmental authorities.

Management
makes estimated adjustments, as necessary, to revenue or accounts receivable for known billing errors. At December 31, 2009, the Company recorded revenue reserves of
$22.6 million.

(c) Maintenance and Repairs

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

(d) Cash and Cash Equivalents

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

(e) Restricted Cash

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

As
of December 31, 2009, the Company had released $79.2 million of the restricted cash, including $1.4 million in interest earned on such restricted cash, for
approved expenditures under the required projects and had forfeited an additional $0.5 million to the Vermont Board due to an inability to spend the full $12.5 million allocated for such
projects in the 2008 calendar year. Included in the $79.2 million of restricted cash released for approved expenditures is $12.5 million to be spent during the 2009

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Notes to Consolidated Financial Statements (Continued)

(3) Summary of Significant Accounting Policies (Continued)

calendar
year on service quality improvements under a performance enhancement plan in Vermont. The Company failed to fulfill its obligation to spend the full $12.5 million allocated for such
projects in the 2009 calendar year. As a result, the Company accrued and subsequently paid an additional $0.5 million forfeiture to the Vermont Board. As of December 31, 2009,
$2.6 million of the Merger Restricted Cash remains for removal of double poles in Vermont. As of December 31, 2009, the Company also had $1.4 million of cash restricted for other
purposes.

As
of December 31, 2009, the Company had $4.0 million of restricted cash of which $2.5 million is shown in current assets and $1.5 million is shown as a
non-current asset on the Consolidated Balance Sheet.

However,
at this time, it is unclear what effect the filing of the Chapter 11 Cases will have on the requirements imposed by the PUCs in Maine, New Hampshire and Vermont as a
condition to the approval of the Merger and whether such requirements will be enforceable against the Company in the future.

(f) Accounts Receivable

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

The
following is activity in the Company's allowance for doubtful accounts receivable for the years ended December 31 (in thousands):

2009

2008

2007Balance, beginning of period

$
20,340

$
25,585

$
19,514Acquisition of Legacy FairPoint





1,832


Contributed back to Verizon





(9,356
)

Provision charged to expense


56,073


25,234


21,765Provision charged to other accounts (a)


(91
)

5,419


4,728Amounts written off, net of recoveries


(10,293
)

(28,374
)

(20,422
)Balance, end of period

$
66,029

$
20,340

$
25,585


(a)Provision
charged to other accounts includes accruals charged to accounts payable for anticipated uncollectible charges on purchase of accounts receivable
from others which were billed by the Company.


(g) Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and trade
receivables. The Company places its cash with high-quality financial institutions. Concentrations of credit risk with respect to trade receivables are principally

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Notes to Consolidated Financial Statements (Continued)

(3) Summary of Significant Accounting Policies (Continued)

related
to receivables from other interexchange carriers and are otherwise limited to the Company's large number of customers in several states.

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

(h) Materials and Supplies

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

(i) Property, Plant, and Equipment

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

At
December 31, 2009 and 2008, accumulated depreciation for property, plant and equipment was $4.2 billion and $4.0 billion, respectively.

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

Average Lives

YearsBuildings


45Central office equipment


5  11Outside communications plantCopper cable


15  18Fiber cable


25Poles and conduit


30  50Furniture, vehicles and other


3  15


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

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

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Notes to Consolidated Financial Statements (Continued)

(3) Summary of Significant Accounting Policies (Continued)

Periodically, the Company reviews the estimated useful lives of property, plant, and equipment along with the associated depreciation rates. Effective January 1, 2009, the
depreciation rates of copper cable and certain central office equipment were decreased to reflect the change in distribution of assets within these classes. As a result, depreciation expense decreased
by approximately $28 million in 2009 compared to 2008.

Effective
January 1, 2008, the life of fiber cable was increased to 25 years from a previous life of 20 years. As a result, depreciation expense decreased by
approximately $2.4 million in 2008 compared to 2007. This change was based on a review of the physical mortality of fiber cable and the Company's long-term strategy for use of fiber
cable, as well as a lack of technology-driven substitutes.

Effective
January 1, 2007, the life of buildings was increased to 45 years from a previous range of 31-34 years. This change was largely driven by a
desire to standardize the useful life across all states and to be more consistent with the industry as a whole. Effective January 1, 2007, the life of circuit equipment was increased from 8 to
9 years, predominantly due to increased reserve ratios and other factors.

The
Company believes that current estimated useful asset lives are reasonable, although they are subject to regular review and analysis. In the evaluation of asset lives, multiple
factors are considered, including, but not limited to, the ongoing network deployment, technology upgrades and enhancements, planned retirements and the adequacy of reserves.

(j) Long-Lived Assets

Property, plant and equipment and intangible assets subject to amortization are reviewed for impairment as required by the Property,
Plant, and Equipment Topic of the ASC and the Intangibles Topic of the ASC. These assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts
may not be recoverable. An impairment charge is recognized for the amount, if any, by which the carrying value of the asset exceeds its fair value.

The
Company determined as of December 31, 2009 that a possible impairment of long-lived assets was indicated by the filing of the Chapter 11 Cases as well as a
significant decline in the fair value of the Company's common stock. In accordance with the Property, Plant, and Equipment Topic of the ASC, the Company performed a recoverability test, based on
undiscounted projected future cash flows associated with its long-lived assets, and determined that long-lived assets were not impaired at that time.

While
no impairment charges resulted from the analysis performed at December 31, 2009, asset values may be adjusted in the future due to the outcome of the Chapter 11 Cases
or the application of Fresh Start Accounting upon the Company's emergence from Chapter 11.

(k) Computer Software and Interest Costs

The Company capitalizes certain costs incurred in connection with developing or obtaining internal use software which has a useful life
in excess of one year in accordance with the Intangibles-Goodwill and Other Topic of the ASC. Capitalized costs include direct development costs associated with internal use software, including direct
labor costs and external costs of materials and services.

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Notes to Consolidated Financial Statements (Continued)

(3) Summary of Significant Accounting Policies (Continued)

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

In
addition, the Company capitalizes the interest cost associated with the period of time over which the Company's internal use software is developed or obtained in accordance with the
Interest Topic of the ASC. The Company has not capitalized interest costs incurred subsequent to the filing of the Chapter 11 Cases, as payments on all interest obligations have been stayed as
a result of the filing of the Chapter 11 Cases.

On
January 15, 2007, FairPoint entered into the Master Services Agreement (the "MSA"), with Capgemini U.S. LLC. Through the MSA, the Company replicated and/or replaced
certain existing Verizon systems during a phased period through January 2009. As of June 30, 2009, the Company had completed the application development stage of the project and was no longer
capitalizing costs in accordance with the Intangibles-Goodwill and Other Topic of the ASC. The Company has recognized both external and internal service costs associated with the MSA based on total
labor incurred through the completion of the application development stage. As of December 31, 2009, the Company had capitalized $107.0 million of MSA costs and an additional
$6.9 million of interest costs.

In
addition to the MSA, the Company has other agreements and projects for which costs are capitalized in accordance with the IntangiblesGoodwill and Other Topic and the
Interest Topic of the ASC. During the year ended December 31, 2009, the Company capitalized $19.4 million in software costs in addition to those capitalized under the MSA. During the
year ended December 31, 2009, the Company capitalized $2.5 million in interest costs in addition to those capitalized under the MSA.

As
of December 31, 2008, the Company had capitalized $94.6 million of costs under the IntangiblesGoodwill and Other Topic of the ASC and $5.9 million of
interest costs under the Interest Topic of the ASC.

(l) Debt Issue Costs

On March 31, 2008, immediately prior to the Merger, Legacy FairPoint and Spinco entered into the Pre-petition Credit
Facility, consisting of the Revolving Credit Facility, the Term Loan and the Delayed Draw Term Loan. The Company incurred $29.2 million of debt issue costs associated with these credit
facilities and began to amortize these costs over the life of the related debt, ranging from 6 to 7 years using the effective interest method.

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

Concurrent
with the Pre-petition Credit Facility Amendment, the Company wrote off $0.8 million of the unamortized debt issue costs associated with the original
Pre-petition Credit Facility, in accordance with the DebtModifications and Extinguishments Topic of the ASC.

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Notes to Consolidated Financial Statements (Continued)

(3) Summary of Significant Accounting Policies (Continued)

In
connection with the Exchange Offer consummated on July 29, 2009, the Company paid a cash consent fee of $1.6 million in the aggregate to holders of Old Notes who validly
delivered and did not revoke consents in the related consent solicitation prior to a specified early consent deadline, which amount was equal to $3.75 in cash per $1,000 aggregate principal amount of
Old Notes exchanged in the Exchange Offer. Pursuant to the Debt Topic of the ASC, this consent fee was capitalized and the Company began to amortize these costs over the life of the New Notes using
the effective interest method.

Concurrent
with the filing of the Chapter 11 Cases, on October 26, 2009 the Company wrote off all remaining debt issue and offering costs related to its
pre-petition debt in accordance with the Reorganizations Topic of the ASC.

The
Company entered into the DIP Credit Agreement on October 27, 2009. The Company incurred $0.9 million of debt issue costs associated with the DIP Credit Agreement and
began to amortize these costs over the nine month life of the DIP Credit Agreement using the effective interest method.

As
of December 31, 2009, the Company had capitalized debt issue costs of $0.7 million, net of amortization.

(m) Advertising Costs

Advertising costs are expensed as they are incurred.

(n) Goodwill and Other Intangible Assets

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

Goodwill
impairment is determined using a two-step process. Step one compares the estimated fair value of the Company's single wireline reporting unit (calculated using both
the market
approach and the income approach) to its carrying amount, including goodwill. The market approach compares the fair value of the Company, as measured by its market capitalization, to the carrying
amount of the Company, which represents its shareholders' equity balance. As of December 31, 2009, shareholders' deficit totaled $218.4 million. The income approach compares the fair
value of the Company, as measured by discounted expected future cash flows, to the carrying amount of the Company. If the Company's carrying amount exceeds its estimated fair value, there is a
potential impairment and step two of the analysis must be performed.

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

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(3) Summary of Significant Accounting Policies (Continued)

The
Company performed step one of its annual goodwill impairment assessment as of October 1, 2009 and concluded that there was no impairment at that time. In light of the
Chapter 11 Cases, the Company performed an interim goodwill impairment assessment as of December 31, 2009 and determined that goodwill was not impaired.

As
of December 31, 2009, the Company had goodwill of $595.1 million.

The
Company's only non-amortizable intangible asset is the trade name of Legacy FairPoint acquired in the Merger. Consistent with the valuation methodology used to value the
trade name at the Merger, the Company assesses the fair value of the trade name based on the relief from royalty method. If the carrying amount of the trade name exceeds its estimated fair value, the
asset is considered impaired. The Company performed its annual non-amortizable intangible asset impairment assessment as of October 1, 2009 and concluded that there was no
indication of impairment at that time. In light of the Chapter 11 Cases, the Company performed an interim non-amortizable intangible asset impairment assessment as of
December 31, 2009 and determined that the trade name was not impaired.

For
its non-amortizable intangible asset impairment assessments at October 1, and December 31, 2009, the Company made certain assumptions including an estimated
royalty rate, an effective tax rate and a discount rate, and applied these assumptions to projected future cash flows of the consolidated FairPoint Communications, Inc. business, exclusive of
cash flows associated with wholesale revenues as these revenues are not generated through brand recognition. Changes in one or more of these assumptions may have resulted in the recognition of an
impairment loss.

While
no impairment charges resulted from the analyses performed at October 1, and December 31, 2009, asset values may be adjusted in the future due to the outcome of the
Chapter 11 Cases or the application of "fresh start" accounting upon the Company's emergence from Chapter 11.

The
Company's amortizable intangible assets consist of customer lists and a non-compete agreement. Amortizable intangible assets must be reviewed for impairment whenever
indicators of impairment exist. See note 3(j) above.

The
intangible assets of the Verizon Northern New England business were not transferred to Spinco, and thus are not included in the Company's balance sheet for periods subsequent to the
Merger date. Prior to the Merger, the Verizon Northern New England business' intangible assets consisted of non-network internal use software, which had a weighted average useful life of
7 years and was carried at $2.0 million, net of $15.4 million in accumulated amortization as of December 31, 2007. Amortization of Verizon New England business intangible
assets was $3.2 million in the year ended December 31, 2007.

(o) Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences

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(3) Summary of Significant Accounting Policies (Continued)

are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

FairPoint
files a consolidated income tax return with its subsidiaries. FairPoint has a tax-sharing agreement in which all subsidiaries are participants. All
intercompany tax transactions and accounts have been eliminated in consolidation.

The
Company adopted FASB Interpretation No. (FIN) 48,Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement
No. 109,on January 1, 2007. FIN 48 requires
applying a "more likely than not" threshold to the recognition and de-recognition of tax positions. The Company's unrecognized tax benefits totaled $8.8 million as of
January 1, 2009 and $5.4 million as of December 31, 2009, of which $2.0 million would impact its effective tax rate, if recognized.

In
assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management
determines its estimates of future taxable income based upon the scheduled reversal of deferred tax liabilities, projected future taxable income exclusive of reversing temporary differences, and tax
planning strategies. The Company establishes valuation allowances for deferred tax assets when it is estimated to be more likely than not that the tax assets will not be realized.

Based
upon the level of projections for future taxable income at December 31, 2008, management believed it was more likely than not the Company would realize the full benefits of
these deductible differences. However, as a result of the change in facts and circumstances during 2009 in which the Company filed for Chapter 11 reorganization, the Company reassessed the
likelihood that its deferred tax assets will be realized as of December 31, 2009. Based upon the change in circumstances, management believes it can support the realizability of its deferred
tax asset only by the scheduled reversal of its deferred tax liabilities and can no longer rely upon the projection of future taxable income. At December 31, 2009, the Company established a
valuation allowance of $27.2 million against its deferred tax assets which consists of a $21.7 million Federal allowance and a $5.5 million state allowance.

(p) Stock-based Compensation Plans

The Company accounts for its stock-based compensation plans in accordance with the Compensation-Stock Compensation Topic of the ASC,
which establishes accounting for stock-based awards granted in exchange for employee services. Accordingly, for employee awards which are expected to vest, stock-based compensation cost is measured at
the grant date, based on the fair value of the award, and is recognized as expense on a straight-line basis over the requisite service period, which generally begins on the date the award
is granted through the date the award vests. The Company elected to adopt the provisions of the Compensation-Stock Compensation Topic of the ASC using the prospective application method for awards
granted prior to becoming a public company and valued using the minimum value method, and using the modified prospective application method for awards granted subsequent to becoming a public company.

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Notes to Consolidated Financial Statements (Continued)

(3) Summary of Significant Accounting Policies (Continued)

(q) Employee Benefit Plans

For the three months ended March 31, 2008 and the year ended December 31, 2007, the employees of the Verizon Northern New
England business participated in Verizon's benefit plans including noncontributory pension plans, post-retirement healthcare and life insurance plans for Verizon Northern New England
business retirees and their dependents. Upon the effective date of the Merger, the Company assumed certain liabilities with respect to certain employees of the Northern New England operations, and the
Company adopted pension plans (which are non-contributory), post-retirement healthcare and life insurance plans covering the Northern New England operations' future retirees
and their dependents. Pension, post-retirement healthcare and life insurance benefits earned during the year as well as interest on projected benefit obligations are accrued annually.
Prior service costs and credits resulting from changes in plan benefits are amortized over the average remaining service period of the employees expected to receive benefits. Expected return on plan
assets is determined by applying the expected return on assets assumption to the market related value of assets. Accumulated actuarial gains and losses are amortized over the average remaining service
period of the employees expected to receive benefits only to the extent the unrecognized amounts exceed a 10% corridor determined as the greater of the plan's assets or liabilities.

Since
June 30, 2006, the Company's Northern New England operations management employees have not earned pension benefits. In addition, Northern New England operations management
employees hired after December 31, 2005 are not eligible for pension benefits and managers with less than 13.5 years of service as of June 30, 2006 are not eligible for
Company-subsidized retiree healthcare or retiree life insurance benefits.

Prior
to the effective date of the Merger, the benefit plans were part of the Verizon consolidated plans. The structure of the plans during this period did not provide for the separate
attribution of the related pension and post-retirement assets and obligations at the Verizon Northern New England business level. Because there was not a separate plan for the Verizon
Northern New England business, the annual income and expense related to such assets and obligations were allocated to the Verizon Northern New England business and were reflected as prepaid pension
assets and employee benefit obligations in the balance sheet as of December 31, 2007 and were reflected in the financial results for all periods prior to March 31, 2008.

As
part of the Merger, liabilities and assets attributable to the employees of the Verizon Northern New England business were spun off from the relevant Verizon benefit plans to new
benefit plans maintained by the Company and accounted for in accordance with the Compensation-Retirement Benefits Topic of the ASC. The separate Northern New England operations plans now maintained by
the Company for collectively bargained employees generally cover all eligible active collectively bargained employees of the Northern New England operations and approximately 315 management employees
(benefits for management employees are no longer accrued). Retired employees of the Verizon Northern New England business at March 31, 2008 will continue to be covered by the Verizon benefit
plans. In accordance with the Employee Matters Agreement dated January 15, 2007 between Verizon and the Company (the "Employee Matters Agreement"), an amount equal to $202.4 million of
cash was transferred from the trusts of the two Verizon defined benefit pension plans to the corresponding Company pension plans' trusts on April 30, 2008, which amount was calculated by
Verizon's actuaries to be 80% of the estimated pension liability for the Company's active employees.

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(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(3) Summary of Significant Accounting Policies (Continued)

An
additional transfer of $33.3 million was received from Verizon's defined benefit plans' trusts on February 5, 2010, and an additional transfer estimated to be $0.2 million,
will be made from Verizon's defined benefit plans' trusts upon final validation by actuaries and the Company of the census information and related actuarial calculations in accordance with relevant
statutory and regulatory guidelines and the Employee Matters Agreement. The assets transferred from the Verizon benefit plans' trusts to the Company's benefit plans' trusts have been invested by the
plans' trustee in various equity and fixed income securities. The final asset transfer will include investment return or loss on the final transfer amount from March 31, 2008 until the date of
the final asset transfer equivalent to the rate of return in the Verizon pension trusts.

The
Company accounts for pensions and other post-retirement benefit plans in accordance with the Compensation-Retirement Benefits Topic of the ASC. This Topic requires the
recognition of a defined benefit post-retirement plan's funded status as either an asset or liability on the balance sheet. This Topic also requires the immediate recognition of the
unrecognized actuarial gains and losses and prior service costs and credits that arise during the period as a component of other accumulated comprehensive income, net of applicable income taxes.
Additionally, a company must determine the fair value of plan assets as of the company's year end.

In
addition, the Company and its subsidiaries sponsor four voluntary 401(k) savings plans that, in the aggregate, cover substantially all eligible Legacy FairPoint employees, and two
voluntary 401(k) savings plans that cover in the aggregate substantially all eligible Northern New England operations employees. Each 401(k) plan year, the Company contributes to the 401(k) plans an
amount of matching contributions determined by the Company at its discretion or as otherwise negotiated with respect to collectively bargained employees.

(r) Business Segments

Management views its business of providing video, data and voice communication services to residential and business customers as one
business segment as defined in Segment Reporting Topic of the ASC. The Company consists of retail and wholesale telecommunications services, including local telephone, high speed Internet, long
distance and other services in 18 states. The Company's chief operating decision maker assesses operating performance and allocates resources based on the consolidated results.

(s) Purchase Accounting

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

(t) New Accounting Pronouncements

On July 1, 2009, the Company adopted the FASB ASC. The FASB has established the ASC as the source of authoritative principles
and standards recognized by the FASB to be applied by

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Notes to Consolidated Financial Statements (Continued)

(3) Summary of Significant Accounting Policies (Continued)

nongovernmental
entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. The adoption of the ASC had no impact on the Company's consolidated results of operations and financial position.

On
January 1, 2009, the Company adopted the accounting standard relating to business combinations. This standard establishes principles and requirements for how an acquirer in a
business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities
assumed, and any controlling interest; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial effects of the business combination. This standard is to be applied prospectively to business combinations for which the
acquisition date is on or after an entity's fiscal year that begins after December 15, 2008. The Company will assess the impact of this standard if and when a future acquisition occurs.

On
January 1, 2009, the Company adopted the accounting standard relating to disclosures about derivative instruments and hedging activities. This standard requires companies with
derivative instruments to disclose information that should enable financial statement users to understand how and why a company uses derivative instruments, how derivative instruments and related
hedged items are accounted for under the Derivatives and Hedging Topic of the ASC and how derivative instruments and related hedged items affect a company's financial position, financial performance
and cash flows. This standard is effective for financial statements issued for fiscal years beginning after November 15, 2008. The adoption of this standard had no impact on the Company's
consolidated results of operations and financial position.

On
June 15, 2009, the Company adopted the accounting standard relating to interim disclosures about fair value of financial instruments. This standard extends financial instrument
fair value disclosure to interim financial statements of publicly traded companies. This standard is effective for interim reporting periods ending after June 15, 2009. The adoption of this
standard had no impact on the Company's consolidated results of operations and financial position.

On
June 15, 2009, the Company adopted the accounting standard relating to subsequent events. This standard establishes principles and requirements for identifying, recognizing and
disclosing subsequent events. This standard requires that an entity identify the type of subsequent event as either recognized or unrecognized, and disclose the date through which the entity has
evaluated subsequent events. This standard was revised by FASB Accounting Standard Update 2010-09 to remove the requirement to disclose the date through which subsequent events have been
evaluated. This standard is effective for interim or annual financial periods ending after June 15, 2009. The adoption of this standard had no impact on the Company's consolidated results of
operations and financial position.

On
August 28, 2009, the Company adopted the accounting standard update regarding the measurement of liabilities at fair value. This update clarifies the valuation techniques that
should be used to measure liabilities that are carried at fair value on a company's statement of financial position. This update is effective for interim or annual financial periods beginning after
August 28, 2009. The adoption of this update had no impact on the Company's consolidated results of operations and financial position.

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(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(3) Summary of Significant Accounting Policies (Continued)

In
December 2008, the accounting standard regarding employers' disclosures about postretirement benefit plan assets was updated to require the Company, as a plan sponsor, to provide
disclosures about plan assets, including categories of plan assets, the nature of concentrations of risk and disclosures about fair value measurements of plan assets. This standard is effective for
fiscal years ending after December 15, 2009. The adoption of this standard is not expected to have a significant impact on the Company's consolidated results of operations and financial
position.

(4) Certain Transactions

(a) Merger

On March 31, 2008, FairPoint completed the acquisition of Spinco, pursuant to which Spinco merged with and into FairPoint, with
FairPoint continuing as the surviving corporation for legal purposes. Spinco was a wholly-owned subsidiary of Verizon and prior to the Merger the Verizon Group transferred certain specified assets and
liabilities of the local exchange businesses of Verizon New England in Maine, New Hampshire and Vermont and the customers of the related long distance and Internet service provider businesses in those
states to subsidiaries of Spinco. The Merger was accounted for as a "reverse acquisition" of Legacy FairPoint by Spinco under the purchase method of accounting because Verizon stockholders owned a
majority of the shares of the consolidated Company following the Merger and, therefore, Spinco is treated as the acquirer for accounting purposes.

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

(b) Dividends

On December 5, 2008, the Company declared a dividend of $0.2575 per share of common stock, which was paid on January 16,
2009 to holders of record as of December 31, 2008. In 2008, the Company declared dividends totaling $69.0 million, or $0.773 per share of common stock. Prior to the Merger, Legacy
FairPoint declared a dividend totaling $14.0 million, or $0.39781 per share of common stock, which was paid on April 16, 2008 to Legacy FairPoint holders of record as of March 30,
2008.

On
March 4, 2009, the Company's board of directors voted to suspend the quarterly dividend on the Company's common stock. The Company currently does not expect to reinstate the
payment of dividends.

(5) Acquisitions and Dispositions

On March 31, 2008, the Company completed a merger with Northern New England Spinco, Inc., or Spinco. The Merger of FairPoint and Spinco was accounted for as a reverse
acquisition of FairPoint by Spinco under the purchase method of accounting because Verizon's stockholders owned a majority of the shares of the combined Company following the Merger. The Merger
consideration was $316.3 million. Goodwill resulting from this transaction will not be deductible for income tax purposes. Spinco was a wholly-owned subsidiary of Verizon that owned Verizon's
local exchange and related business activities in Maine, New Hampshire and Vermont. Spinco was spun off from Verizon

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(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(5) Acquisitions and Dispositions (Continued)

immediately
prior to the Merger. Spinco served approximately 1,562,000 access line equivalents as of the date of acquisition.

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



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

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

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

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

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(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(5) Acquisitions and Dispositions (Continued)

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

Cash

$
11,401Current assets


57,178Property, plant, and equipment


303,261Investments


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


595,120Intangible assets


251,678Other assets


127,034Current liabilities


(179,146
)Long-term debt


(687,491
)Other liabilities


(171,493
)Total net purchase price

$
316,290


The
following unaudited pro forma information presents the combined results of operations of the Company as though the Merger and related transactions had been
consummated on January 1, 2007. These results include certain adjustments, mainly associated with increased interest expense on debt and amortization of intangible assets related to the
acquisitions and the related income tax effects. The pro forma financial information does not necessarily reflect the actual results of operations had the Merger been consummated at the beginning of
the period or which may be attained in the future (in thousands, except per share data).

Pro forma
year ended
December 31,2008

2007(unaudited)Revenue

$
1,341,623

$
1,475,927Net loss


(87,582
)

19,947Loss per common share:Basic


(1.09
)

0.23Diluted


(1.09
)

0.22


(6) Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill were as follows (in thousands):

Balance, December 31, 2007

$
Acquisition of FairPoint Communications, Inc.


619,372Balance, December 31, 2008

$
619,372Adjustment to deferred income taxes


(24,252
)Balance, December 31, 2009

$
595,120


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(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(6) Goodwill and Other Intangible Assets (Continued)

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

At December 31,2009

2008Customer lists (weighted average 9.7 years):Gross carrying amount

$
208,504

$
208,504Less accumulated amortization


(39,501
)

(16,929
)Net customer lists


169,003


191,575Non-Compete agreement (weighted average 1 year):Gross carrying amount


358


358Less accumulated amortization


(358
)

(268
)Net non-compete agreement





90Trade names (indefinite life):Gross carrying amount


42,816


42,816Total intangible assets, net

$
211,819

$
234,481


The
estimated weighted average useful lives of the intangible assets are 9.7 years for the customer relationships, one year for the non-compete
agreement and an indefinite useful life for trade names. Amortization expense was $22.6 million and $17.2 million for the years ended December 31, 2009 and 2008, respectively, and
is expected to be approximately $22.6 million per year.

(7) Property, Plant, and Equipment

A summary of property, plant, and equipment is shown below (in thousands):

Estimated
life

2009

2008(in years)Land




$
23,871

$
23,835Buildings and leasehold improvements


2  45


313,766


312,080Central office equipment


5  11


2,388,216


2,337,762Outside communications plant


15  50


2,908,287


2,872,207Furniture, vehicles and other work equipment


3  15


326,157


181,767Plant under construction





144,541


211,557Other





35,359


35,357Total property, plant, and equipment





6,140,197


5,974,565Accumulated depreciation





(4,189,762
)

(3,961,050
)Net property, plant, and equipment




$
1,950,435

$
2,013,515


Depreciation
expense, excluding amortization of intangible assets, for the years ended December 31, 2009, 2008, and 2007 was $252.7 million,
$237.8 million, and $230.0 million, respectively.

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(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(8) Interest Rate Swap Agreements

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

The
Company uses variable and fixed-rate debt to finance its operations, capital expenditures and acquisitions. The variable-rate debt obligations expose the
Company to variability in interest payments due to changes in interest rates. The Company believes it is prudent to limit the variability of a portion of its interest payments. To meet this objective,
from time to time, the Company entered into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. The Swaps effectively changed the variable rate on the
debt obligations to a fixed rate. Under the terms of the Swaps, the Company was required to make a payment if the variable rate was below the fixed rate, or it received a payment if the variable rate
was above the fixed rate.

The
Company failed to make payments of $14.0 million due under the Swaps on September 30, 2009, which failure resulted in an event of default under the Swaps upon the
expiration of a three business day grace period.

The
filing of the Chapter 11 Cases constituted a termination event under the Swaps. Subsequent to the filing of the Chapter 11 Cases, the Company received notification from
the counterparties to the Swaps that the Swaps had been terminated. However, the Company believes that any efforts to enforce payment obligations under such debt instruments are stayed as a result of
the filing of the Chapter 11 Cases. See note 1.

In
addition, as a result of the Restatement, the Company determined that the Company was not in compliance with the interest coverage ratio maintenance covenant and the leverage ratio
maintenance covenant under the Pre-petition Credit Facility for the measurement period ended June 30, 2009, which constituted an event of default under each of the
Pre-petition Credit Facility and the Swaps, and may have constituted an event of default under the Notes, in each case at June 30, 2009.

As
a result of the Merger, the Company reassessed the accounting treatment of the Swaps and determined that, beginning on April 1, 2008, the Swaps did not meet the criteria for
hedge accounting. Therefore, the changes in fair value of the Swaps subsequent to the Merger have been recorded as other income (expense) on the consolidated statement of operations. At
December 31, 2009, the carrying value of the Swaps was a net liability of approximately $98.8 million, all of which has been included in liabilities subject to compromise as a result of
the filing of the Chapter 11 Cases. The carrying value of the Swaps at December 31, 2009 represents the termination value of the Swaps as determined by the respective counterparties
following the event of default described above. The Company has recognized a $12.3 million gain on derivative instruments on the consolidated statement of operations as a result of changes in
the fair value of the Swaps during the year ended December 31, 2009. In addition, during the year ended December 31, 2009, the Company has recognized a loss of approximately
$10.3 million through reorganization items related to the termination of the swaps as a result of the event of default described above.

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(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(9) Long-term Debt

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

2009

2008Senior secured Pre-petition Credit Facility, variable rates ranging from 6.75% to 7.00% (weighted average rate of 6.94%) at December 31, 2009, due
2014 to 2015

$
1,965,450

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


549,996


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





(10,747
)Total outstanding long-term debt


2,515,446


2,470,253Less amounts subject to compromise


(2,515,446
)

Less current portion





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

$


$
2,425,253


As
a result of the filing of the Chapter 11 Cases (see note 1), all pre-petition debts owed by the Company under the Pre-petition
Credit Facility, the Notes and the Swaps have been classified as liabilities subject to compromise in the consolidated balance sheet as of December 31, 2009.

The
estimated fair value of the Company's long-term debt at December 31, 2009 is $1,619.9 million based on market prices of the Company's debt securities at the
balance sheet date.

The
Company failed to make the September 30, 2009 principal and interest payments required under the Pre-petition Credit Facility. Failure to make the principal
payment on the due date and failure to make the interest payment within five days of the due date constituted events of default under the Pre-petition Credit Facility, which permits the
lenders to accelerate the maturity of the loans outstanding thereunder, seek foreclosure upon any collateral securing such loans and terminate any remaining commitments to lend to the Company. In
addition, the incurrence of an event of default on the Pre-petition Credit Facility constituted an event of default under the Swaps at September 30, 2009, which failure resulted in
an event of default under the Swaps upon the expiration of a three business day grace period. Also, the failure to make the October 1, 2009 interest payment on the Notes within thirty days of
the due date constituted an event of default under the Notes. An event of default under the Notes permits the holders of the Notes to accelerate the maturity of the Notes. Filing of the
Chapter 11 Cases constituted an event of default on the New Notes. In addition, as a result of the Restatement, the Company determined that the Company was not in compliance with the interest
coverage ratio maintenance covenant and the leverage ratio maintenance covenant under the Pre-petition Credit Facility for the measurement period ended June 30, 2009, which
constituted an event of default under each of the Pre-petition Credit Facility and the Swaps, and may have constituted an event of default under the Notes, in each case at June 30,
2009.

On
September 25, 2009, the Company entered into forbearance agreements with the lenders under the Pre-petition Credit Facility and the Swaps under which the lenders
agreed to forbear from exercising their rights and remedies under the respective agreements with respect to any events of default through October 30, 2009. On October 26, 2009, the
Company filed the Chapter 11 Cases. The filing of the Chapter 11 Cases constituted an event of default under each of the Pre-petition Credit Facility, the New Notes and the
Swaps. However, the Company believes that any efforts to enforce payment obligations under these agreements are stayed as a result of the filing of the Chapter 11 Cases. For additional
information about the impact of the Chapter 11 Cases, see note 1.

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(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(9) Long-term Debt (Continued)

The
approximate aggregate maturities of long-term debt for each of the five years subsequent to December 31, 2009 are as follows (in thousands):

Year ending December 31,2010

$
45,0002011


58,7252012


63,3002013


288,3002014


102,750Thereafter


1,957,371$
2,515,446


Pursuant
to the Plan, the Company does not expect to make any principal or interest payments on its pre-petition debt during the pendency of the
Chapter 11 Cases. In accordance with the Reorganizations Topic of the ASC, as interest on the Notes subsequent to the Petition Date is not expected to be an allowed claim, the Company has not
accrued interest expense on the Notes subsequent to the Petition Date. $13.4 million of interest on unsecured debts, at the stated contractual rates, was not accrued for this reason during the
year ended December 31, 2009. The Company has continued to accrue interest expense on the Pre-petition Credit Facility, as such interest is considered an allowed claim per the Plan.

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



On March 31, 2008, immediately prior to the Merger, FairPoint and Spinco entered into the
Pre-Petition Credit Facility consisting of the Revolving Credit Facility, the Term Loan and the Delayed Draw Term Loan. Spinco drew $1,160 million under the Term Loan immediately
prior to the spin-off, and then the Company drew $470 million under the Term Loan and $5.5 million under the Delayed Draw Term Loan concurrently with the closing of the
Merger. Subsequent to the Merger, the Company has drawn an additional $194.5 million under the Delayed Draw Term Loan. These funds were used for certain capital expenditures and other expenses
associated with the Merger.

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

The
Revolving Credit Facility has a swingline subfacility in the amount of $10 million and a letter of credit subfacility in the amount of $30 million, which will allow
issuances of standby letters of credit by the Company. The Pre-petition Credit Facility also permits interest rate and currency exchange

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(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(9) Long-term Debt (Continued)

swaps
and similar arrangements that the Company may enter into with the lenders under the Pre-petition Credit Facility and/or their affiliates.

As
of December 31, 2009, the Company had borrowed $150.0 million under the Revolving Credit Facility and letters of credit had been issued for $18.6 million. Upon
the event of default under the Pre-petition Credit Facility relating to the Chapter 11 Cases described herein, the commitments under the Revolving Credit Facility were automatically
terminated. Accordingly, as of December 31, 2009, no funds remained available under the Revolving Credit Facility.

The
Term Loan B Facility and the Delayed Draw Term Loan will mature in March 2015 and the Revolving Credit Facility and the Term Loan A Facility will mature in March 2014. Each of the
Term Loan A Facility, the Term Loan B Facility and the Delayed Draw Term Loan, collectively referred to as the Term Loans, are repayable in quarterly installments in the manner set forth in the
Pre-petition Credit Facility beginning June 30, 2009.

Borrowings
under our Pre-petition Credit Facility bear interest at variable interest rates. Interest rates for borrowings under the Pre-petition Credit Facility
are, at the Company's option, for the Revolving Credit Facility and for the Term Loans at either (a) the Eurodollar rate, as defined in the Pre-petition Credit Facility, plus an
applicable margin or (b) the base rate, as defined in the Pre-petition Credit Facility, plus an applicable margin.

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

The
Pre-petition Credit Facility provides for payment to the lenders of a commitment fee on the average daily unused portion of the Revolving Credit Facility commitments,
payable quarterly in arrears on the last business day of each calendar quarter and on the date upon which the commitment is terminated. The Pre-petition Credit Facility also provides for
payment to the lenders of a commitment fee from the closing date of the Pre-petition Credit Facility up through and including the twelve month anniversary thereof on the unused portion of
the Delayed Draw Term Loan, payable quarterly in arrears, and on the date upon which the Delayed Draw Term Loan is terminated, as well as other fees.

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

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FairPoint Communications, Inc. and Subsidiaries

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(9) Long-term Debt (Continued)

Voluntary prepayments of borrowings under the Term Loan facilities and optional reductions of the unutilized portion of the revolving facility commitments will be permitted upon payment
of an applicable payment fee, which shall only be applicable to certain prepayments of borrowings as described in the Pre-petition Credit Facility.

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

Scheduled
amortization payments on our Pre-petition Credit Facility began in 2009. No principal payments are due on the Notes prior to their maturity. As a result of the
Chapter 11 Cases, the Company does not expect to make any additional principal or interest payments on its pre-petition debt.

For
the year ended December 31, 2009, the Company repaid $8.4 million of principal under the Term Loan A Facility and $6.1 million of principal under the Term Loan B
Facility.

Prior
to the filing of the Chapter 11 Cases, the Company failed to make principal and interest payments due under the Pre-petition Credit Facility on
September 30, 2009. The failure to make the principal payment on the due date and failure to make the interest payment within five days of the due date constituted events of default under the
Pre-petition Credit Facility. An event of default under the Pre-petition Credit Facility permits the lenders under the Pre-petition Credit Facility to accelerate
the maturity of the loans outstanding thereunder, seek foreclosure upon any collateral securing such loans and terminate any remaining commitments to lend to the Company. The occurrence of an event of
default under the Pre-petition Credit Facility constituted an event of default under the Swaps. In addition, the Company failed to make payments due under the Swaps on September 30,
2009, which failure resulted in an event of default under the Swaps upon the expiration of a three business day grace period.

In
addition, as a result of the Restatement, the Company determined that the Company was not in compliance with the interest coverage ratio maintenance covenant and the leverage ratio
maintenance covenant under the Pre-petition Credit Facility for the measurement period ended
June 30, 2009, which constituted an event of default under each of the Pre-petition Credit Facility and the Swaps, and may have constituted an event of default under the Notes, in
each case at June 30, 2009.

The
Pre-petition Credit Facility also contains restrictions on the Company's ability to pay dividends on its common stock.

The
Pre-petition Credit Facility is guaranteed, jointly and severally, by all existing and subsequently acquired or organized wholly owned first-tier domestic
subsidiaries of the Company that are holding

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Notes to Consolidated Financial Statements (Continued)

(9) Long-term Debt (Continued)

companies.
No guarantee is required of a subsidiary that is an operating company. Northern New England Telephone Operations LLC, Telephone Operating Company of Vermont LLC and Enhanced
Communications of Northern New England Inc. are regulated operating subsidiaries and, accordingly, are not guarantors under the Pre-petition Credit Facility.

The
Pre-petition Credit Facility is secured by a first priority perfected security interest in all of the stock, equity interests, promissory notes, partnership interests and
membership interests owned by the Company.



On March 31, 2008, Spinco issued $551.0 million aggregate principal amount of the Old Notes. The Old Notes mature on
April 1, 2018 and are not redeemable at the Company's option prior to April 1, 2013. Interest is payable on the Old Notes semi-annually in cash on April 1 and
October 1 of each year. The Old Notes bear interest at a fixed rate of 131/8% and principal is due at maturity. The Old Notes were issued at a discount and, accordingly, at the
date of their distribution, the Old Notes had a carrying value of $539.8 million (principal amount at maturity of $551.0 million less discount of $11.2 million).
$9.9 million of discount on the Notes was written off following the filing of the Chapter 11 Cases in order to adjust the carrying amount of the Company's pre-petition debt
to the Bankruptcy Court approved amount of the allowed claims for the Company's pre-petition debt.

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

For
purposes of the Verizon Northern New England business statements prior to the Merger, some funding requirements were summarized as Retained Earnings on the Consolidated Balance Sheet
without regard to whether the funding represents debt or equity. No specific debt instruments could be directly associated with the Verizon Northern New England business, nor were separate equity
accounts maintained. As such, a portion of interest expense net of interest income of the Verizon Companies for the years ended December 31, 2007 and 2006 was allocated to the Verizon Northern
New England business based on the percentage of the Verizon Northern New England business funding relative to the total debt and equity for the Verizon Companies.

Prior
to the filing of the Chapter 11 Cases, the Company failed to make the October 1, 2009 interest payment on the Notes. The failure to make the interest payment on the
Notes constituted an event of default under the Notes upon the expiration of a thirty day grace period. An event of default under the Notes permits the holders of the Notes to accelerate the maturity
of the Notes.

In
addition, as a result of the Restatement, the Company determined that the Company was not in compliance with the interest coverage ratio maintenance covenant and the leverage ratio
maintenance covenant under the Pre-petition Credit Facility for the measurement period ended June 30, 2009, which constituted an event of default under each of the
Pre-petition Credit Facility and the Swaps, and may have constituted an event of default under the Notes, in each case at June 30, 2009.

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(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(9) Long-term Debt (Continued)



On July 29, 2009, the Company successfully consummated the Exchange Offer. On the Settlement Date, the Proposed Amendments
became operative and $439.6 million in aggregate principal amount of the Old Notes (which amount was equal to approximately 83% of the then outstanding Old Notes) were exchanged for
$439.6 million in aggregate principal amount of the New Notes. In addition, pursuant to the terms of the Exchange Offer, an additional $18.9 million in aggregate principal amount of New
Notes was issued to holders who tendered their Old Notes in the Exchange Offer as payment for accrued and unpaid interest on the exchanged Old Notes up to, but not including, the Settlement Date.

The
New Notes mature on April 2, 2018 and bear interest at a fixed rate of 131/8%, payable in cash, except that the New Notes bore interest at a rate of 15% for the
period from July 29, 2009 through and including September 30, 2009. In addition, the Company was permitted to pay the interest payable on the New Notes for the Initial Interest Payment
Period in the form of cash, by capitalizing such interest and adding it to the principal amount of the New Notes or a combination of both cash and such capitalization of interest, at its option. The
Company intended to make the interest payments due on October 1, 2009 on the New Notes by capitalizing such interest and adding it to the principal amount of the New Notes. As such, interest
payable of $12.2 million at September 30, 2009 was reflected as interest payable in kind on the condensed consolidated balance sheet. As the Notes have been classified as subject to
compromise as of December 31, 2009, the Company has classified the accrued interest on the exchanged Old Notes as of December 31, 2009 of $12.2 million as subject to compromise on
the condensed consolidated balance sheet. In accordance with the Reorganizations Topic of the ASC, as interest on the Notes subsequent to the Petition Date is not expected to be an allowed claim, the
Company has not accrued interest expense on the Notes subsequent to the Petition Date.

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

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

During
the year ended December 31, 2009, the Company repurchased $19.9 million in aggregate principal amount of the Old Notes for an aggregate purchase price of
$6.3 million in cash. In total, including amounts repaid under the Term Loan A Facility and Term Loan B Facility, the Company retired $34.5 million of outstanding debt during the year
ended December 31, 2009.

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

Prior
to the filing of the Chapter 11 Cases, the Company failed to make the October 1, 2009 interest payment on the Notes. The failure to make the interest payment on the
Notes constituted an

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(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(9) Long-term Debt (Continued)

event
of default under the Notes upon the expiration of a thirty day grace period. An event of default under the Notes permits the holders of the Notes to accelerate the maturity of the Notes. In
addition, the filing of the Chapter 11 Cases constituted an event of default under the New Notes.

In
addition, as a result of the Restatement, the Company determined that the Company was not in compliance with the interest coverage ratio maintenance covenant and the leverage ratio
maintenance covenant under the Pre-petition Credit Facility for the measurement period ended June 30, 2009, which constituted an event of default under each of the
Pre-petition Credit Facility and the Swaps, and may have constituted an event of default under the Notes, in each case at June 30, 2009.



In connection with the Chapter 11 Cases, the DIP Borrowers entered into the DIP Credit Agreement with the DIP Lenders and the
Administrative Agent. The DIP Credit Agreement provides for DIP Financing. Pursuant to the Interim Order, the DIP Borrowers were authorized to enter into and immediately draw upon the DIP Credit
Agreement on an interim basis, pending a final hearing before the Bankruptcy Court, in an aggregate amount of $20 million. On March 11, 2010 the Bankruptcy Court entered the Final DIP
Order, permitting the DIP Borrowers access to the total $75 million of the DIP Financing, subject to the terms and conditions of the DIP Credit Agreement and related orders of the Bankruptcy
Court. As of December 31, 2009, the Company had not borrowed any amounts under the DIP Credit Agreement and letters of credit totaling $1.6 million had been issued under the DIP Credit
Agreement.

The
DIP Financing will mature and will be repayable in full on the earlier to occur of (i) July 26, 2010, which date can be extended up to three months at the request of
the DIP Borrowers upon the prior written consent of the Required DIP Lenders with no fee payable by the DIP Borrowers in connection with any such extension, (ii) the Effective Date,
(iii) the voluntary reduction by the DIP Borrowers to
zero of all commitments to lend under the DIP Credit Agreement or (iv) the date on which the obligations under the DIP Financing are accelerated by the Required DIP Lenders upon the occurrence
and during the continuance of certain events of default.

Other
material provisions of the DIP Credit Agreement include the following:

Interest Rate and Fees.Interest rates for borrowings under the DIP Credit Agreement are, at the DIP Borrowers' option, at either
(i) the
Eurodollar rate plus a margin of 4.5% or (ii) the base rate plus a margin of 3.5%, payable monthly in arrears on the last business day of each month.

Interest
accrues from and including the date of any borrowing up to but excluding the date of any repayment thereof and is payable (i) in respect of each base rate loan, monthly
in arrears on the last business day of each month, (ii) in respect of each Eurodollar loan, on the last day of each interest period applicable thereto (which shall be a period of one month) and
(iii) in respect of each such loan, on any prepayment or conversion (on the amount prepaid or converted), at maturity (whether by acceleration or otherwise) and, after such maturity, on demand.
The DIP Credit Agreement provides for the payment to the Administrative Agent, for the pro rata benefit of the DIP Lenders, of an upfront fee in the aggregate principal amount of $1.5 million,
which upfront fee was payable in two installments: (1) the first installment of $400,000 was due and payable on October 28, 2009, the date on which the Interim Order was entered by the
Bankruptcy Court, and (2) the remainder of the upfront

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(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(9) Long-term Debt (Continued)

fee
was due and payable on the date the Final DIP Order was entered by the Bankruptcy Court. The DIP Credit Agreement also provides for an unused line fee of 0.50% on the unused revolving commitment,
payable monthly in arrears on the last business day of each month (or on the date of maturity, whether by acceleration or otherwise), and a letter of credit facing fee of 0.25% per annum calculated
daily on the stated amount of all outstanding letters of credit, payable monthly in arrears on the last business day of each month (or on the date of maturity, whether by acceleration or otherwise),
as well as certain other fees.

Voluntary Prepayments.Voluntary prepayments of borrowings and optional reductions of the unutilized portion of the commitments are
permitted without
premium or penalty (subject to payment of breakage costs in the event Eurodollar loans are prepaid prior to the end of an applicable interest period).

Covenants.Under the DIP Credit Agreement, the DIP Borrowers are required to maintain compliance
with certain covenants, including maintaining minimum EBITDAR (earnings before interest, taxes, depreciation, amortization, restructuring charges and certain other non-cash costs and
charges, as set forth in the DIP Credit Agreement) and not exceeding maximum permitted capital expenditure amounts. The DIP Credit Agreement also contains customary affirmative and negative covenants
and restrictions, including, among others, with respect to investments, additional indebtedness, liens, changes in the nature of the business, mergers, acquisitions, asset sales and transactions with
affiliates. As of December 31, 2009, the DIP Borrowers are in compliance with all covenants under the DIP Credit Agreement.

Events of Default.The DIP Credit Agreement contains customary events of default, including, but not limited to, failure to pay
principal, interest
or other amounts when due, breach of covenants, failure of any representations to have been true in all material respects when made, cross-defaults to certain other indebtedness in excess of specific
amounts (other than obligations and indebtedness created or incurred prior to the filing of the Chapter 11 Cases), judgment defaults in excess of specified amounts, certain ERISA defaults and
the failure of any guaranty or security document supporting the DIP Credit Agreement to be in full force and effect, the occurrence of a change of control and certain matters related to the Interim
Order, the Final DIP Order and other matters related to the Chapter 11 Cases.



The DIP Borrowers and the DIP Pledgors entered into the DIP Pledge Agreement with Bank of America N.A., as the DIP Collateral Agent, as
required under the terms of the DIP Credit Agreement. Pursuant to the DIP Pledge Agreement, the DIP Pledgors provided the DIP Pledge Agreement Collateral to the DIP Collateral Agent for the secured
parties identified therein.



The DIP Guarantors entered into the DIP Subsidiary Guaranty with the Administrative Agent, as required under the terms of the DIP
Credit Agreement. Pursuant to the DIP Subsidiary Guaranty, the DIP Guarantors agreed to jointly and severally guarantee the full and prompt payment of all fees, obligations, liabilities and
indebtedness of the DIP Borrowers, as borrowers under the DIP Financing. Pursuant to the terms of the DIP Subsidiary Guaranty, the DIP Guarantors further agreed to subordinate any indebtedness of the
DIP Borrowers held by such DIP Guarantor to the indebtedness of the DIP Borrowers held by the secured parties under the DIP Financing.

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FairPoint Communications, Inc. and Subsidiaries

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(9) Long-term Debt (Continued)



The DIP Grantors entered into the DIP Security Agreement with the DIP Collateral Agent, as required under the terms of the DIP Credit
Agreement. Pursuant to the DIP Security Agreement, the DIP Grantors provided to the DIP Collateral Agent for the benefit of the secured parties identified therein, a security interest in all assets
other than the DIP Pledge Agreement Collateral, any causes of action arising under Chapter 5 of the Bankruptcy Code and FCC licenses and authorizations by state regulatory authorities to the
extent that any DIP Grantor is prohibited from granting a lien and security interest therein pursuant to applicable law.

As
of December 31, 2009, the Company had not borrowed any amounts under the DIP Credit Agreement, however letters of credit had been issued under the DIP Credit Agreement for
$1.6 million. Accordingly, as of December 31, 2009, the amount available under the DIP Credit Agreement was $18.4 million of the $20.0 million made available pursuant to
the Interim Order. On March 11, 2010 the Bankruptcy Court entered its Final DIP Order, and the remaining portion of the $75.0 million DIP Credit Agreement became available to the
Company.

(10) Employee Benefit Plans

As a result of the Merger and the associated transfer of the pension and other post-employment benefits ("OPEB") assets and liabilities to FairPoint, the Company remeasured
its pension and OPEB assets and liabilities as of April 1, 2008. This measurement was based
on a 6.80% discount rate, as well as certain other valuation assumption modifications and recognition of a new collective bargaining agreement, the sum of which resulted in material changes to the
pension and OPEB balances.

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

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

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

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FairPoint Communications, Inc. and Subsidiaries

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(10) Employee Benefit Plans (Continued)

Obligations and funded status

A summary of plan assets, projected benefit obligation and funded status of the plans are as follows for the year ended
December 31, 2009 and the nine months ended December 31, 2008:

Qualified Pension

Post-retirement Health(In thousands)

Year ended
December 31,
2009

Nine months
ended December 31,
2008

Year ended
December 31,
2009

Nine months
ended December 31,
2008Fair value of plan assets:Fair value of plan assets at beginning of year

$
184,300

$
252,500

$


$
Actual return on plan assets


26,339


(66,370
)




Plan settlements


(47,857
)







Employer contributions








389


208Benefits paid


(178
)

(1,830
)

(389
)

(208
)Fair value of plan assets at end of year


162,604


184,300





Projected benefit obligation:Projected benefit obligation at beginning of year

$
222,393

$
182,420

$
221,286

$
168,483Service cost


10,923


6,741


13,020


7,018Interest cost


13,269


9,383


13,889


8,196Plan amendments





13,454





123Plan settlements


(47,857
)







Benefits paid


(178
)

(1,830
)

(389
)

(208
)Actuarial loss


6,684


12,225


12,524


37,674Projected benefit obligation at end of year


205,234


222,393


260,330


221,286Plan assets less than projected benefit obligation

$
(42,630
)
$
(38,093
)
$
(260,330
)
$
(221,286
)Accumulated benefit obligation

$
204,946

$
222,126

$
N/A


N/AAmounts recognized in the consolidated balance sheets:Non-current assets

$
8,808

$
8,708

$


$
Current liabilities








(961
)

(573
)Non-current liabilities


(51,438
)

(46,801
)

(259,369
)

(220,713
)Net amount recognized

$
(42,630
)
$
(38,093
)
$
(260,330
)
$
(221,286
)Amounts recognized in accumulated other comprehensive income (loss):Prior service credit (cost)

$
(18,665
)
$
(20,116
)
$
(33,715
)
$
(38,008
)Net actuarial gain (loss)


(80,666
)

(98,979
)

(75,707
)

(66,671
)Net amount recognized in accumulated other comprehensive income (loss)

$
(99,331
)
$
(119,095
)
$
(109,422
)
$
(104,679
)


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FairPoint Communications, Inc. and Subsidiaries

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(10) Employee Benefit Plans (Continued)

Pension plan assets at December 31, 2009 include an additional transfer of assets from Verizon of $33.3 million, which was received
on February 5, 2010, as well as a pending transfer of assets from Verizon estimated to be $0.2 million.

The
plans' portfolio strategy emphasizes a long-term equity orientation, significant global diversification and financial and operating risk controls. The plans'
diversification seeks to minimize the concentration of risk. Assets are allocated according to long-term risk and return estimates. Both active and passive management approaches are used
depending on perceived market efficiencies and various other factors.

The
fair values for the pension plans by asset category at December 31, 2009 are as follows:

(In thousands)

Total

Level 1

Level 2

Level 3Cash and cash equivalents

$
18,972

$
18,972

$


$
Equity securities


41,569


41,569





Fixed income securities


52,045





52,045


Hedge funds


14,202








14,202Funds receivable from Verizon


33,553








33,553Other assets


2,263








2,263Total

$
162,604

$
60,541

$
52,045

$
50,018


A
reconciliation of the beginning and ending balance of pension plan assets that are measured at fair value using significant unobservable (Level 3) inputs as of
December 31, 2009 is as follows:

(In thousands)

Hedge Funds

Funds Receivable
from Verizon

Other assets

TotalBalance at December 31, 2008

$


$
32,094

$


$
32,094Actual gain (loss) on plan assets


(798
)

1,459





661Purchases and sales











Transfers in and/or out of Level 3


15,000





2,263


17,263Balance at December 31, 2009

$
14,202

$
33,553

$
2,263

$
50,018


Cash
and cash equivalents include short-term investment funds, primarily in diversified portfolios of investment grade money market instruments and are valued using quoted
market prices, and thus classified within Level 1 of the fair value hierarchy.

Equity
securities are investments in common stock of domestic and international corporations in a variety of industry sectors and are valued using quoted market prices, and are
classified within Level 1 of the fair value hierarchy.

Fixed
income securities are investments in corporate bonds. The fair values of fixed income securities are based on observable prices and are classified within Level 2 of the fair
value hierarchy.

Hedge
funds seek to maximize absolute returns using a broad range of strategies to enhance returns and provide diversification. The fair values of hedge funds are estimated using net
asset value per share (NAV) of the investments. The Company has the ability to redeem these investments at NAV on a limited basis, and thus has classified hedge funds within Level 3 of the fair
value hierarchy.

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(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(10) Employee Benefit Plans (Continued)

Other
assets represent cash and cash equivalents held in a short-term investment fund. Due to limitations on the liquidity of assets within this fund, the Company has
classified these assets within Level 3 of the Fair Value hierarchy.

Funds
receivable from Verizon represent the estimated pending transfer of funds from Verizon following final actuarial settlement. Concurrent with the closing of the Merger, Verizon
transferred 80% of the value of the pension plans to the Company. An additional transfer was made subsequent to December 31, 2009 from Verizon's defined benefit plans' trusts. A disputed amount
is pending final validation by a third-party actuary of the census information and related actuarial calculations in accordance with relevant statutory and regulatory guidelines and the Employee
Matters Agreement. The assets transferred from the Verizon benefit plans' trusts to the Company's benefit plans' trusts were invested by the plans' trustee in various equity and fixed income
securities. The final asset transfer included investment return or loss on the final transfer amount from March 31, 2008 through the date of the final asset transfer equivalent to the rate of
return in the Verizon pension trusts.

Net periodic benefit cost

The net periodic benefit (income) cost related to the Company's pension plans was $0.9 million for the year ended
December 31, 2008, of which ($0.1) million related to net periodic benefit income for the three months ended March 31, 2008. The net periodic benefit cost related to the Company's
post-retirement healthcare plans was $41.2 million for the year ended December 31, 2008, of which $22.5 million related to net periodic benefit cost for the three
months ended March 31, 2008.

The
structure of Verizon's benefit plans did not provide for the separate determination of certain disclosures for the Verizon Northern New England business for periods prior to the
Merger. The net periodic benefit cost related to the Verizon Northern New England business pension plans was $1 million for the year ended December 31, 2007. The net periodic benefit
cost related to the Verizon Northern New England business post-retirement healthcare plans was $90 million for the year ended December 31, 2007.

Components
of the net periodic benefit (income) cost related to the Company's pension and post-retirement healthcare plans for the year ended December 31, 2009 and the
nine months ended December 31, 2008 are presented below.

Qualified Pension

Post-retirement Health(In thousands)

Year ended
December 31,
2009

Nine months
ended December 31,
2008

Year ended
December 31,
2009

Nine months
ended December 31,
2008Service cost

$
10,923

$
6,741

$
13,020

$
7,018Interest cost


13,269


9,383


13,889


8,196Expected return on plan assets


(20,575
)

(15,745
)




Amortization of prior service cost


1,452


632


4,293


3,219Amortization of actuarial (gain) loss


813





3,487


261Settlement (gain) loss


18,420








Net periodic benefit cost

$
24,302

$
1,011

$
34,689

$
18,694


131

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Table of Contents

FairPoint Communications, Inc. and Subsidiaries

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(10) Employee Benefit Plans (Continued)

Other
pre-tax changes in plan assets and benefit obligations recognized in other comprehensive (income) loss are as follows for the year ended December 31, 2009 and
the nine months ended December 31, 2008:

Qualified Pension

Post-retirement Health(In thousands)

Year ended
December 31,
2009

Nine months
ended December 31,
2008

Year ended
December 31,
2009

Nine months
ended December 31,
2008Amounts recognized in other comprehensive income (loss):New prior service cost

$


$
13,454

$


$
123Net loss arising during the year


920


94,340


12,524


37,674Amortization or curtailment of prior service cost


(1,452
)

(632
)

(4,293
)

(3,219
)Amortization or settlement recognition of net loss


(19,233
)




(3,487
)

(260
)Total amount recognized in other comprehensive loss

$
(19,765
)
$
107,162

$
4,744

$
34,318Estimated amounts that will be amortized from accumulated other comprehensive income (loss) in the next fiscal year:Prior service cost

$
(1,524
)
$
(1,452
)
$
(4,290
)
$
(4,292
)Net actuarial gain (loss)


(1,115
)

(623
)

(3,110
)

(2,656
)Total amount estimated to be amortized from accumulated other comprehensive income (loss) in the next fiscal year

$
(2,639
)
$
(2,075
)
$
(7,400
)
$
(6,948
)


During
the year ended December 31, 2009, the Company did not make a contribution to the qualified pension plans, but did incur $0.4 million in post-retirement
healthcare plan expenditures. In 2010, the Company expects to make contributions of $1.0 million to its post-retirement health plans and does not expect to make any contributions to
the qualified pension plans due to the funded status of the plans.

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Table of Contents

FairPoint Communications, Inc. and Subsidiaries

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(10) Employee Benefit Plans (Continued)

Assumptions

The weighted average assumptions used in determining benefit obligations are as follows:

At December 31,2009

2008Qualified PensionDiscount rate


6.00
%

6.02
%Rate of future increases in compensation


4.00
%

4.00
%Post-retirement HealthDiscount rate


6.13
%

5.94
%Rate of future increases in compensation


4.00
%

4.00
%


The
weighted average assumptions used in determining net periodic cost are as follows:

Year ended
December 31,
2009

Nine months ended
December 31,
2008

Year ended
December 31,
2007Qualified PensionDiscount rate


5.94
%

6.80
%

6.00
%Expected return on plan assets


8.32
%

8.38
%

8.50
%Rate of compensation increase


4.00
%

4.00
%

4.00
%Post-retirement HealthDiscount rate


5.95
%

6.80
%

6.00
%Rate of compensation increase


4.00
%

4.00
%

4.00
%Healthcare cost trend rate assumed for participants under 65 next year


8.00
%

9.50
%

10.00
%Healthcare cost trend rate assumed for participants over 65 next year


8.50
%

10.50
%

10.00
%Rate that the cost trend rates ultimately declines to


4.00
%

5.00
%

5.00
%Year that the rates reach the terminal rate


2029


2014


2013


Prior
to the Merger, the weighted average assumptions were used in determining net periodic cost for the three months ended March 31, 2008 were as follows:

Three months ended
March 31, 2008Qualified PensionDiscount rate


6.50
%Expected return on plan assets


8.50
%Rate of compensation increase


4.00
%Post-retirement HealthDiscount rate


6.00
%Rate of compensation increase


4.00
%


133

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Table of Contents

FairPoint Communications, Inc. and Subsidiaries

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(10) Employee Benefit Plans (Continued)

In
developing the expected long-term rate of return assumption, the Company evaluated historical investment performance and input from its investment advisors. Projected
returns by such advisors were based on broad equity and bond indices. The expected long-term rate of return on qualified pension plan assets is based on target allocations of 50% equity
and 50% fixed income securities for the management plan and 70% equity and 30% fixed income securities for the associate plan. The asset allocation at December 31, 2009 for the Company's
qualified pension plan assets, excluding amounts receivable from Verizon, was as follows:

Management Plan

Associate Plan

Total PensionCash and cash equivalents(1)


1.0
%

0.4
%

0.6
%Equity securities


42.8
%

66.2
%

59.1
%Fixed income securities


56.2
%

33.4
%

40.3
%100.0
%

100.0
%

100.0
%


(1)Cash
and cash equivalents includes only those amounts that are held in the respective plans' trusts as cash and cash equivalent instruments. Amounts pending
purchase or settlement of equity or fixed income securities are classified within equity securities or fixed income securities, as appropriate.


For
the year ended December 31, 2009, the actual gain on the pension plan assets was approximately 17.3%. Net periodic benefit cost for 2009 assumes a weighted average annualized
expected return on plan assets of approximately 8.3%. Should the Company's actual return on plan assets become significantly lower than the expected return assumption, the net periodic benefit cost
may increase in future periods and the Company may be required to contribute additional funds to its pension plans after 2010.

A
1% change in the medical trend rate assumed for post-retirement health benefits would have the following effects at December 31, 2009:

(In thousands)

Post-retirement Health1% increase in the medical trend rate:Effect on total service cost and interest cost components

$
6,428Effect on benefit obligation


58,2421% decrease in the medical trend rate:Effect on total service cost and interest cost components

$
(4,940
)Effect on benefit obligation


(45,188
)


134

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Table of Contents

FairPoint Communications, Inc. and Subsidiaries

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(10) Employee Benefit Plans (Continued)

The impact of the Medicare Drug Act of 2003 subsidy on the post-retirement health benefits at December 31, 2009 is as follows:

(In thousands)

Post-retirement HealthChange in projected benefit obligation$
(16,949
)Change in each component of net periodic cost:Service cost

$
(842
)Interest cost


(895
)Net amortization and deferral of prior service cost


16Net amortization and deferral of actuarial loss


(466
)Total change in net periodic cost

$
(2,187
)


Estimated future benefit payments

Estimated future employer contributions, benefit payments and Medicare prescription drug subsidies expected to offset the future
post-retirement benefit payments are as follows as of December 31, 2009:

(In thousands)

Qualified Pension

Post-retirement HealthExpected employer contributions for 2010

$


$
961Expected benefit payments:2010

$
9,080

$
9612011


10,860


1,6232012


12,469


2,5172013


14,081


3,6332014


15,244


4,7662015-2019


39,327


49,872Expected subsidy:2010




$
2011





142012





242013





382014





572015-2019





1,086


401(k) savings plans

The Company and its subsidiaries sponsor four voluntary 401(k) savings plans that, in the aggregate, cover substantially all eligible
Legacy FairPoint employees, and two voluntary 401(k) savings plans that cover in the aggregate substantially all eligible Northern New England operations employees (collectively, "the 401(k) Plans").
Each 401(k) Plan year, the Company contributes to the 401(k) Plans an amount of matching contributions determined by the Company at its discretion. For the 401 (k) Plan year ended
December 31, 2009, the Company matched 100% of each employee's contribution

135

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Table of Contents

FairPoint Communications, Inc. and Subsidiaries

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(10) Employee Benefit Plans (Continued)

up
to 5% of compensation. For the 401(k) Plan years ended December 31, 2008 and 2007, the Company generally matched in the Legacy FairPoint 401(k) plans 100% of each employee's contribution up
to 3% of compensation and 50% of additional contributions up to 6% or as otherwise required by relevant collective bargaining agreement; in the Northern New England 401(k) management plan an amount
equal to 100% of each employee's contribution up to 6% of base compensation, plus,
depending on Company performance, an additional discretionary match of up to 50% of the next 3% of base compensation; and in the Northern New England 401(k) plan for union associates an amount equal
to 82% of each employee's contribution up to 6% of base compensation. Total Company contributions to all 401(k) Plans were $9.8 million, $10.9 million, and $11.0 million for the
years ended December 31, 2009, 2008 and 2007, respectively. The $9.8 million of Company contributions during the year ended December 31, 2009 includes a lump sum contribution of
$1.2 million made in 2010 to match certain employee contributions made during the year ended December 31, 2009.

(11) Income Taxes

Income tax (expense) benefit for the years ended December 31, 2009, 2008, and 2007 consists of the following components (in thousands):

2009

2008

2007Current:Federal

$


$
8,027

$
(48,688
)State and local


(240
)

1,498


(10,552
)Total current income tax (expense) benefit


(240
)

9,525


(59,240
)Investment tax credits


532


417


578Deferred:Federal


69,704


30,269


32,844State and local


9,018


3,197


6,359Total deferred income tax (expense) benefit


78,722


33,466


39,203Total income tax (expense) benefit

$
79,014

$
43,408

$
(19,459
)


136

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Table of Contents

FairPoint Communications, Inc. and Subsidiaries

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(11) Income Taxes (Continued)

Total
income tax (expense) benefit was different than that computed by applying U.S. Federal income tax rates to income before income taxes for the years ended December 31, 2009,
2008 and 2007. The reasons for the differences are presented below (in thousands):

2009

2008

2007Statutory Federal income tax (benefit) rate


(35.0
)%

(35.0
)%

35.0
%State income tax (expense) benefit, net of Federal income tax expense


(2.9
)

(2.7
)

5.3Post-petition interest


2.7





Investment tax credits


(0.1
)

(0.4
)

(0.7
)Medicare subsidy


(0.2
)

(1.0
)

(3.5
)Restructuring charges


1.3





Other, net


1.0


0.3


1.1Valuation allowance


8.5





Effective income tax rate


(24.7
)%

(38.8
)%

37.2
%


The
tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2009 and 2008 are
presented below (in thousands):

2009

2008Deferred tax assets:Federal and state tax loss carryforwards

$
165,982

$
135,011Employee benefits


136,242


117,794Allowance for doubtful accounts


26,539


8,253Investment tax credits


1,925


2,127Alternative minimum tax and other state credits


6,095


4,098Basis in interest rate swaps


33,181


33,094Bond issuance costs


13,154


Service quality rebate reserve


11,044


Other, net


9,009


13,065Total gross deferred tax assets


403,171


313,442Deferred tax liabilities:Property, plant, and equipment


321,856


316,943Goodwill and other intangible assets


88,011


115,649Other, net


6,119


4,189Total gross deferred tax liabilities


415,986


436,781Net deferred tax liabilities before valuation allowance


12,815


123,339Valuation allowance


27,214


Net deferred tax liabilities

$
40,029

$
123,339


137

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Table of Contents

FairPoint Communications, Inc. and Subsidiaries

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(11) Income Taxes (Continued)

In
assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management
determines its estimates of future taxable income based upon the scheduled reversal of deferred tax liabilities, projected future taxable income exclusive of reversing temporary differences, and tax
planning strategies. The Company establishes valuation allowances for deferred tax assets when it is estimated to be more likely than not that the tax assets will not be realized.

Based
upon the level of projections for future taxable income at December 31, 2008, management believed it was more likely than not the Company would realize the full benefits of
these deductible differences. However, as a result of the change in facts and circumstances during 2009 in which the Company filed for Chapter 11 reorganization, the Company reassessed the
likelihood that its deferred tax assets will be realized as of December 31, 2009. Based upon the change in circumstances, management believes it can support the realizability of its deferred
tax asset only by the scheduled reversal of its deferred tax liabilities and can no longer rely upon the projection of future taxable income. At December 31, 2009, the Company established a
valuation allowance of $27.2 million against its deferred tax assets which consists of a $21.7 million Federal allowance and a $5.5 million state allowance.

In
addition to the impact of the change in valuation allowance, the effective tax rate for the year ended December 31, 2009 is impacted by post-petition interest on
debts that is not expected to be paid and, therefore, not expected to result in a future tax deduction, as well as non-deductible costs incurred related to the Chapter 11 Cases.

At
December 31, 2009, the Company had federal and state NOL carryforwards of $432.9 million that will expire from 2019 to 2028. At December 31, 2009, the Company has
alternative minimum tax credits of $3.8 million that may be carried forward indefinitely. Legacy FairPoint completed an initial public offering on February 8, 2005, which resulted in an
"ownership change" within the meaning of the U.S. Federal income tax laws addressing NOL carryforwards, alternative minimum tax credits, and other similar tax attributes. The March 31, 2008
Merger (see note 5) also resulted in an ownership change. As a result of these ownership changes, there are specific limitations on the Company's ability to use its NOL carryfowards and other
tax attributes. It is the Company's belief that it can use the NOLs even with these restrictions in place.

The
Income Taxes Topic of the ASC requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and
disclosures regarding uncertainties in income tax positions. The unrecognized tax benefits under the Income Taxes Topic of the ASC are similar to the income tax reserves reflected prior to adoption
under SFAS No. 5,Accounting for Contingencies,whereby reserves were established for probable loss contingencies that could be reasonably
estimated. The adoption of the uncertainties in income tax positions provisions of the Income Taxes Topic of the ASC (formerly FIN 48) did not have a material impact on the

138

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Table of Contents

FairPoint Communications, Inc. and Subsidiaries

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(11) Income Taxes (Continued)

Company's
financial position or results of operations. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

Balance as of December 31, 2007

$
10,393Additions for tax positions related to the current year


Additions for tax positions related to acquired companies


985Additions for tax positions of prior years


Reductions for tax positions of prior years


(27
)Reductions as a result of audit settlements


(2,757
)Reductions due to lapse of statute of limitations


Balance as of December 31, 2008

$
8,594Additions for tax positions related to the current year


Additions for tax positions related to acquired companies


Additions for tax positions of prior years


Reductions for tax positions of prior years


Reductions as a result of audit settlements


(3,219
)Reductions due to lapse of statute of limitations


Balance as of December 31, 2009

$
5,375


The
Company does not expect or anticipate a significant increase or decrease over the next twelve months in the unrecognized tax benefits reported above. Of the $5.4 million of
unrecognized tax benefits at December 31, 2009, $2.0 million would impact the Company's effective tax rate, if recognized.

The
Company recognizes any interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the year ended December 31, 2009, the Company did not
make any payment of interest and penalties. During the year ended December 31, 2008, the Company recognized $0.2 million (after-tax) for the payment of interest and penalties. The
Company had $0.8 million and $1.2 million (after-tax) for the payment of interest and penalties accrued in the consolidated balance sheet at December 31, 2009 and
2008, respectively.

The
Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and with various state and local governments. The Company is no longer subject to U.S.
federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2004. During the quarter ending June 30, 2009, Verizon received notification from
the IRS that a tax position taken on their returns for the years 2000 through 2003 relating to FairPoint's acquired business was settled through acceptance of the filing position. During the quarter
ending June 30, 2008, Verizon effectively settled the IRS examination for fiscal years 2000 through 2003. Due to the executed Tax Sharing Agreement, the settlement of the IRS audit resulted in
an amount due to Verizon from FairPoint in the amount of $1.5 million relating to adjustments of temporary differences and $0.1 million of interest. As of December 31, 2009, the
Company does not have any significant additional jurisdictional tax audits.

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Table of Contents

FairPoint Communications, Inc. and Subsidiaries

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(11) Income Taxes (Continued)

Prior
to the Merger, Verizon and its domestic subsidiaries, including the operations of the Verizon Companies, filed a consolidated federal income tax return and combined state income
tax returns in the states of Maine, New Hampshire and Vermont. The operations of the Verizon Companies, including the Verizon Northern New England business, for periods prior to the Merger were
included in a Tax Sharing Agreement with Verizon and were allocated tax payments based on the respective tax liability as if they were filing on a separate company basis. Current and deferred tax
expense was determined by applying the provisions of the Income Taxes Topic of the ASC to each company as if it were a separate taxpayer.

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

(12) Accumulated Other Comprehensive Loss

Changes in the components of accumulated other comprehensive income were as follows (in thousands):

As of December 31,2009

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

$
(124,924
)
$
(134,504
)Total other accumulated comprehensive loss

$
(124,924
)
$
(134,504
)


Defined
benefit pension and post-retirement plan activity during 2008 included $49.5 million (net of $32.8 million taxes) in connection with the Merger, which
is reflected as a reduction to Accumulated Other Comprehensive Loss. This amount represents the allocation of previously existing plan assets, obligations and prior service costs to the surviving
benefit plans upon Merger. Other Comprehensive Loss for the years ended December 31, 2009 and 2008 also includes amortization of defined benefit pension and post-retirement plan
related prior service costs and actuarial gains and losses included in Accumulated Other Comprehensive Loss.

140

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Table of Contents

FairPoint Communications, Inc. and Subsidiaries

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(13) Earnings Per Share

Earnings per share has been computed in accordance with the Earnings Per Share Topic of the ASC. Basic earnings per share is computed by dividing net income by the weighted average
number of shares of common stock outstanding for the period. Except when the effect would be anti-dilutive, the diluted earnings per share calculation calculated using the treasury stock
method includes the impact of stock units, shares of non-vested common stock and shares that could be issued under outstanding stock options. The weighted average number of common shares
outstanding for all periods presented have been restated to reflect the issuance of 53,760,623 shares to the stockholders of Spinco in connection with the Merger.

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

As of December 31,2009

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


89,271


80,443Effect of potential dilutive shares





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


89,271


80,443Anti-dilutive shares excluded from the above reconciliation


2,750


1,069


As
the Company incurred a loss for the years ended December 31, 2009 and 2008, all potentially dilutive securities are anti-dilutive and are, therefore, excluded from
the determination of diluted earnings per share.

(14) Stockholders' Equity

On March 31, 2008, FairPoint completed the acquisition of Spinco, pursuant to which Spinco merged with and into FairPoint, with FairPoint continuing as the surviving corporation
for legal purposes. In order to effect the Merger, the Company issued 53,760,623 shares of common stock, par value $.01 per share, to Verizon stockholders for their interest in Spinco. At the time of
the Merger, Legacy FairPoint had 35,264,945 shares of common stock outstanding. Upon consummation of the Merger, the combined Company had 89,025,568 shares of common stock outstanding. At
December 31, 2009, there were 90,002,026 shares of common stock outstanding and 200,000,000 shares of common stock were authorized.

(15) Stock-Based Compensation

Upon consummation of the Merger, the Company inherited several stock based compensation plans that had been adopted by Legacy FairPoint prior to the Merger. As these plans were inherited
on March 31, 2008, there is no impact reflected in the consolidated balance sheets or consolidated statements of operations for periods prior to March 31, 2008.

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Table of Contents

FairPoint Communications, Inc. and Subsidiaries

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(15) Stock-Based Compensation (Continued)

Effective
on January 1, 2006, the Company adopted the provisions of SFAS 123(R). At December 31, 2009, the Company had $2.1 million of total unearned
compensation cost related to non-vested share-based payment arrangements granted under the Company's five stock-based compensation plans. That cost is expected to be recognized over a
weighted average period of 1.7 years. Compensation cost for awards is recognized on a straight-line basis over the requisite service period of each award. Any future share awards
under any of these plans will be made using newly issued shares. Amounts recognized in the financial statements with respect to these plans are as follows (in thousands):

For The Year ended December 31,2009

2008

2007Amounts charged against income, before income tax benefit

$
2,052

$
4,408

$
Amount of related income tax benefit recognized in income


(825
)

(1,758
)

Total net income impact

$
1,227

$
2,650

$



(a) 1998 Stock Incentive Plan

In August 1998, the Company adopted the FairPoint Communications, Inc. (formerly MJD Communications, Inc.) Stock
Incentive Plan (the 1998 Plan). The 1998 Plan provided for grants of up to 1,317,425 nonqualified stock options to executives and members of management, at the discretion of the compensation committee
of the board of directors. Options vest in 25% increments on the second, third, fourth, and fifth anniversaries of an individual grant. All options have a term of 10 years from date of grant.
In the event of a change in control, outstanding options will vest immediately. Effective in February 2005, the Company may no longer grant awards under the 1998 Plan.

Pursuant
to the terms of the grant, options granted in 1998 and 1999 would have become exercisable only in the event that the Company was sold, an initial public offering of the
Company's common stock resulted in the principal shareholders holding less than 10% of their original ownership, or other changes in control, as defined, were to have occurred. The number of options
that would have become
ultimately exercisable also depended upon the extent to which the price per share obtained in the sale of the Company would exceed a minimum selling price of $22.59 per share. The initial public
offering did not trigger exercisability of these options.

In
February 2007, all the options outstanding under the 1998 Plan were cancelled, except the 47,373 options with a $36.94 exercise price. This cancellation was triggered by certain
events noted in the 1998 Plan.

These
stock options were granted by the Company prior to becoming a public company and therefore the Company is accounting for these options under the prospective method under
SFAS 123(R). As of December 31, 2009, options to purchase 47,373 shares of common stock were outstanding with a weighted average exercise price of $36.94. These remaining options
outstanding are time-based vesting only and are fully vested and exercisable as of December 31, 2009.

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Table of Contents

FairPoint Communications, Inc. and Subsidiaries

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(15) Stock-Based Compensation (Continued)

Stock option activity under the 1998 Plan is summarized as follows:

Options
outstanding

Weighted
average
exercise
priceOutstanding at March 31, 2008


47,373


36.94Granted





Exercised





Forfeited





Outstanding at December 31, 2008


47,373

$
36.94Granted





Exercised





Forfeited





Outstanding at December 31, 2009


47,373

$
36.94Stock options available for grant at December 31, 2009










Options outstanding

Options exercisableExercise price

Number
outstanding at
December 31, 2009

Remaining
contractual
life (years)

Aggregate
Intrinsic
Value
(In thousands)

Number
exercisable at
December 31, 2009$
36.94


47,373


2.0





47,373


The
outstanding options have no aggregate intrinsic value based on the closing price of the Company's stock of $0.03 on December 31, 2009.

(b) 2000 Employee Stock Incentive Plan

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

Under
the 2000 Employee Stock Incentive Plan, unless otherwise determined by the compensation committee at the time of grant, participating employees were granted options to purchase
common stock at exercise prices not less than the market value of the Company's common stock at the date of

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Notes to Consolidated Financial Statements (Continued)

(15) Stock-Based Compensation (Continued)

grant.
Options have a term of 10 years from date of grant. Options vest in increments of 10% on the first anniversary, 15% on the second anniversary, and 25% on the third, fourth, and fifth
anniversaries of an individual grant. Stock units vest in increments of 33% on each of the third, fourth, and fifth anniversaries of the award. Subject to certain provisions, the Company can cancel
each option in exchange for a payment in cash of an amount equal to the excess of the fair value of the shares over the exercise price for such option. The Company has not previously exercised this
right and does not currently intend to exercise this right in the future.

The
2000 Employee Stock Incentive Plan stock options and stock units were granted by the Company prior to becoming a public company and therefore the Company is accounting for these
awards under the prospective method under SFAS 123(R).

Stock
option activity under the 2000 Employee Stock Incentive Plan is summarized as follows:

Options
outstanding

Weighted
average
exercise
priceOutstanding at March 31, 2008


208,687

$
36.94Granted





Exercised





Forfeited





Outstanding at December 31, 2008


208,687

$
36.94Granted





Exercised





Forfeited


77,752

$
36.94Outstanding at December 31, 2009


130,935

$
36.94Stock options available for grant at December 31, 2009








The
remaining contractual life for the options outstanding at December 31, 2009 was 2.8 years, and 130,935 options were exercisable. Based upon the fair market value of the
stock as of December 31, 2009 of $0.03, these options do not have any intrinsic value.

As
of March 31, 2008, there were 6,957 stock units outstanding with a grant date fair value per share of $32.51. During 2008, 1,703 stock units were forfeited and 5,254 stock
units vested and were converted to common shares. No unvested awards remained as of December 31, 2008. The intrinsic value of the 5,254 stock units that vested during 2008 was
$0.1 million.

(c) 2005 Stock Incentive Plan

In February 2005, the Company adopted the FairPoint Communications, Inc. 2005 Stock Incentive Plan (the "2005 Stock Incentive
Plan"). The 2005 Stock Incentive Plan provides for the grant of up to 947,441 shares of non-vested stock, stock units and stock options to members of the Company's board of directors and
certain key members of the Company's management. Shares granted to employees under the 2005 Stock Incentive Plan vest over periods ranging from three to four years and certain of

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(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(15) Stock-Based Compensation (Continued)

these
shares pay current dividends. At December 31, 2009, up to 79,781 additional shares of common stock may be issued in the future pursuant to awards authorized under the 2005 Stock Incentive
Plan.

In
March 2006, the Company's board of directors approved the grant of an additional 100,000 shares to the Company's chief executive officer. These shares were granted under the 2005
Stock Incentive Plan in two installments of 50,000 shares each on January 1, 2007 and January 1, 2008. These shares are considered to have been granted in March 2006 under
SFAS 123(R) at a grant date fair value of $14.02 per share.

In
2005, the Company's board of directors approved an annual award to each of the Company's non-employee directors in the form of non-vested stock or stock units,
at
the recipient's option, issued under the 2005 Stock Incentive Plan. The non-vested stock and stock units will vest in four equal quarterly installments on the first day of each of the
first four calendar quarters following the grant date and the holders thereof will be entitled to receive dividends from the date of grant, whether or not vested. The following table presents
information regarding stock units granted to non-employee directors under the 2005 Stock Incentive Plan (including stock units granted in lieu of dividends):

Stock units

Units
outstanding

Weighted
average grant
date fair value
per shareOutstanding at March 31, 2008


29,544

$
15.04Granted


43,965


9.86Exercised





Forfeited





Outstanding at December 31, 2008


73,509

$
11.94Granted


6,272


3.02Exercised





Forfeited





Outstanding at December 31, 2009


79,781

$
11.24


The
fair value of the awards is calculated as the fair value of the shares on the date of grant. Beginning on January 1, 2006, the Company adopted the provisions of
SFAS 123(R) using the modified prospective method for the awards under the 2005 Stock Incentive Plan as all awards were granted subsequent to the Company becoming public. Under this
methodology, the Company is required to estimate expected forfeitures related to these grants and, for the non-dividend paying shares, the compensation expense is reduced by the present
value of the dividends which were not paid on those shares prior to their vesting.

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FairPoint Communications, Inc. and Subsidiaries

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(15) Stock-Based Compensation (Continued)

The
following table presents information regarding non-vested stock granted to employees under the 2005 Stock Incentive Plan:

Non-vested stock

Shares
outstanding

Weighted
average grant
date fair value
per shareNon-vested at March 31, 2008


412,807

$
16.88Granted





Vested


(164,296
)

18.28Forfeited


(85,250
)

17.25Non-vested at December 31, 2008


163,261

$
15.27Granted





Vested


(101,269
)

15.92Forfeited


(11,993
)

17.76Non-vested at December 31, 2009


49,999

$
13.36


The
weighted average fair value of the 101,269 shares that vested in 2009 was $0.31.

(d) 2008 Long Term Incentive Plan

In March 2008, the Company adopted the FairPoint Communications, Inc. 2008 Long Term Incentive Plan (the "2008 Long Term
Incentive Plan"). The 2008 Long Term Incentive Plan provides for the grant of up to 9,500,000 shares of non-vested stock, stock units and stock options to members of the Company's board of
directors and certain key members of the Company's management. Shares granted to employees under the 2008 Long Term Incentive Plan vest over periods ranging from two to three years and certain of
these shares pay current dividends. At December 31, 2009, up to 8,955,363 additional shares of common stock may be issued in the future pursuant to awards authorized under the 2008 Long Term
Incentive Plan.

On
March 27, 2008, the Company's compensation committee approved the award of performance units under the Plan for the performance period beginning April 1, 2008 and ending
December 31, 2008 and for the performance period beginning April 1, 2008 and ending December 31, 2009, in each case to certain key employees. On March 6,
2009 502,764 common shares were issued, and 265,957 performance units were forfeited to satisfy tax withholdings, for the performance period beginning April 1, 2008 and ending
December 31, 2008. The Company failed to meet the threshold performance conditions for issuance of shares related to the performance period beginning April 1, 2008 and ending
December 31, 2009. As such, all performance units under this grant were forfeited as of December 31, 2009.

On
June 18, 2008, the Company's compensation committee approved the award of performance units under the Plan for the performance period beginning April 1, 2008 and ending
December 31, 2010 to certain key employees. As of December 31, 2009, no shares of common stock had been issued under this grant.

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(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(15) Stock-Based Compensation (Continued)

On
March 3, 2009, the Company's compensation committee approved the award of performance units under the Plan for the performance period beginning January 1, 2009 and
ending December 31, 2011 to
certain key employees. As of December 31, 2009, no shares of common stock had been issued pursuant to this grant.

In
2008, the Company's board of directors approved an annual award to each of the Company's non-employee directors in the form of non-vested stock or stock units,
at the recipient's option, issued under the 2008 Long Term Incentive Plan. The non-vested stock and stock units will vest in four equal quarterly installments on the first day of each of
the first four calendar quarters following the grant date and the holders thereof will be entitled to receive dividends from the date of grant, whether or not vested. The following table presents
information regarding stock units granted to non-employee directors under the 2008 Plan (including stock units granted in lieu of dividends):

Stock units

Units
outstanding

Weighted
average grant
date fair value
per shareOutstanding at March 31, 2008




$
Granted





Exercised





Forfeited





Outstanding at December 31, 2008




$
Granted


175,352


1.79Exercised





Forfeited





Outstanding at December 31, 2009


175,352

$
1.79


The
fair value of the awards is calculated as the fair value of the shares on the date of grant. Beginning on January 1, 2006, the Company adopted the provisions of
SFAS 123(R) using the modified prospective method for the awards under the 2005 Stock Incentive Plan as all awards were granted subsequent to the Company becoming public. Under this
methodology, the Company is required to estimate expected forfeitures related to these grants and, for the non-dividend paying shares, the compensation expense is reduced by the present
value of the dividends which were not paid on those shares prior to their vesting.

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FairPoint Communications, Inc. and Subsidiaries

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(15) Stock-Based Compensation (Continued)

The
following table presents information regarding non-vested stock granted to employees under the 2008 Long Term Incentive Plan:

Non-vested stock

Shares
outstanding

Weighted
average grant
date fair value
per shareNon-vested at March 31, 2008




$
Granted


50,000


8.45Vested





Forfeited





Non-vested at December 31, 2008


50,000

$
8.45Granted





Vested


(16,873
)

8.45Forfeited


(8,127
)

8.45Non-vested at December 31, 2009


25,000

$
8.45


The
weighted average fair value of the 16,873 shares that vested in 2009 was $0.03.

(e) 2009 CEO Compensation Plan

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

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FairPoint Communications, Inc. and Subsidiaries

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(15) Stock-Based Compensation (Continued)

The
grant date fair value of the Inducement Options was determined using the Black-Scholes model. Key assumptions used for determining the fair value of the Inducement Options were as
follows: risk-free rate3.54%; expected term10 years; expected volatility5.70%.

The
following table presents information regarding non-vested stock granted to Mr. Hauser under the FairPoint Communications Inc. 2009 CEO Compensation Plan:

Non-vested stock

Shares
outstanding

Weighted
average grant
date fair value
per shareNon-vested at December 31, 2008




$
Granted


523,810


0.64Vested





Forfeited





Non-vested at December 31, 2009


523,810

$
0.64


(f) Verizon Northern New England Business Stock-based Compensations Plans

Prior to the Merger, the Verizon Northern New England business participated in the Verizon Communications Long Term Incentive Plan (the
Verizon Plan). The Verizon Plan permitted the granting of nonqualified stock options, incentive stock options, restricted stock, restricted stock units, performance shares, performance share units and
other awards.



The Verizon Plan provided for grants of restricted stock units ("RSUs") that vested at the end of the third year of the grant. The RSUs
are classified as liability awards in the balance sheets for all periods prior to the Merger, because the RSUs were paid in cash upon vesting. The RSU award liability is measured at its fair value at
the end of each reporting period prior to the Merger and, therefore, fluctuated based on the price of Verizon's stock.



The Verizon Plan also provided for grants of performance share units ("PSUs") that vested at the end of the third year after the grant.
The target award was determined at the beginning of the period and could increase (to a maximum 200% of the target) or decrease (to zero) based on Total Shareholder Return ("TSR"). At the end of the
period, the PSU payment was determined by comparing Verizon's TSR to the TSR of a predetermined peer group and the S&P 500 companies. All payments were subject to approval by the Verizon
Board's Human Resources Committee. The PSUs are classified as liability awards in the balance sheets for all periods prior to the Merger, because the PSU awards were paid in cash upon vesting. The PSU
award liability is measured at its fair value at the end of each reporting period prior to the Merger and, therefore, fluctuated based on the price of Verizon's stock as well as Verizon's TSR relative
to the peer group's TSR and S&P 500 TSR.

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(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(15) Stock-Based Compensation (Continued)



The Verizon Plan provided for grants of stock options to employees at an option price per share of 100% of the fair market value of
Verizon stock on the date of grant. Each grant had a 10-year life, vesting equally over a three-year period, starting at the date of the grant. The Verizon Northern New England
business has not granted new stock options since 2004.

The
structure of Verizon's stock incentive plans did not provide for the separate determination of certain disclosures for the Verizon Northern New England business. The costs associated
with such plans were allocated to the Verizon Northern New England business as part of the general allocations and were not relevant on a participant basis. The disclosures omitted are the rollforward
of stock option activity, the assumptions used in the Black-Scholes valuation and information about the range of exercise prices for outstanding and exercisable options.

After-tax
compensation expense for stock options and other stock-based compensation included in net income as reported for the year ended December 31, 2007 was not
material.

(16) Transactions with Affiliates

(a) Construction Services

The Company hired Gilbane Building Company to construct a new data center in Manchester, New Hampshire and to perform restoration
services on a flooded building in Raymond, New Hampshire. Thomas F. Gilbane, Jr., a director of FairPoint, is Chairman and Chief Executive Officer of Gilbane Building Company. Gilbane Building Company
was hired by the Company for both projects prior to Mr. Gilbane's designation to the board of directors. The Company paid Gilbane Building Company fees of $0.8 million and
$2.8 million in the years ended December 31, 2009, and December 31, 2008, respectively. For the year ended December 31, 2009, Mr. Gilbane has advised the Company
that the amounts paid to Gilbane Building Company represented less than 2% of such company's consolidated gross revenues.

(b) Verizon Northern New England business transactions with Affiliates

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

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

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

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(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(16) Transactions with Affiliates (Continued)

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

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

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

(17) Quarterly Financial Information (Unaudited)

The quarterly information presented below represents selected quarterly financial results as restated on Forms 10-Q/A for the quarters ended March 31,
June 30, and September 30, 2009.

First
quarter

Second
quarter

Third
quarter

Fourth
quarter(in thousands, except per share data)2009:Revenue

$
299,298


284,762


270,455


272,246Net income (loss)


(22,305
)

(28,163
)

(75,202
)

(115,726
)Earnings (loss) per shareBasic


(0.25
)

(0.32
)

(0.84
)

(1.29
)Diluted


(0.25
)

(0.32
)

(0.84
)

(1.29
)2008:Revenue

$
282,414


344,690


328,255


319,260Net income (loss)


9,543


23,114


(25,109
)

(76,073
)Earnings (loss) per shareBasic


0.18


0.26


(0.28
)

(0.85
)Diluted


0.18


0.26


(0.28
)

(0.85
)


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FairPoint Communications, Inc. and Subsidiaries

(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(18) Fair Value Measurements

The Fair Value Measurements and Disclosures Topic of the ASC (formerly SFAS No. 157,Fair Value Measurements("SFAS
No. 157")) defines fair value, establishes a framework for measuring fair value and establishes a hierarchy that categorizes and prioritizes the sources to be used to estimate fair value. The
Fair Value Measurements and Disclosures Topic of the ASC also expands financial statement disclosures about fair value measurements. On February 12, 2008, the FASB issued FASB Staff Position
(FSP) 157-2, which delayed the effective date of SFAS No. 157 for one year for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis. The Company elected a partial deferral of SFAS No. 157 under the provisions of FSP 157-2 related to the measurement of
fair value used when evaluating goodwill, investments, other intangible assets and other long-lived assets for impairment and valuing asset retirement obligations and liabilities for exit
or disposal activities. The Company is currently evaluating the impact of FSP 157-2 on its financial statements. The impact of partially adopting SFAS No. 157 effective
January 1, 2008 was not material to the Company's financial statements.

The
carrying value of the Swaps at December 31, 2009 represents the termination value of the Swaps as determined by the respective counterparties following the event of default
described herein. See note 8 for more information.

The
following table summarizes the Company's financial assets and liabilities measured at fair value on a recurring basis (at least annually) as of December 31, 2008 (in
thousands):

December 31,
2008

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

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)Interest rate swaps(1)


(82,955
)




(82,955
)




---

(19) Revenue Concentrations

As of December 31, 2009, approximately 86% of the Company's access line equivalents were located in Maine, New Hampshire and Vermont. As a result of this geographic concentration,
the Company's financial results will depend significantly upon economic conditions in these markets. A deterioration or recession in any of these markets could result in a decrease in demand for the
Company's services and resulting loss of access lines which could have a material adverse effect on the Company's business, financial condition, results of operations and liquidity.

In
addition, if state regulators in Maine, New Hampshire or Vermont were to take an action that is adverse to the Company's operations in those states, the Company could suffer greater
harm from that action by state regulators than it would from action in other states because of the concentration of operations in those states.

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(DEBTORS-IN-POSSESSION)

Notes to Consolidated Financial Statements (Continued)

(20) Commitments and Contingencies

(a) Leases

Future minimum lease payments under capital leases and non-cancelable operating leases as of December 31, 2009 are
as follows (in thousands):

Capital Leases

Operating LeasesYear ending December 31:2010

$
3,033

$
11,0072011


1,988


9,1002012


1,761


7,6282013


1,561


6,2272014


1,534


3,971Thereafter


105


7,651Total minimum lease payments

$
9,982

$
45,584Less interest and executory cost


(2,355
)Present value of minimum lease payments


7,627Less amounts subject to compromise


(7,627
)Long-term obligations at December 31, 2009

$



Total
rent expense was $16.7 million, $30.1 million and $63.2 million in 2009, 2008 and 2007, respectively.

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

(b) Legal Proceedings

From time to time, the Company is involved in litigation and regulatory proceedings arising out of its operations. With the exception
of the Chapter 11 Cases, the Company's management believes that it is not currently a party to any legal or regulatory proceedings, the adverse outcome of which, individually or in the
aggregate, would have a material adverse effect on the Company's financial position or results of operations. To the extent the Company is currently involved in any litigation and/or regulatory
proceedings, such proceedings have been stayed as a result of the filing of the Chapter 11 Cases. For a discussion of the Chapter 11 Cases, see "Item.
1BusinessChapter 11 Cases."

(c) Service Quality Penalties

The Company is subject to certain service quality requirements in the states of Maine, New Hampshire and Vermont. Failure to meet these
requirements in any of these states may result in penalties being assessed by the respective state regulatory body. As of December 31, 2009, the Company has recognized an estimated liability
for service quality penalties based on metrics defined by the state regulatory authorities in Maine, New Hampshire and Vermont. Applicable orders provide that any penalties assessed by the states be
paid by the Company in the form of credits applied to customer

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Notes to Consolidated Financial Statements (Continued)

(20) Commitments and Contingencies (Continued)

bills.
Based on the Company's current estimate of its service quality penalties in these states, a $26.0 million increase in the estimated liability was recorded as a reduction to revenue for
the year ended December 31, 2009. The Company has recorded a total liability of $27.5 million on the consolidated balance sheet at December 31, 2009. Additional penalties may be
assessed as a result of service quality issues related to the Cutover, which could have a material adverse effect on the Company's financial position, results of operations and liquidity.

During
February 2010, the Company reached agreements with the state regulatory authorities in each of Maine, New Hampshire and Vermont. Term sheets executed with the state regulatory
authorities of New Hampshire and Vermont defer fiscal 2008 and 2009 penalties until December 31, 2010 and include a clause whereby such penalties may be forgiven in part or in whole if the
Company meets certain metrics for the twelve-month period ending December 31, 2010. As this clause represents a contingent gain, the Company has not recognized such gain as of
December 31, 2009. As of December 31, 2009 the Company has accrued fiscal 2008 and 2009 liabilities of $6.0 million for New Hampshire and approximately $11.4 million for
Vermont.

At
this time, it is unclear what effect the filing of the Chapter 11 Cases will have on the requirements, including service quality penalties, imposed by the PUCs in Maine, New
Hampshire and Vermont as a condition to the approval of the Merger and whether such requirements will be enforceable against the Company in the future.

(21) Subsequent Events

Impact of Healthcare Reform on Deferred Tax Assets

President Obama signed into law on March 23, 2010 the Patient Protection and Affordable Care Act and on March 30, 2010
the Health Care and Education Reconciliation Act of 2010 (collectively "PPACA") which reforms the healthcare system in the United States. One of the provisions of PPACA is the elimination of the tax
deductibility for retiree health care costs after December 31, 2012 to the extent of federal subsidies received by plan sponsors that provide retiree prescription drug benefits equivalent to
Medicare Part D coverage. Employers who include the present value of future Medicare Part D retiree drug subsidy ("RDS") in their post-retirement liabilities will be required
to adjust the balance of any deferred tax assets on their balance sheets accordingly in the period the PPACA was signed into law. The present value as of December 31, 2009 of the RDS payments
affected by PPACA in the FairPoint retiree medical plans is $16.9 million. The reduction in deferred tax asset to be booked in 1Q2010 is this amount multiplied by our assumed effective tax
rate.

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ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A.    CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Annual Report, we carried out an evaluation, under the supervision and with the
participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our "disclosure controls and procedures" (as defined in
Rule 13a-15(e) of the Exchange Act). As a result of the Restatement described in "Part IBusinessRestatement", our management, including our
principal executive officer and principal financial officer, concluded that our disclosure controls and procedures were not effective as of December 31, 2009 because of the material weaknesses
described below.

(b) Material Weaknesses in Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Internal control over financial reporting is a process designed by, or under the supervision of, our principal
executive officer and principal financial officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with GAAP.

A
material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement in the reporting company's annual or interim financial statements will not be prevented or detected on a timely basis.

Our
management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2009 based upon criteria inInternal
ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation, management determined that
our internal control over financial reporting was not effective as of December 31, 2009 because the following material weaknesses in internal control over financial reporting existed during
2009:



Effective
in February 2010, our management believes that it has corrected the primary issues that led to the Restatement. Specifically, we have:



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We
believe these measures and other planned process improvements will adequately remediate the material weaknesses described above and will strengthen our internal controls over
financial reporting. We are committed to continuing to improve our internal control processes and will continue to review our financial reporting controls and procedures. As we continue to evaluate
and work to improve our internal control over financial reporting, we may identify additional measures to address these material weaknesses or determine to modify certain of the remediation procedures
described above. Our management, with the oversight of the audit committee of our board of directors, will continue to assess and take steps to enhance the overall design and capability of our control
environment in the future.

The
effectiveness of internal control over financial reporting as of December 31, 2009 has been audited by Ernst & Young LLP, an independent registered public
accounting firm.

(c) Changes in Internal Control Over Financial Reporting

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

With
the exception of the foregoing, there have been no changes in our internal control over financial reporting during the year ended December 31, 2009 that have materially
affected or are reasonably likely to materially affect our internal control over financial reporting. We do note however that subsequent to the year ended December 31, 2009, we implemented the
remediation described above to address the material weaknesses in our internal control over financial reporting.

ITEM 9B.    OTHER INFORMATION

Not applicable.

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PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Our board of directors currently consists of six directors. Two of our directors, David L. Hauser and Claude C. Lilly, were appointed
as directors in connection with our initial public offering. Robert S. Lilien was appointed as a director by our board of directors in December 2005 to fill a vacancy which had existed on our board of
directors since our initial public offering. Pursuant to the Merger, Verizon was entitled to designate four individuals to serve on our board of directors. Jane E. Newman was designated by Verizon and
appointed as a director by our board of directors in August 2007, filling a vacancy which had existed on our board of directors since the resignation of two directors in January 2007. Effective
March 31, 2008, our board of directors was increased from seven to nine members. Thomas F. Gilbane, Jr., Robert A. Kennedy and Michael R.
Tuttle were designated by Verizon and appointed as directors by our board of directors effective as of March 31, 2008, filling a vacancy which had existed on our board of directors since the
resignation of two directors in January 2007 and filling the two new positions created upon the increase of the size of our board of directors. Verizon has no further rights to designate individuals
to serve on our board of directors. Three of our directors resigned during 2009: (i) Eugene B. Johnson resigned from our board of directors effective concurrently with his resignation as our
Chief Executive Officer on June 30, 2009; (ii) Patricia Garrison-Corbin resigned from our board of directors effective August 17, 2009; and (iii) Robert A. Kennedy resigned
from our board of directors effective September 28, 2009.

Our
directors are divided into three classes having staggered three-year terms, so that the term of one class expires at each annual meeting of stockholders. The classes are
currently comprised as follows:



We do not intend to hold an annual meeting of stockholders during 2010. As of the Effective Date, the reorganized Company is expected to have a newly appointed
seven person board of directors. Selected biographical information for each of the seven proposed new board members is attached to the Plan Supplement, which is available at www.fprestructuring.com
under the "Court Filings" link. In accordance with the Amended By-Laws, the initial members of the New Board are expected to hold office until the first annual meeting of stockholders
which will be held following the one year anniversary of the Effective Date. Thereafter, members of the board of directors of the Company are expected to have one year terms, so that their terms will
expire at each annual meeting of stockholders.

Director Independence

The board of directors considered transactions and relationships between each director or any member of his or her immediate family and
the Company and its subsidiaries and affiliates. Our board of directors has determined that, other than David L. Hauser, all of our directors are independent under the criteria for independence set
forth in the listing standards of the NYSE, and accordingly are independent directors with no material relationship to the Company other than being a director or stockholder of FairPoint.

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Directors

The following sets forth selected biographical information for our directors.



David L. Hauser-Mr. Hauser, age 58, has served as our Chairman and Chief
Executive Officer since July 1, 2009. Prior to assuming this role, Mr. Hauser had served as a director of FairPoint Communications since February 2005. Prior to becoming FairPoint's
Chairman and Chief Executive Officer, Mr. Hauser served as the Group Executive and Chief Financial Officer of Duke Energy Corporation, where he was employed for 35 years.
Mr. Hauser is on the board of directors of Furman University and of Charlotte, North Carolina's Blumenthal Center for the Performing Arts, the board of trustees of University of North Carolina
at Charlotte and is past chair of the University of North Carolina at Charlotte Business School Advisory Council. He is also a past board member of the North Carolina Zoological Society and is a
member of the North Carolina Association of Certified Public Accountants. Mr. Hauser also serves as a director of Enpro Industries, Inc.

Jane E. Newman-Ms. Newman, age 64, was appointed as a director of FairPoint in August 2007 and as FairPoint's lead director in
October 2007. Ms. Newman previously served as the Interim President of the University of New Hampshire in Durham, New Hampshire from 2006 to June 2007. Prior to assuming this role,
Ms. Newman served as the Executive Dean of the John F. Kennedy School of Government at Harvard University, beginning in 2000. Ms. Newman's academic positions also include engagements at
the University of New Hampshire as Interim Dean of the Whittemore School of Business and Economics from 1998 to 1999, Dean of Students from 1972 to 1978 and Assistant Dean of Students from 1969 to
1972. She was also previously employed in various capacities by the Exeter Trust Company and Coastal Broadcasting Corporation, and served as a Senior Aide to the President of the United States.
Ms. Newman is a director of the Lumina Foundation, Gilbane Inc., Exeter Trust Company and Global Relief Technologies, Inc. She is also the former Chair of the United States Naval
Academy Board of Visitors.

Michael R. Tuttle-Mr. Tuttle, age 55, was appointed as a director of FairPoint in March 2008. Mr. Tuttle has served as the
President and Chief Executive Officer of Merchants Bank, a commercial bank with headquarters in Burlington, Vermont, since January 2006. Mr. Tuttle has also served, since January 2007, as the
President and Chief Executive Officer and as a director of Merchants Bancshares, Inc., the parent company of Merchants Bank. Prior to assuming his current responsibilities, Mr. Tuttle
served as Chief Operating Officer and Senior Lender of Merchants Bank from 1997 through 2005. He also serves on the boards of the Vermont Bar Foundation, United Way of Chittendon County, Vermont and
Burlington, Vermont's Flynn Center for the Performing Arts.



Thomas F. Gilbane, Jr.-Mr. Gilbane, age 62, was appointed as a director of
FairPoint in March 2008. Mr. Gilbane is the President and Chief Executive Officer of Gilbane Inc., the parent company of Gilbane Building Company and Gilbane Development Company, and the
Chairman and Chief Executive Officer of Gilbane Building Company, one of the nation's largest general contractors and construction managers. Mr. Gilbane also serves as a director and audit
committee member of Gilbane Inc., and as a director of both Gilbane Building Company and Gilbane Development Company. Prior to assuming his current roles, Mr. Gilbane served as President
and Chief Operating Officer of Gilbane Building Company from 1997 to January 2004. Prior to Mr. Gilbane's nomination as a director of the Company, the Company hired the Gilbane Building Company
to construct a new data center in Manchester, New Hampshire. See "Item 13. Certain Relationships and Related Transactions and Director IndependenceConstruction Services."

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Robert S. Lilien-Mr. Lilien, age 62, was appointed as a director of FairPoint in December 2005. Mr. Lilien is currently a
partner in the law firm of Robinson, Bradshaw & Hinson, P.A., located in Charlotte, North Carolina, where he has worked since April 2002, and is also the managing member of Trilogy Capital
Partners, LLC, a captive private equity fund with equity provided by a single family group, where he has also worked since April 2002. From 1993 to 2002, he held various positions at Duke
Energy Corporation, including Senior Vice President-Duke Ventures for Duke Energy Corporation, Chairman and Chief Executive Officer of Crescent Resources, LLC, Chairman of DukeNet
Communications, Inc. and Chairman of Duke Capital Partners, LLC.

Claude C. Lilly-Dr. Lilly, age 63, was appointed as a director of FairPoint in February 2005. Dr. Lilly is currently
serving as Dean of the College of Business and Behavioral Science at Clemson University. Previously, Dr. Lilly served as Dean and James J. Harris Chair of Risk Management and Insurance in the
Belk College of Business Administration at the University of North Carolina at Charlotte, where he was employed from July 1997 to June 2007. Dr. Lilly has served as Assistant Deputy Insurance
Commissioner for the State of Georgia and as a director of several corporations. He currently serves on the audit committee of the Board of Pensions of the Presbyterian Church (PCUSA) and is the Chair
of the board of the Charlotte branch of the Federal Reserve Bank of Richmond. Dr. Lilly also currently sits on the board of directors of the Erie Insurance Group, where he serves as the chair
of the audit committee and as a member of the investment and strategic planning committees. Dr. Lilly earned the Chartered Property and Casualty Underwriter and Chartered Life Underwriter
designations and is a member of numerous professional associations.



We currently have no class I directors whose terms are expiring at the annual meeting of stockholders to be held in 2012.

Committees of the Board of Directors

Our board of directors has three separately designated standing committees: an audit committee, a compensation committee and a
corporate governance committee.



Our audit committee for fiscal 2009 consisted of Thomas F. Gilbane, Jr., Robert S. Lilien and Claude C. Lilly, and met five times
during 2009. Prior to his appointment as our Chief Executive Officer, David L. Hauser served on our audit committee. Prior to his resignation, Robert A. Kennedy served on our audit committee.
Mr. Kennedy was replaced on our audit committee by Thomas F. Gilbane, Jr. Claude C. Lilly is the chair of our audit committee. All audit committee members satisfy the independence criteria set
forth in the listing standards of the NYSE and the applicable provisions of the Exchange Act. Mr. Lilien is qualified as an audit committee financial expert within the meaning of
item 407(d)(5)(ii) of Regulation S-K under the Exchange Act and our board of directors has determined that he has the accounting and related financial management expertise
within the meaning of the listing standards of the NYSE. The SEC has determined that the audit committee financial expert designation does not impose on the person with that designation any duties,
obligations or liability that are greater than the duties, obligations or liability imposed on such person as a member of the audit committee of the board of directors in the absence of such
designation.

Among
other functions, the principal duties and responsibilities of our audit committee are to select and appoint our independent registered public accounting firm, oversee the quality
and integrity of our financial reporting and the audit of our financial statements by our independent registered public accounting firm and, in fulfilling its obligations, our audit committee reviews
with our

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management
and independent registered public accounting firm the scope and results of the annual audit, our accounting firm's independence and our accounting policies.

The
audit committee is required to report regularly to our board of directors to discuss any issues that arise with respect to the quality or integrity of our financial statements, our
compliance with legal or regulatory requirements, the performance and independence of our independent registered public accounting firm, and the performance of the internal audit function.

A
copy of our audit committee charter can be found on our website at www.fairpoint.com on the "Investors" page, under the "Corporate Governance" caption. In addition, a copy of our audit
committee charter is available free of charge upon request directed to our secretary at: Secretary, FairPoint Communications, Inc., 521 East Morehead Street, Suite 500, Charlotte, North
Carolina 28202.



Our compensation committee for fiscal 2009 consisted of Thomas F. Gilbane, Jr., Jane E. Newman, and Michael R. Tuttle and met
twenty-one times during 2009. Prior to his appointment as our Chief Executive Officer, David L. Hauser served on our compensation committee. Thomas F. Gilbane, Jr. is the chair of our
compensation committee. All compensation committee members satisfy the independence criteria set forth in the listing standards of the NYSE. Among other functions, our compensation committee oversees
the compensation of our Chief Executive Officer and other executive officers, including plans and programs relating to cash compensation, incentive compensation, equity based awards and other benefits
and perquisites and administers any such plans or programs as required by the terms thereof.

A
copy of our compensation committee charter can be found on our website at www.fairpoint.com on the "Investors" page, under the "Corporate Governance" caption. In addition, a copy of
our compensation committee charter is available free of charge upon request directed to our secretary at: Secretary, FairPoint Communications, Inc., 521 East Morehead Street, Suite 500,
Charlotte, North Carolina 28202.



During 2009, decisions on various elements of executive compensation were made by our compensation committee. No officer, employee or
former officer of the Company served as a member of our compensation committee during 2009. No committee member had any interlocking relationships requiring disclosure under applicable rules and
regulations.

For
a description of certain relationships and transactions between us and members of our board of directors or their affiliates, see "Certain Relationships and Related Party
Transactions."



Our corporate governance committee for fiscal 2009 consisted of Claude C. Lilly, Jane E. Newman and Michael R. Tuttle, and met twice
during 2009. Michael R. Tuttle is the chair of our corporate governance committee. Prior to her resignation from our board of directors, Ms. Garrison-Corbin served as the chair of our corporate
governance committee. All corporate
governance committee members satisfy the independence criteria set forth in the listing standards of the NYSE. Among other functions, the principal duties and responsibilities of our corporate
governance committee are to identify qualified individuals to become board members, recommend to our board of directors individuals to be designated as nominees for election as directors at the annual
meetings of stockholders, and develop and recommend to our board of directors our corporate governance guidelines.

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A
copy of our corporate governance committee charter can be found on our website at www.fairpoint.com on the "Investors" page, under the "Corporate Governance" caption. In addition, a
copy of our corporate governance committee charter is available free of charge upon request directed to our secretary at: Secretary, FairPoint Communications, Inc., 521 East Morehead Street,
Suite 500, Charlotte, North Carolina 28202.

Attendance of Directors

During 2009, the board of directors held seventeen meetings. Each current director attended at least 75% of the aggregate of the total
number of meetings held by the board of directors and the total number of meetings held by all committees of the board of directors on which he or she served, which meetings were held when he or she
was a director.

Corporate Governance

Code of Business Conduct and Ethics.We have adopted a code of business conduct and ethics that applies to all of our employees,
including our
principal executive officer, principal financial officer and principal accounting officer. This code of business conduct and ethics is designed to comply with the SEC regulations and NYSE listing
standards related to codes of conduct and ethics and is posted on our corporate website at www.fairpoint.com on the "Investors" page, under the "Corporate Governance" caption. A copy of our code of
business conduct and ethics is available free of charge
upon request directed to our secretary at: Secretary, FairPoint Communications, Inc., 521 East Morehead Street, Suite 500, Charlotte, North Carolina 28202.

Code of Ethics for Financial Professionals.We have also adopted a code of ethics for financial professionals as required by the SEC
under
Section 406 of the Sarbanes-Oxley Act. This code sets forth written standards that are designed to deter wrongdoing and to promote honest and ethical conduct by our senior financial officers,
including our Chief Executive Officer, and is a supplement to our code of business conduct and ethics. In addition to applying to our Chief Executive Officer, Chief Financial Officer, Chief Accounting
Officer, and Treasurer, this code applies to all of the other persons employed by us who have significant responsibility for preparing or overseeing the preparation of our financial statements and the
other financial data included in our periodic reports to the SEC and in other public communications made by us that are designated from time to time by our Chief Financial Officer as senior financial
professionals. Our code of ethics for financial professionals is posted on our corporate website at www.fairpoint.com on the "Investors" page, under the "Corporate Governance" caption.

Corporate Governance Guidelines:We have also adopted corporate governance guidelines to advance the functioning of our board of
directors and its
committees and to set forth our board of directors' expectations as to how it should perform its functions. Our corporate governance guidelines are posted on our corporate website at www.fairpoint.com
on the "Investors" page, under the "Corporate Governance" caption. A copy of our corporate governance guidelines is available free of charge upon request directed to our secretary at: Secretary,
FairPoint Communications, Inc. 521 East Morehead Street, Suite 500, Charlotte, North Carolina 28202.

Policies Relating to our Board of Directors



Our corporate governance committee identifies and evaluates potential director candidates in a variety of ways. Recommendations may
come from current members of our board of directors, professional search firms, members of management, stockholders or other persons. In assessing the qualifications of potential nominees, the
corporate governance committee may rely on personal interviews or discussions with the candidate and others familiar with the candidate's professional background, on third-party background and
reference checks and on such other due diligence

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information
as is reasonably available. The corporate governance committee must be satisfied that the candidate possesses the highest professional and personal ethics and values and has broad
experience at the policy-making level in business, government, education or public interest before the corporate governance committee will recommend a candidate as a nominee to our board of directors.



Our board of directors has adopted policies with respect to the consideration of candidates recommended by stockholders for election as
well as for director and stockholder communications with the board of directors.

Stockholders
may recommend nominees for consideration by the corporate governance committee by submitting the names and the following supporting information to our secretary at:
Secretary, Stockholder Nominations, FairPoint Communications, Inc., 521 East Morehead Street, Suite 500, Charlotte, North Carolina 28202. The submissions should include a current resume
of the candidate and a statement describing the candidate's qualifications and contact information for the candidate. The submission should also include the name and address of the stockholder who is
submitting the nominee, the number of shares which are owned of record or beneficially by the submitting stockholder and a description of all arrangements or understandings between the submitting
stockholder and the nominee.

Stockholders
and other interested parties may communicate directly with our board of directors or the non-management directors. All communications should be in writing and
should be directed to our secretary at: Secretary, Stockholder Communications, FairPoint Communications, Inc., 521 East Morehead Street, Suite 500, Charlotte, North Carolina 28202. The
sender should indicate in the address whether it is intended for the entire board of directors, the
non-management directors as a group or an individual director. Each communication intended for the board of directors or non-management directors received by the secretary will
be forwarded to the intended recipients in accordance with the submitted instructions.

The
full text of the stockholder nominations and communications policy is available on our corporate website at www.fairpoint.com on the "Investors" page, under the "Corporate
Governance" caption.



The non-management directors regularly meet in private session without our Chairman and Chief Executive Officer. Our lead
director presides at these non-management executive sessions. Jane E. Newman served as our lead director in 2009.



We do not have a formal policy regarding attendance by directors at our annual meeting of stockholders but invite and encourage all
directors to attend. The annual meeting of stockholders is also held in conjunction with a regularly scheduled board of directors meeting to encourage director attendance. Eight of our nine directors
attended the 2009 annual meeting of stockholders.

ITEM 11.    EXECUTIVE COMPENSATION

General Principles and Procedures



The compensation committee's principal objective in designing compensation policies is to develop and administer a comprehensive
program to attract, motivate and retain outstanding executives who are

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likely
to enhance our profitability and create value for our stockholders. Within this overall compensation philosophy, the compensation committee seeks to: (1) recognize and reward sustained
superior performance by individual officers and key employees; (2) pay for performance on both an individual and corporate level; (3) align stockholder and executive interests by placing
a significant portion of executive compensation "at risk"; (4) tie executive compensation to the achievement of certain short term and long term performance objectives of the Company; and
(5) offer a total compensation program that takes into account the compensation practices of comparable companies.

The
compensation committee intends to provide our named executive officers ("NEOs") with an executive compensation program that emphasizes performance. The program therefore combines a
competitive base salary component with a significant amount of variable compensation in the form of performance based annual and long term incentives. The compensation committee believes this emphasis
on performance aligns the compensation of our NEOs with the long term interests of our stockholders.

The
compensation committee has engaged and regularly consults an independent consultant, Findley Davies, Inc., to review the competitiveness and structure of the executive
compensation program and each component of the program, and to assist the compensation committee in ensuring that the executive compensation program achieves the compensation committee's objectives.
Findley Davies also assisted the compensation committee with the negotiation of the compensation related terms of Mr. Hauser's employment as Chief Executive Officer of the Company, which
commenced on July 1, 2009.

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Specific Principles for Determining Executive Compensation

The table below identifies and explains the reason for each component of our executive compensation program. See
"Executive Compensation Decisions for 2009" for amounts and further detail.

Element:

Reason for ElementSalary

Our career-oriented philosophy toward executive compensation requires a competitive base salary as a starting
point. The compensation committee establishes the base salaries for our NEOs as fixed amounts to provide a reliable indication of the minimum amount of compensation each NEO will receive in a given year.Annual Incentives

We maintain an Annual Incentive Plan under which our NEOs and other key employees may earn annual cash incentives
based on corporate and individual performance. The Annual Incentive Plan is designed to provide an incentive for executives to attain short term goals. The compensation committee establishes and approves the goals of the Chief Executive Officer and
the Chief Executive Officer approves the goals of the other NEOs and the compensation committee reviews them.Long Term Incentives/Equity Awards

We maintain the 2008 Long Term Incentive Plan that allows for a variety of stock-based awards to link employee
compensation to stockholders' interests and encourage the creation of long term value for our stockholders by increasing the retention of qualified key employees.Deferred Compensation

We have maintained a Non-Qualified Deferred Compensation Plan, which we refer to as the NQDC Plan, which covers
certain employees. The NQDC Plan allows senior management employees to defer additional compensation beyond the contribution limitations of the 401(k) plan. Company matching contributions are made according to the same percentage of deferrals as is
made under our 401(k) plan, but only with respect to compensation that exceeds the limits for the 401(k) plan, up to the maximum allowed contribution.Welfare Benefits

We provide, on equal terms for all employees, group term life insurance, group health insurance, and short term
and long term disability insurance.Post-employment Benefits

Retirement. We maintain a 401(k) retirement savings plan that in 2009 included an
employer matching contribution up to an amount equal to 5% of each participant's compensation.Severance and Change in Control Benefits. We provide severance benefits to certain
NEOs at levels that we consider conservative yet competitive when compared to those offered by our peers. We believe that such benefits are necessary and appropriate in order to attract and retain qualified NEOs.


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Method for Determining Amounts



The compensation committee determines the level of base salary for our Chief Executive Officer and the other executive officers with
the general goal of providing competitive salaries. In making its decisions, the compensation committee considers independent studies and surveys prepared by consultants based on publicly available
information with respect to other comparable communications companies. In addition, with respect to each executive officer, including the Chief Executive Officer, the compensation committee considers
the individual's performance, including that individual's total level of experience in the communications industry, his or her record of performance and contribution to our success relative to his or
her job responsibilities and annual goals, as well as his or her overall service to the Company.



The annual incentive awards are based on a combination of corporate and individual goals having specific financial and operational
objectives such as the following: FairPoint achieving specified milestones under the installation schedule for its Next Generation Network, FairPoint achieving a specified year-end
broadband penetration target, FairPoint achieving certain free cash flow and revenue targets, FairPoint accomplishing certain budgetary, operational and regulatory goals and providing Company and
industry leadership. We generally establish bonus targets and performance criteria at the end of each year for the following year.



In determining the long term incentive component of the Chief Executive Officer's compensation, the compensation committee considers,
among other factors selected by the compensation committee, our performance and relative stockholder return and the value of similar incentive awards to chief executive officers at comparable
companies. With respect to the amount of long term incentive awards for other executive officers and key employees, the compensation committee considers the recommendation of the Chief Executive
Officer and takes into account the amount of long term incentive awards granted to peer executives at comparable companies. The compensation committee also obtains and reviews market compensation data
from its compensation consultant.

The
compensation committee determines the vesting schedule and criteria for future equity awards. We do not time our equity awards to the release of material non-public
information.

In
2007, the compensation committee established stock ownership guidelines for certain of our executives which became effective in 2008. These guidelines are intended to reflect our
executives' commitment to the organization and strong alignment with our stockholders. The guidelines, which must be achieved by 2013 (or if an executive is employed or promoted after 2008 to a
position that is subject to the guidelines, within five years of that date), include ownership of our common stock in an amount equal to or greater than, for our Chief Executive Officer, five times
his base salary, for the NEOs other than the Chief Executive Officer and all other Executive Vice Presidents and Senior Vice Presidents, three times his or her base salary and for all Vice Presidents,
one times his or her base salary.



We have maintained a nonqualified deferred compensation plan (the "NQDC Plan") for NEOs and other select senior management to enable
them to defer compensation in excess of the limits applicable to them under our 401(k) plan. Matching contributions are made to the NQDC Plan

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according
to the same percentage of deferrals as is made under our 401(k) plan, but only with respect to compensation that exceeds the limits for the 401(k) plan.



Our NEOs participate in our broad-based 401(k) and welfare benefit plans, and thereby receive, for example, group health insurance,
group term life insurance and short term and long term disability insurance. The costs of these benefits constitute only a small percentage of each executive officer's total compensation.



We provide post-employment severance and change-in-control benefits to Mr. Hauser, pursuant
to an employment agreement, and to Messrs. Giammarino and Nixon and Ms. Linn, pursuant to change in control and severance agreements. See "Potential Payments Upon
Termination or Change of Control." We also provide post-employment severance and change-in-control benefits to certain other non-NEO executives. The
severance benefits for these executives are generally paid only if the executives are terminated without cause and they do not voluntarily resign. The severance benefits are also provided if any
termination of employment occurs because of a change in control. In addition to severance payments, each executive is entitled to continued welfare benefits for a limited period.

Executive Compensation Decisions for 2009

Explained below are the key components of the compensation that our NEOs earned in 2009 as shown in the "Summary Compensation Table."
Their base salaries generally accounted for between 33% and 50% of their total potential compensation, while incentive compensation accounted for most of the remainder of their total potential
compensation. The compensation committee believes that the balance described below of 2009 levels for salary, annual cash incentive awards and other benefits (including, with respect to
Mr. Hauser, a stock option award and a restricted stock award) reflect both (i) an appropriate performance-oriented structure for total compensation, and (ii) a suitable
correlation of total NEO compensation to the Company's financial and business performance in 2009. Note that the "Summary Compensation Table" below reports the grant date value of equity awards rather
than the fair value of the awards when they are subsequently earned or become vested.

Pursuant
to the Plan, all outstanding equity interests of the Company, including but not limited to all outstanding shares of common stock, options and contractual or other rights to
acquire any equity interests, will be canceled and extinguished on the Effective Date. In addition, on the Effective Date, the Company will be deemed to have adopted the New Long Term Incentive Plan
and the Success Bonus Plan without any further action by the Company. On the Effective Date, in accordance with the Plan, (i) management and other employees of the Company are expected to
receive certain cash bonuses pursuant to the Success Bonus Plan and certain equity awards pursuant to the New Long Term Incentive Plan and (ii) members of the New Board are expected to receive
certain equity awards pursuant to the New Long Term Incentive Plan. See "Item 1. BusinessBankruptcyThe PlanNew Long Term Incentive Plan and Success Bonus
Plan."



None of the NEOs received a base salary increase in 2009. Upon the recommendation of the compensation committee, our board of directors
approved a starting annual base salary for Mr. Hauser of $800,000 effective as of his hire on July 1, 2009.

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The compensation committee established the 2009 target bonuses and related performance goals for certain members of our senior
management under the FairPoint Communications, Inc. Annual Incentive Plan, or the Annual Incentive Plan, on March 3, 2009.

Below
is a chart that identifies the target bonus for each NEO who was eligible to participate in the Annual Incentive Plan in 2009 and the performance criteria used to evaluate the
NEO's performance. The performance criteria were weighted as indicated. The Company was required to achieve a threshold level of adjusted EBITDA before any amounts would be paid under the Annual
Incentive Plan. The Company did not achieve the threshold adjusted EBITDA level and, accordingly, no annual incentive awards were paid for 2009.

Executive

Position

Bonus Target
(% of 2009
Annual Base
Salary)

Performance CriteriaEugene B. Johnson

Chief Executive Officer (1)

100%

(i) 25%FairPoint achieving all major milestones under the installation schedule for its Next Generation Network by a
specified date; (ii) 25%FairPoint achieving a specified year-end broadband penetration target; (iii) 25%FairPoint increasing its net new commercial and wholesale sales revenue by a specified amount during 2009; (iv)
 20%FairPoint reducing its debt by a specified amount during 2009; and (v) 5%promoting workers' safety and reducing FairPoint's recordable accident rate.


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Executive

Position

Bonus Target
(% of 2009
Annual Base
Salary)

Performance CriteriaAlfred C. Giammarino

Executive Vice President and Chief Financial Officer (2)

50%

(i) 25%FairPoint achieving major milestones under the installation schedule for its Next Generation Network by a specified date;
(ii) 25%FairPoint achieving a specified year-end broadband penetration target; (iii) 25%FairPoint reducing its debt by a specified amount during 2009; (iv) 10%FairPoint repurchasing a certain amount of the Old Notes;
(v) 5%FairPoint improving its cash flow by a specified amount during the first quarter of 2009; (vi) 5%FairPoint making certain amendments to the credit agreement entered into in connection with the Verizon transaction; and
(vii) 5%promoting workers' safety and reducing the FairPoint's recordable accident rate.Peter G. Nixon

President

50%

(i) 25%FairPoint achieving all major milestones under the installation schedule for its Next Generation Network by a
specified date; (ii) 25%FairPoint achieving a specified year-end broadband penetration target; (iii) 25%FairPoint increasing its net new commercial and wholesale sales revenue by a specified amount during 2009; (iv)
 10%FairPoint completing systems integration for its operations in northern New England by a specified date; (v) 10%FairPoint implementing a customer loyalty program by a specified date and achieving certain goals under the
customer loyalty program during 2009; and (vi) 5%promoting workers' safety and reducing FairPoint's recordable accident rate.


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Table of Contents

Executive

Position

Bonus Target
(% of 2009
Annual Base
Salary)

Performance CriteriaShirley J. Linn

Executive Vice President, General Counsel and Secretary

50%

(i) 20%FairPoint entering into certain specified agreements and increasing internal succession-planning cross-training during 2009;
(ii) 15%FairPoint achieving all major milestones under the installation schedule for its Next Generation Network by a specified date; iii) 15%FairPoint achieving a specified year-end broadband penetration target; (iv)
 15%FairPoint increasing its net new commercial and wholesale sales revenue by a specified amount during 2009; (v) 10%managing the performance and cost of FairPoint's outside legal advisors, meeting certain budget and expense
goals for the in-house legal department and managing litigation prevention and costs; (vi) 10%FairPoint improving its public company compliance processes during 2009; (vii) 10%FairPoint partnering with the sales organization to
improve its sales process; and (viii) 5%promoting workers' safety and reducing FairPoint's recordable accident rate.


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Table of Contents

Executive

Position

Bonus Target
(% of 2009
Annual Base
Salary)

Performance CriteriaLisa R. Hood

Senior Vice President and Controller (3)

40%

(i) 20%FairPoint improving its internal controls for inventory and supply chain by a specified date; (ii) 20%FairPoint improving
its monthly reporting process by a specified date; (iii) 15%FairPoint achieving all major milestones under the installation schedule for its Next Generation Network by a specified date; (iv) 15%FairPoint achieving a specified
year-end broadband penetration target; (v) 15%FairPoint increasing its net new commercial and wholesale sales revenue by a specified amount during 2009; (vi) 10%facilitating the completion of FairPoint's 2010 budget by a
specified date; and (vii) 5%promoting workers' safety and reducing FairPoint's recordable accident rate.


(1)   Mr. Johnson
resigned as Chairman and Chief Executive Officer effective June 30, 2009. (2)   Mr. Giammarino
resigned as Executive Vice President and Chief Financial officer effective March 30, 2010. (3)   On
March 31, 2010, Ms. Hood was appointed as the Company's Chief Financial Officer and principal financial officer on an interim basis.


We
have not disclosed specific financial targets and metrics above as we believe this information would give our competition insight into key market dynamics and could cause us
competitive harm.

Mr. Hauser,
who commenced employment on July 1, 2009, did not participate in the Annual Incentive Plan in 2009. The terms of Mr. Hauser's incentive compensation were
negotiated in connection with his employment and are explained below.

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The Company adopted the FairPoint Communications, Inc. 2008 Long Term Incentive Plan (the "Long Term Plan") to permit the award
of long term, equity based awards to key employees. The stockholders approved the Long Term Plan at the 2008 annual stockholders meeting. We believe the Long Term Plan supports our pursuit of long
term creation of stockholder value and helps us motivate and retain a high quality executive team.



The
compensation committee awarded performance units under the Long Term Plan to the Company's executive officers (other than the Chief Executive Officer and
Mr. Leach, who had previously informed the Company that he intended to retire during the third quarter of 2008) on June 18, 2008. The compensation committee also awarded performance
units to Mr. Giammarino when he commenced employment on September 2, 2008. The performance units will be earned over the performance period beginning April 1, 2008 and ending
December 31, 2010. One share of the Company's
common stock will be delivered to each performance unit holder for each earned performance unit as soon as administratively feasible after the end of the performance period.

The
extent to which the units are earned will be determined based on the following two performance metrics:



The
compensation committee selected Adjusted EBITDA as a performance metric because Adjusted EBITDA measures the efficiency of the Company's operations better than the Company's reported
net earnings. The compensation committee selected the relative total stockholder return performance metric because it will provide compensation to the executive officers based on the return delivered
by the Company to its stockholders in comparison to the Company's peers.



As
described above, the 2008-2010 performance units are expected to pay incentive compensation to our executives in the first quarter of 2011. The
executive team last received equity based awards in 2006. The transition to incentive compensation under the Long Term Plan left a significant gap in any long term or equity incentive opportunity for
our executives. The compensation committee believed that this would place FairPoint at a competitive disadvantage with respect to our key executives. With this in mind, on March 27, 2008, the
compensation committee approved an interim equity based award for selected executives and key employees for the 2008 through 2009 period that would provide equity awards for achieving a specific total
return to stockholders as of December 31, 2009. The Company did not achieve the stockholder return and none of the units for the period ended December 31, 2009 were paid to the
executives.



On
March 3, 2009 the compensation committee awarded performance units under the Long Term Plan to the Company's executive officers (other than the Chief
Executive Officer). The performance

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units
will be earned over the performance period beginning January 1, 2009 and ending December 31, 2011. One share of the Company's common stock will be delivered to each performance
unit holder for each earned performance unit as soon as administratively feasible after the end of the performance period.

The
extent to which the units are earned will be determined based on the following two performance metrics:



The
compensation committee selected Adjusted EBITDA as a performance metric because Adjusted EBITDA measures the efficiency of the Company's operations better than the Company's reported
net earnings. The compensation committee selected the relative total stockholder return performance metric because it will provide compensation to the executive officers based on the return delivered
by the Company to its stockholders in comparison to the Company's peers.



The Company and Mr. Hauser negotiated and subsequently entered into an employment agreement that sets forth the terms and
conditions of Mr. Hauser's employment as Chairman and CEO for a three-year term commencing July 1, 2009. Under the agreement, Mr. Hauser will receive an annual base
salary of $800,000. Mr. Hauser will also be eligible to participate in the Annual Incentive Plan and earn a performance-based bonus thereunder for an 18-month performance period
beginning July 1, 2009 and for annual performance periods thereafter. Mr. Hauser's target bonus under the Annual Incentive Plan will be 100% of the base salary payable to him during the
performance period. Mr. Hauser's maximum bonus will be 200% of the base salary payable to him during the performance period.

As
an inducement to accept employment with the Company, Mr. Hauser received (i) the Inducement Options, (ii) the Inducement Restricted Stock and (iii) the
Inducement Performance Units. The Inducement Options were granted on July 1, 2009 at an exercise price equal to $0.95 (the average of the closing prices of the Company's common stock during the
thirty calendar days immediately preceding the grant date). The Inducement Options will vest and become exercisable in three equal annual installments commencing on July 1, 2010, provided
Mr. Hauser remains employed through each such date. The Inducement Restricted Stock will be awarded in three installments as follows: (i) $500,000 on July 1, 2009,
(ii) $1,750,000 on July 1, 2010 and (iii) $1,750,000 on July 1, 2011, in each case valued based on the average closing prices of the Company's common stock during the
thirty calendar days immediately preceding each award date. The Inducement Restricted Stock will become fully vested on July 1, 2012, provided Mr. Hauser remains employed through such
date. The Inducement Performance Units will be earned and paid in shares of the Company's Common Stock, based on the Company's performance during the performance periods, with a target amount of 200%
of base salary and a maximum of 400% of base salary. The number of shares subject to the Inducement Options and the option exercise price will be adjusted, and additional shares of Inducement
Restricted Stock will be awarded, as necessary to preserve the value of the Inducement Options and the Inducement Restricted Stock awarded on July 1, 2009 if, prior to December 31, 2010,
the Company completes a restructuring of its indebtedness.

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Mr. Johnson's employment agreement included the following severance obligations, subject to certain conditions, when he retired
from the Company on June 30, 2009:
(i) continuation of medical coverage for Mr. Johnson and his spouse, at his election, for their respective lives upon payment of applicable premiums; (ii) extension of
Mr. Johnson's right to exercise all of his vested options under the Company's 2000 Employee Stock Option Plan until the earlier of (1) March 12, 2012, or (2) the sale of
the Company (as defined in the Company's 1998 Stock Incentive Plan); and (iii) continued vesting of all restricted stock granted through June 30, 2009 under the Company's 2005 Stock
Incentive Plan as provided in the restricted stock agreement applicable to each grant of such restricted stock. This agreement and the severance obligations were terminated in November 2009.



Section 162(m) of the Internal Revenue Code (the "Code") generally disallows a tax deduction to public corporations for
compensation, other than performance based compensation, over $1.0 million paid for any fiscal year to any of the corporation's Chief Executive Officer and three other highly compensated
executive officers as of the end of any fiscal year. The Company's policy is to qualify its executive officers for deductibility under Section 162(m) to the extent the compensation committee
determines such to be appropriate. In 2009, compensation did not exceed the deductibility limits of Section 162(m) for any NEO. The compensation committee remains aware of the Code
Section 162(m) limitations and the available exemptions and special rules, and will address the issue of 162(m) deductibility when and if circumstances warrant the use of such exemptions or
other considerations.

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Summary Compensation Table

The table below summarizes the total compensation paid or earned by each of the NEOs for the fiscal years ended December 31,
2009, 2008 and 2007.

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(j)Name and Principal Position

Year

Salary
$

Bonus
$

Stock
Awards
$(1)

Option
Awards
$(1)

Non-Equity
Incentive
Plan
Compensation
$

Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
$

All Other
Compensation
$(2)

Total
$David L. Hauser(3)


2009


409,231





1,814,349


55,520








12,602


2,291,702Chairman of the Board ofDirectors and ChiefExecutive OfficerEugene B. Johnson(3)


2009


535,385

















13,627


549,012Chairman of the Board of


2008


559,077


158,862


593,100











12,370


1,323,409Directors and Chief


2007


460,000


526,150


451,000











12,131


1,449,281Executive OfficerAlfred C. Giammarino(4)


2009


401,923





236,180











12,634


650,737Executive Vice President,


2008


109,615


9,591


738,261











23,757


881,224Chief Financial OfficerPeter G. Nixon


2009


343,750





201,996











19,165


564,911President


2008


303,481


103,109


484,155











19,167


909,9122007


244,036


193,063














14,646


451,745Shirley J. Linn


2009


317,308





186,458











17,801


521,567Executive Vice President,


2008


278,291


109,244


445,724











19,116


852,375General Counsel and


2007


219,423


208,650














14,490


442,563SecretaryLisa R. Hood(4)


2009


243,269





71,476











12,968


327,713Senior Vice President and


2008


223,435


54,047


185,388











14,206


477,076Controller


(1)The
amounts in columns (e) and (f) are the grant date fair value of the stock and option awards, adjusted to eliminate the effect of any
forfeiture assumption, computed in accordance with the CompensationStock Compensation Topic of the ASC. Grant date fair value of awards granted prior to the Merger have been adjusted to
reflect the fair value of the award immediately following the Merger. Please see note 15 to FairPoint's Consolidated Financial Statements for the fiscal year ended December 31, 2009 for
more information about the assumptions FairPoint used to determine the grant date value of the awards(2)The
amount shown in column (i) for 2009 reflects the following for each NEO:




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Table of Contents

Grants of Plan-Based Awards

Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards

Estimated Future Payouts
Under Equity Incentive
Plan Awards(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(j)

(k)

(l)Name

Grant
Date

Threshold
($)

Target
($)

Maximum
($)

Threshold
(#)

Target
(#)

Maximum
(#)

All
Other
Stock
Awards:
Number
of Shares
of Stock
or Units
(#)(1)

All
Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)

Exercise
or Base
Price
of Option
Awards
($/Sh)

Grant
Date
Fair
Value
of Stock
and
Option
Awards
($)(2)David L. Hauser


01-Jul-09
(3)










365,714


914,286


1,828,572











585,143Chairman of the Board


01-Jul-09
(4)










558,730


1,396,825


2,793,650











893,968of Directors and Chief


01-Jul-09




















523,810








335,238Executive Officer


01-Jul-09























1,600,000


0.95


55,520Eugene B. Johnson
































Chairman of the Boardof Directors and ChiefExecutive OfficerAlfred C. Giammarino


03-Mar-09
(4)










52,778


131,944


263,888











236,180Executive VicePresident, ChiefFinancial OfficerPeter G. Nixon


03-Mar-09
(4)










45,139


112,847


225,694











201,996PresidentShirley J. Linn


03-Mar-09
(4)










41,667


104,167


208,334











186,458Executive VicePresident, GeneralCounsel and SecretaryLisa R. Hood


03-Mar-09
(4)










15,972


39,931


79,862











71,476Senior Vice Presidentand Controller


(1)The
amounts shown in column (i) reflect the number of shares of restricted stock granted to Mr. Hauser on July 1, 2009 in accordance
with the terms of his employment agreement with the Company.(2)The
amounts shown in column (l) reflect the grant date fair value of stock awards based on the target number of awards included in the grant and the
fair value of the awards at the date of grant, as determined in accordance with the Compensation-Stock Compensation Topic of the ASC. The grant date fair value, as determined in accordance with the
Compensation-Stock Compensation Topic of the ASC takes into account the likelihood of market conditions and performance conditions required by the award being achieved. In the case of restricted stock
this amount is equal to the number of restricted shares issued, multiplied by the market value of the Company's common stock on the date of grant.(3)These
awards were granted under the FairPoint Communications, Inc. 2008 Long Term Incentive Plan for the performance period April 1, 2008
through December 31, 2010. Payout of awards is based 70% on the Company's TSR, as defined in the award agreement, versus its peer group and 30% on the Company's Adjusted EBITDA versus a target
set by the compensation committee prior to the beginning of the performance period. Participants will receive a percentage of their TSR target according to the Company's TSR versus its peer group, as
follows: TSR greater than 20% of peer group40%, TSR greater than 40% of peer group100%, TSR greater than 60% of peer group200%. If the Company's TSR is not
greater than at least 20% of its peer group0%. Participants will receive a percentage of their Adjusted EBITDA target according to the Company's Adjusted EBITDA versus its target, as
follows: less than 95% of target0%, 95% of target40%, 100% of target100%, 105% of target or higher200%.(4)These
awards were granted under the FairPoint Communications, Inc. 2008 Long Term Incentive Plan for the performance period January 1, 2009
through December 31, 2011. Payout of awards is based 50% on the Company's TSR, as defined in the award agreement, versus its peer group and 50% on the Company's Adjusted EBITDA versus a target
set by the compensation committee prior to the beginning of the performance period. Participants will receive a percentage of their TSR target according to the Company's TSR versus its peer group, as
follows: TSR greater than 20% of peer group40%, TSR greater than 40% of peer group100%, TSR greater than 60% of peer group200%. If the Company's TSR is not
greater than at least 20% of its peer group0%. Participants will receive a percentage of their Adjusted EBITDA target according to the Company's Adjusted EBITDA versus its target, as
follows: less than 95% of target0%, 95% of target40%, 100% of target100%, 105% of target or higher200%.


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Table of Contents

Outstanding Equity Awards at December 31, 2009

Option Awards

Stock Awards(a)



(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(j)Name

Grant
Date

Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable

Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable

Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)

Option
Exercise
Price
($)

Option
Expiration
Date

Number of
Shares or
Units of
Stock That
Have Not
Vested
(#)

Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)

Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested (#)

Equity
Incentive
Plan
Awards:
Market
or Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
($)David L. Hauser


7/1/2009





1,600,000





0.95


7/1/2019











Chairman of the


7/1/2009

















523,810
(3)

17,286





Board of Directors


7/1/2009























365,714
(4)

12,069and Chief Executive


7/1/2009























558,730
(5)

18,438OfficerEugene B. Johnson


1/1/2002


47,373








36.94


1/1/2012











Chairman of the


3/12/2002


20,490








36.94


3/12/2012











Board of Directors


1/1/2007

















16,666
(1)

550





and Chief Executive


1/1/2008

















33,333
(1)

1,100





OfficerAlfred C.


9/3/2008

















25,000
(2)

825





Giammarino


9/3/2008























13,094
(4)

432Executive Vice


3/3/2009























52,778
(5)

1,742President, ChiefFinancial OfficerPeter G. Nixon


3/12/2002


8,419








36.94


3/12/2012











President


12/12/2003


23,786








36.94


12/12/2013











6/18/2008























13,198
(4)

4363/3/2009























45,139
(5)

1,490Shirley J. Linn


3/12/2002


9,209








36.94


3/12/2012











Executive Vice


12/12/2003


14,212








36.94


12/12/2013











President, General


6/18/2008























12,183
(4)

402Counsel and


3/3/2009























41,667
(5)

1,375SecretaryLisa R. Hood


3/12/2002


8,791








36.94


3/12/2012











Senior Vice


12/12/2003


6,633








36.94


12/12/2013











President and


6/18/2008























4,392
(4)

145Controller


3/3/2009























15,972
(5)

527


(1)These
restricted shares vest one-third per year on the first, second, and third anniversaries of the grant date.(2)These
restricted shares vest in equal installments on December 31, 2009 and December 31, 2010.(3)These
restricted shares vest on July 1, 2012.(4)These
awards were granted under the FairPoint Communications, Inc. 2008 Long Term Incentive Plan for the performance period April 1, 2008
through December 31, 2010. Payout of awards is based 70% on the Company's TSR, as defined in the award agreement, versus its peer group in the Dow Jones Telecommunications Index and 30% on the
Company's Adjusted EBITDA versus a target set by the compensation committee prior to the beginning of the performance period. Participants will receive a percentage of their TSR target as follows: TSR
greater than 20% of peer group40%, TSR greater than 40% of peer group100%, TSR greater than 60% of peer group200%. If the Company's TSR is not greater than at
least 20% of its peer group, then participants will receive nothing. Participants will receive a percentage of their Adjusted EBITDA target according to the Company's Adjusted EBITDA versus its
target, as follows: less than 95% of target0%, 95% of target40%, 100% of target100%, 105% of target or higher200%. Amounts listed in column
(i) reflect the threshold number of shares to be issued, as performance to date has not exceed the threshold. Amounts listed in column (j) reflect the market value of these awards at
December 31, 2009, based on the closing price of the Company's common stock on December 31, 2009.


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(5)These
awards were granted under the FairPoint Communications, Inc. 2008 Long Term Incentive Plan for the performance period January 1, 2009
through December 31, 2011. Payout of awards is based 50% on the Company's TSR, as defined in the award agreement, versus its peer group in the Dow Jones Telecommunications Index and 50% on the
Company's Adjusted EBITDA versus a target set by the compensation committee prior to the beginning of the performance period. Participants will receive a percentage of their TSR target as follows: TSR
greater than 20% of peer group40%, TSR greater than 40% of peer group100%, TSR greater than 60% of peer group200%. If the Company's TSR is not greater than at
least 20% of its peer group, then participants will receive nothing. Participants will receive a percentage of their Adjusted EBITDA target according to the Company's Adjusted EBITDA versus its
target, as follows: less than 95% of target0%, 95% of target40%, 100% of target100%, 105% of target or higher200%. Amounts listed in column
(i) reflect the threshold number of shares to be issued, as performance to date has not exceeded the threshold. Amounts listed in column (j) reflect the market value of these awards at
December 31, 2009, based on the closing price of the Company's common stock on December 31, 2009.


Option Exercises and Stock Vested

None of the NEOs exercised any stock options during the fiscal year ended December 31, 2009.

Option Awards

Stock AwardsName

Number of
Shares Acquired
on Exercise
(#)

Value
Realized
Upon
Exercise
($)

Number of
Shares Acquired
on Vesting
(#)

Value Realized on
Vesting
($)David L. HauserChairman of the Board of Directors and
Chief Executive Officer











Eugene B. JohnsonChairman of the Board of Directors and
Chief Executive Officer








50,000


117,502Alfred C. GiammarinoExecutive Vice President, Chief
Financial Officer








25,000


825Peter G. NixonPresident








18,137


14,195Shirley J. LinnExecutive Vice President, General
Counsel and Secretary








31,377


12,318Lisa R. HoodSenior Vice President and
Controller








6,566


5,106


Nonqualified Deferred Compensation

Pursuant to the NQDC Plan, certain executives, including NEOs, may defer a portion of their annual salary and bonuses. Deferral
elections are made by eligible executives in each year for amounts

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Table of Contents

to
be earned in the following year. An executive can defer up to 50% of his or her annual salary and up to 100% of his or her annual bonus.

(a)

(b)

(c)

(d)

(e)

(f)Name

Executive
Contributions
in Last FY
($)(1)

Registrant
Contributions
in Last FY
($)(2)

Aggregate
Earnings
in Last FY
($)

Aggregate
Withdrawals/
Distributions
($)

Aggregate
Balance
at Last FYE
($)(3)David L. HauserChairman of the Board of Directors and Chief Executive Officer














Eugene B. JohnsonChairman of the Board of Directors and Chief Executive Officer








40,539





175,973Alfred C. GiammarinoExecutive Vice President, Chief
Financial Officer














Peter G. NixonPresident


10,313


5,906


12,370





64,051Shirley J. LinnExecutive Vice President,
General Counsel and Secretary


9,519


4,541


(1,187
)

(76,196
)

17,106Lisa R. HoodSenior Vice President and Controller


12,163


708


4,923





40,305


---

Name

AmountDavid L. Hauser


Eugene B. Johnson


Alfred C. Giammarino


Peter G. Nixon


34,278Shirley J. Linn


29,658Lisa R. Hood


4,247


Potential Payments Upon Termination or Change of Control

FairPoint has an employment agreement with David L. Hauser and change in control and severance agreements with
Messrs. Giammarino and Nixon and Ms. Linn. These agreements provide benefits to our NEOs in the event their employment is terminated under certain circumstances as summarized below.

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Under the employment agreement with Mr. Hauser, either party may terminate Mr. Hauser's employment at any time. In the
event the Company terminates Mr. Hauser's employment without cause or Mr. Hauser resigns his employment for good reason (each as defined in the agreement), Mr. Hauser will
receive: (i) any unpaid base salary, expense reimbursements, accrued bonuses or incentive compensation; (ii) a lump sum cash payment of 2 times (A) base salary, (B) his
target annual incentive award and (C) the value of the long term incentive award that would have been due for the performance period ending as of the next December 31;
(iii) accelerated vesting of the Inducement Options; and (iv) accelerated award and vesting of all shares of Inducement Restricted Stock. The employment agreement contains a provision
pursuant to which Mr. Hauser may not compete with the Company for a period of two years following termination of employment.



We entered into change in control and severance agreements, which we refer to collectively as the severance agreements, with
Mr. Nixon and Ms. Linn, on March 14, 2007, and with Mr. Giammarino, on September 3, 2008. Each severance agreement provides, subject to certain other conditions,
that we will pay severance and provide benefits to the subject executive (i) in the event of such employee's termination without cause or following a change in control, or (ii) within
two years of a change in control, upon such employee's resignation within 45 days following (A) a significant or material reduction of such employee's key responsibilities or duties,
(B) a reduction in such employee's overall compensation opportunities, (C) the diminishment or elimination of such employee's rights to the severance benefits detailed in the severance
agreement, or (D) any material breach by the Company of the severance agreement. The severance payable and benefits required to be provided include unpaid base salary, lump sum cash payments
equal to two times such employee's annual base salary and annual bonus, COBRA premiums and life insurance premiums for 24 months, and the vesting of all non-performance based,
non-vested and/or unearned long term incentive awards, among others. The severance agreements do not require the Company to provide any tax gross-up on the benefits paid under
the severance agreements. However, if the Company determines that reducing the benefits to just below the level that would trigger the "golden parachute" excise tax payable by the executive will
result in a greater after-tax benefit to the executive, the benefits will be reduced to that level.

The
severance agreements also contain provisions pursuant to which the subject employees, for a period of 12 months following termination of employment, promise to refrain from
certain activities including (1) soliciting any of our employees or consultants to leave us or to perform services for another company, or (2) accepting any employment or similar
arrangements with our competitors.



Both the 2008 - 2010 performance units and the 2009 - 2011 performance units under
the 2008 Long Term Incentive Plan contain provisions whereby participants will receive 100% of the target performance units (as defined in each participant's individual award agreement) upon the
occurrence of a change in control, without any adjustment for the levels of performance actually achieved during the performance period prior to or after the change of control.

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The following table shows cash compensation that would have been payable under the agreements with the NEOs (other than Mr. Johnson, who resigned effective
June 30, 2009) if their employment had terminated on December 31, 2009.

Reason for Payment:

Cash
Severance
($)

Bonus
($)

Acceleration and
Continuation of
Equity Awards
(Market Value of
Unearned Awards as of
12/31/09)
($)

Continuation of
Medical/Welfare
Benefits
(Present Value)
($)

Total
Termination
Benefits
($)David L. HauserInvoluntary termination with cause














Voluntary termination














Termination without cause or after change in control


1,600,000


1,600,000


3,547,792





6,747,792Alfred C. GiammarinoInvoluntary termination with cause














Voluntary termination














Termination without cause or after change in control


760,000





2,999


37,408


800,407Peter G. NixonInvoluntary termination with cause














Voluntary termination














Termination without cause or after change in control


650,000





1,926


37,233


689,159Shirley J. LinnInvoluntary termination with cause














Voluntary termination














Termination without cause or after change in control


600,000





1,777


37,153


638,930Lisa R. HoodInvoluntary termination with cause














Voluntary termination














Termination after change in control








672





672


Director Compensation



We use a combination of cash and stock-based incentive compensation to attract and retain qualified candidates to serve on our board of
directors. In setting director compensation, we consider the significant amount of time that directors expend in fulfilling their duties to the Company as well as the skill level required by the
members of our board of directors.

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In
2009, each non-employee director received an annual fee of $55,000 for serving as a director. In addition, an annual fee of $10,000 was paid for serving as the chairperson
of FairPoint's compensation committee or corporate governance committee and an annual fee of $20,000 was paid for serving as the chairperson of FairPoint's audit committee. An annual fee of $10,000
was paid to FairPoint's lead director.

FairPoint's
non-employee directors also receive an annual award of approximately $45,000 in the form of restricted stock or restricted units, at the recipient's option, which
are issued under FairPoint's 2005 Stock Incentive Plan or 2008 Long Term Incentive Plan. These awards vest in
four quarterly installments from the grant date, and the holders thereof are entitled to receive dividends or dividend equivalents on such awards from the date of grant, whether or not vested.
Effective March 31, 2010, this equity award was changed to a $45,000 annual cash award, payable quarterly.

On
September 3, 2008, the corporate governance committee of the board of directors determined that, from time to time, members of special purpose committees of the board of
directors should be awarded appropriate compensation for their services to such committees. They also determined that members of the board of directors' succession planning committee would receive
compensation because of the time requirements, confidentiality requirements and the importance of the committee's work. The chairperson of the committee will receive $25,000 for her service and each
committee member will receive $15,000. One half of this fee was paid in September 2008 and the remainder was paid in June 2009.

FairPoint's
employee directors do not receive any compensation for serving on its board of directors.



(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)Name

Fees
Earned
or Paid
in Cash
($)(1)

Stock
Awards
($)(2)

Option
Awards
($)

Non-equity
Incentive
Plan
Compensation
($)

Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings

All Other
Compensation
($)

Total
($)Patricia Garrison-Corbin(3)


48,478


42,762














91,240Thomas F. Gilbane, Jr.(4)


60,000


40,479














100,479David L. Hauser(5)


32,500


42,762














75,262Robert A. Kennedy(4)(6)


48,750


40,479














89,229Claude C. Lilly


82,500


42,762














125,262Robert S. Lilien


55,000


42,204














97,204Jane E. Newman


77,500


40,893














118,393Michael R. Tuttle(4)


58,750


40,479














99,229


---

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EXECUTIVE OFFICERS

The following table sets forth the names and positions of our current executive officers and their ages as of April 30, 2010.

Name

Age

PositionDavid L. Hauser

58

Chairman of the Board of Directors and Chief Executive OfficerPeter G. Nixon

57

PresidentLisa R. Hood

44

Senior Vice President and Controller, Interim Chief Financial OfficerJeffrey W. Allen

54

Executive Vice President, Northern New England OperationsShirley J. Linn

59

Executive Vice President, General Counsel and SecretaryRaymond C. Allieri

50

Executive Vice President and Chief Strategy OfficerKathleen McLean

50

Executive Vice President and Chief Information OfficerGary C. Garvey

56

Senior Vice President, Human RelationsThomas E. Griffin

49

Vice President and TreasurerRose B. Cummings

51

Vice President, Corporate Communications/Chief of Staff


The
following sets forth selected biographical information for our executive officers who are not directors.

Peter G. Nixon.In July 2007, Mr. Nixon was appointed as our President. Prior to assuming this role, Mr. Nixon had served as
our Chief
Operating Officer since November 2002. Previously, Mr. Nixon was our Senior Vice President of Corporate Development from February 2002 to November 2002 and President of our Telecom Group from
April 2001 to February 2002. Prior to this, Mr. Nixon served as President of our Eastern Region Telecom Group from June 1999 to April 2001 and President of Chautauqua and Erie Telephone
Corporation, which we refer to as C&E, from July 1997, when we acquired C&E, to June 1999. From April 1, 1989 to June 1997, Mr. Nixon served as Executive Vice President of C&E. From
April 1, 1978 to March 31, 1989, Mr. Nixon served as Vice President of Operations for C&E. Mr. Nixon has served as the past Chairman of the New York State
Telecommunications Association from June 1996 to June 1998.

Lisa R. Hood.In February 2008, Ms. Hood was appointed as our Senior Vice President and Controller. In addition, Ms. Hood
served as our
Interim Chief Financial Officer during the period between Mr. Crowley's resignation, effective August 15, 2008, and Mr. Giammarino's appointment as our Chief Financial Officer on
September 2, 2008, and currently serves as our Interim Chief Financial Officer following Mr. Giammarino's resignation, effective March 31, 2010. Prior to her appointment as Senior
Vice President and Controller, Ms. Hood served as our Chief Operating OfficerFairPoint Telecom Group from April 2007 to February 2008. Ms. Hood also served as our Senior
Vice President and Controller from July 2004 to March 2007 and as our Vice President and Controller from December 1993 to July 2004. Prior to joining our Company, Ms. Hood was employed by a
local public accounting firm in Kansas from 1988 to 1993. Ms. Hood is certified as a public accountant in Kansas.

Jeffrey W. Allen.In July 2009, Mr. Allen was appointed as our Executive Vice President, Northern New England Operations.
Previously,
Mr. Allen served as our Executive Vice President, External Relations from May 2008 to July 2009 and Assistant Vice President, Customer Operations from June

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2007
to May 2008. Prior to joining the Company, Mr. Allen served as General Manager, Wireless for Datapath, Inc. from December 2005 to June 2007, Chief Executive Officer of Third Rail
Americas, Inc. from January 2005 to December 2005, President, Chief Executive Officer and Chairman of the Board
of Intellispace, Inc. from June 2001 to June 2004 and Chief Operating Officer of Intellispace, Inc. from April 2000 to June 2001.

Shirley J. Linn.In March 2006, Ms. Linn was appointed as our Executive Vice President, General Counsel and Secretary. Previously,
Ms. Linn served as our Senior Vice President, General Counsel and Secretary from September 2004 to March 2006. Ms. Linn has served as our General Counsel since October 2000, our Vice
President since October 2000, and our Secretary since December 2000. Prior to joining us, Ms. Linn was a partner, from 1984 to 2000, in the Charlotte, North Carolina law firm of Underwood
Kinsey Warren & Tucker, P.A., where she specialized in general business matters, particularly mergers and acquisitions.

Raymond C. Allieri.In February 2010, Mr. Allieri was appointed as our Executive Vice President and Chief Strategy Officer. Prior
to joining
us, Mr. Allieri was a principle at rca Consulting Services, in Wellesley, Massachusetts from 2007 to 2010, President of Business Services at One Communications from 2006 to 2007 and Chief
Executive Officer of CTC Communications from 2004 to 2006.

Kathleen McLean.In March 2010, Ms. McLean was appointed as our Executive Vice President and Chief Information Officer. Prior to
joining us,
Ms. McLean served as Senior Vice President, Customer Service in Verizon Partner Solutions from December 2008 to December 2009. She also served Verizon as Senior Vice President, Wholesale Sales
from December 2007 to December 2008, Senior Vice President, Customer Care from January 2006 to December 2007, Senior Vice President, Customer Relationship and Systems Management from December 2002 to
December 2005 and Senior Vice President, Information Technology Group from May 1998 to November 2002. Prior to joining Verizon, Ms. McLean was a Vice President in the telecommunications
industry group of an international consulting firm.

Gary C. Garvey.In March 2008, Mr. Garvey was appointed as our Senior Vice President, Human Resources. Prior to joining us,
Mr. Garvey
held senior leadership positions in human resources at Draka Holding N.V., and Draka Comteq B.V. in Amsterdam from April 2005 to February 2008, at Lightolier from April 2004 to March
2005 and Corning Cable Systems/Siecor Corporation April 1983 to December 2002.

Thomas E. Griffin.In December 2005, Mr. Griffin was appointed our Treasurer, and, in early 2008, was appointed a Vice President.
Mr. Griffin joined us in January 2000 as Assistant Treasurer and served as
our General Manager of Wireless Broadband operations from December 2003 through March 2005. Previously, Mr. Griffin was employed by Sealand Service, Inc. as Assistant Treasurer from
September 1997 to January 2000 where he was responsible for worldwide cash management and as Director of Financial Planning for Europe for Sealand Service, Inc. from September 1995 to September
1997.

Rose B. Cummings.In October 2007, Ms. Cummings was appointed as our Vice President, Corporate Communications. Prior to joining us,
Ms. Cummings served as Executive Director of Corporate Communications for SunCom Wireless (now T-Mobile) from January 2006 to September 2007, Public Affairs Manager for Duke Energy
from 1994 to 2006 and Public Information Director for Mecklenburg County (NC) Government from 1986 to 1994.

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ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Securities Authorized for Issuance Under Equity Compensation Plans

See "Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
SecuritiesSecurities Authorized for Issuance Under Equity Compensation Plans" for the table entitled "Equity Compensation Plan Information."

Security Ownership of Certain Beneficial Owners

Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own, or are part of a
group that owns, more than ten percent of a
registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC and the NYSE. Officers, directors and beneficial owners of more than 10% of our common
stock are required by regulation of the SEC to furnish us with copies of all Section 16(a) forms they file.

Based
solely on our review of Forms 3, 4 and 5 and amendments thereto available to us and other information obtained from our directors, officers and beneficial owners of more
than 10% of our common stock or otherwise available to us, we believe that no director, officer or beneficial owner of more than 10% of our common stock failed to file on a timely basis reports
required pursuant to Section 16(a) of the Securities Exchange Act of 1934 for fiscal 2009, except for (i) Mr. Griffin, who filed a Form 3/A on April 1, 2009,
reporting a grant of stock options that was inadvertently omitted from his original Form 3 filing, (ii) Mr. Garvey, who filed a Form 4 on November 30, 2009 reporting
his sale of shares of the Company's common stock on November 24, 2009, and (iii) Mr. Giammarino who filed a Form 4 on January 11, 2010, reporting the forfeiture of
restricted shares of the Company's common stock on December 31, 2009.

The
following table sets forth information regarding beneficial ownership of our common stock as of April 30, 2010, for:



The
information (other than with respect to our directors and executives) is based on a review of statements filed with the SEC pursuant to Sections 13(d), 13(f) and 13(g) of the
Exchange Act with respect to our common stock.

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The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial
ownership of securities. Under the rules of the SEC, a person is deemed to be a "beneficial owner" of a security if that person has or shares "voting power," which includes the power to vote or to
direct the voting of such security, or "investment power," which includes the power to dispose of or direct the disposition of such security. A person is also deemed to be a beneficial owner of any
securities of which that person has a right to acquire beneficial ownership within 60 days. All persons listed have sole voting and investment power with respect to their shares unless
otherwise indicated.

Common Stock
Beneficially Owned(1)Name

Number

Percent
of ClassExecutive Officers and Directors:David L. Hauser(2)


537,110


0.6
%Alfred C. Giammarino(3)(4)


41,873


*Peter G. Nixon(5)


140,848


0.2
%Shirley J. Linn(6)


140,761


0.2
%Lisa R. Hood(7)(4)


56,863


*Thomas F. Gilbane, Jr.(8).


10,000


*Robert S. Lilien(9)





*Claude C. Lilly(10)


2,500


*Jane E. Newman(11)


1,000


*Michael R. Tuttle(12)


250


*All directors and executive officers of FairPoint as a group(15 persons)(13)


915,933


1.0
%5% Stockholders:None


*Less
than 0.1%.(1)Unless
otherwise indicated below, the persons and entities named in the table have sole voting and sole investment power with respect to all shares
beneficially owned by them, subject to community property laws where applicable. The percentage of beneficial ownership is based on 89,989,144 shares of our common stock outstanding as of
April 30, 2010.(2)With
respect to shares beneficially owned: (i) does not include 1,600,000 shares of our common stock issuable upon exercise of stock options that are
neither currently exercisable nor become exercisable during the next 60 days, (ii) does not include 2,311,111 restricted units awarded under Mr. Hauser's employment agreement,
which units are subject to certain vesting requirements, (iii) does not include 14,856 restricted units awarded under our 2005 Stock Incentive Plan, which units are vested but for which shares
of common stock will not be issued until the occurrence of certain events set forth in our 2005 Stock Incentive Plan, (iv) does not include 21,919 restricted units awarded under our 2008 Long
Term Incentive Plan, which units are vested but for which shares of common stock will not be issued until the occurrence of certain events set forth in our 2008 Long Term Incentive Plan,
(v) includes 523,810 shares of restricted stock awarded under Mr. Hauser's employment agreement and (vi) includes 800 shares of common stock owned by Mr. Hauser's spouse.(3)Shares
beneficially owned by Mr. Giammarino are presented as of March 31, 2010, the date of his resignation. With respect to shares
beneficially owned, includes 25,000 shares of restricted stock awarded under our 2008 Long Term Incentive Plan.


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(4)Mr. Giammarino
resigned as our Executive Vice President and Chief Financial Officer effective March 30, 2010. Ms. Hood was named as our
Interim Chief Financial Officer for the period between Mr. Giammarino's resignation and the appointment of a new Chief Financial Officer.(5)With
respect to shares beneficially owned: (i) includes 32,205 shares of our common stock issuable upon exercise of stock options that are either
currently exercisable or become exercisable during the next 60 days and (ii) includes 641 shares of common stock owned by Mr. Nixon's spouse and children.(6)With
respect to shares beneficially owned, includes 23,421 shares of our common stock issuable upon exercise of stock options that are either currently
exercisable or become exercisable during the next 60 days.(7)With
respect to shares beneficially owned, includes 15,424 shares of our common stock issuable upon exercise of stock options that are either currently
exercisable or become exercisable during the next 60 days.(8)With
respect to shares beneficially owned: (i) does not include 5,242 restricted units awarded under our 2005 Stock Incentive Plan, which units are
vested but for which shares of common stock will not be issued until the occurrence of certain events set forth in our 2005 Stock Incentive Plan and (ii) does not include 21,919 restricted
units awarded under our 2008 Long Term Incentive Plan, which units are vested but for which shares of common stock will not be issued until the occurrence of certain events set forth in our 2008 Long
Term Incentive Plan.(9)With
respect to shares beneficially owned: (i) does not include 12,502 restricted units awarded under our 2005 Stock Incentive Plan, which units are
vested but for which shares of common stock will not be issued until the occurrence of certain events set forth in our 2005 Stock Incentive Plan and (ii) does not include 21,919 restricted
units awarded under our 2008 Long Term Incentive Plan, which units are vested but for which shares of common stock will not be issued until the occurrence of certain events set forth in our 2008 Long
Term Incentive Plan.(10)With
respect to shares beneficially owned: (i) does not include 14,856 restricted units awarded under our 2005 Stock Incentive Plan, which units are
vested but for which shares of common stock will not be issued until the occurrence of certain events set forth in our 2005 Stock Incentive Plan and (ii) does not include 21,919 restricted
units awarded under our 2008 Long Term Incentive Plan, which units are vested but for which shares of common stock will not be issued until the occurrence of certain events set forth in our 2008 Long
Term Incentive Plan.(11)With
respect to shares beneficially owned: (i) does not include 6,985 restricted units awarded under our 2005 Stock Incentive Plan, which units are
vested but for which shares of common stock will not be issued until the occurrence of certain events set forth in our 2005 Stock Incentive Plan and (ii) does not include 21,919 restricted
units awarded under our 2008 Long Term Incentive Plan, which units are vested but for which shares of common stock will not be issued until the occurrence of certain events set forth in our 2008 Long
Term Incentive Plan.(12)With
respect to shares beneficially owned: (i) does not include 5,242 restricted units awarded under our 2005 Stock Incentive Plan, which units are
vested but for which shares of common stock will not be issued until the occurrence of certain events set forth in our 2005 Stock Incentive Plan and (ii) does not include 21,919 restricted
units awarded under our 2008 Long Term Incentive Plan, which units are vested but for which shares of common stock will not be issued until the occurrence of certain events set forth in our 2008 Long
Term Incentive Plan.(13)With
respect to shares beneficially owned: (i) includes 72,503 shares of our common stock issuable upon exercise of stock options that are either
currently exercisable or become exercisable during the next 60 days, (ii) does not include 1,600,000 shares of our common stock issuable upon


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exercise
of stock options that are neither currently exercisable nor become exercisable during the next 60 days, (iii) does not include 59,683 restricted units awarded under our 2005
Stock Incentive Plan, which units are vested but for which shares of common stock will not be issued until the occurrence of certain events set forth in our 2005 Stock Incentive Plan, (iv) does
not include 131,514 restricted units awarded under our 2008 Long Term Incentive Plan, which units are vested but for which shares of common stock will not be issued until the occurrence of certain
events set forth in our 2008 Long Term Incentive Plan, (v) does not include 2,311,111 restricted units awarded under Mr. Hauser's employment agreement, which units are subject to certain
vesting requirements (vi) does not include any performance units issued pursuant to the FairPoint Communications, Inc. 2008 Long Term Incentive Plan, (vii) includes 523,810 shares
of restricted stock awarded under Mr. Hauser's employment agreement and (viii) includes 1,441 shares of common stock owned indirectly.


ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Our code of business conduct and ethics, which is posted on our website at www.fairpoint.com, prohibits directors and executive
officers from engaging in transactions on behalf of us with a family member, or with a company with which they are or their family member is a significant owner or associated or employed in a
significant role. Our audit committee must review and approve in advance all material related party transactions or business or professional relationships. All instances involving potential related
party transactions or business or professional relationships must be reported to our legal department which will assess the materiality of the transaction or relationship and elevate the matter to the
audit committee as appropriate. Any dealings with a related party must be conducted in such a way as to avoid preferential treatment and assure that the terms obtained by us are no less favorable than
could be obtained from unrelated parties on an arm's-length basis. Directors and officers are not permitted to enter into, develop or continue any such material transaction or relationship without
obtaining prior approval from the audit committee.

Construction Services

We hired Gilbane Building Company to construct a new data center in Manchester, New Hampshire and to perform restoration services on a
flooded building in Raymond, New Hampshire. Thomas F. Gilbane, Jr., a director of FairPoint, is Chairman and Chief Executive Officer of Gilbane Building Company. Gilbane Building Company was hired by
us for both projects prior to Mr. Gilbane's designation to the board of directors. We paid Gilbane Building Company fees of $0.8 million and $2.8 million in the years ended
December 31, 2009, and December 31, 2008, respectively. For the year ended December 31, 2009, Mr. Gilbane has advised us that the amounts paid to Gilbane Building Company
represented less than 2% of such company's consolidated gross revenues.

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ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

The following table sets forth the aggregate fees paid or payable to Ernst & Young LLP, our independent registered public
accounting firm, relating to services rendered for our fiscal year ended December 31, 2009 and 2008:

Fiscal Year
2009

Fiscal Year
2008Audit Fees(1)

$
5,645,000

$
1,562,000Audit Related Fees(2)


42,000


Tax Fees(3)


246,000


All Other Fees





2,000


(1)Audit
Fees include amounts billed to us related to annual financial statement audit work and quarterly financial statement reviews. These amounts also
include the review of documents filed with the SEC, accounting consultations related to the annual audit and preparation of letters for underwriters and other requesting parties with respect to the
Merger and related transactions.(2)Audit
Related Fees consist of amounts billed to us related to a review of our segregation of duties controls.(3)Tax
Fees consist of fees for professional services for tax consulting and compliance.


The
following table sets forth the aggregate fees paid or payable to KPMG LLP, our independent registered public accounting firm prior to March 18, 2008, relating to
services rendered for our fiscal years ended December 31, 2009 and 2008:

Fiscal Year
2009

Fiscal Year
2008Audit Fees

$


$
Audit Related Fees





Tax Fees(1)


199,000


506,000All Other Fees(2)


280,000


536,000


(1)Tax
Fees consist of fees for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal and
state tax compliance, return preparation and tax audits.(2)Other
Fees consist of fees for professional services for our debt offering, our Form S-8 filing for the FairPoint Inc. 2008 Long
Term Incentive Plan, utilities commission reviews of auditor workpapers and advisory services related to the Merger and stock-based compensation.




In accordance with our audit committee pre-approval policy, all audit and non-audit services performed for us
by our independent accountants were pre-approved by our audit committee.

Our
audit committee's pre-approval policy provides that our independent registered public accounting firm shall not provide services that have the potential to impair or
appear to impair the independence of the audit role. The pre-approval policy requires our independent registered public accounting firm to provide an annual engagement letter to our audit
committee outlining the scope of the audit services proposed to be performed during the fiscal year. Upon the audit committee's acceptance of and agreement with such engagement letter, the services
within the scope of the proposed audit services shall be deemed pre-approved pursuant to the policy.

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The
pre-approval policy provides for categorical pre-approval of specified audit and permissible non-audit services and requires the specific
pre-approval by the audit committee, prior to engagement, of such services, other than audit services covered by the annual engagement letter. In addition, services to be provided by our
independent registered public accounting firm that are not within the category of pre-approved services must be approved by the audit committee prior to engagement, regardless of the
service being requested or the dollar amount involved.

Requests
or applications for services that require specific separate approval by the audit committee are required to be submitted to the audit committee by both management and the
independent registered public accounting firm, and must include a detailed description of the services to be provided and a joint statement confirming that the provision of the proposed services does
not impair the independence of the independent registered public accounting firm.

The
audit committee may delegate pre-approval authority to one or more of its members. The member or members to whom such authority is delegated shall report any
pre-approval decisions to the audit committee at its next scheduled meeting. The audit committee is prohibited from delegating to management its responsibilities to pre-approve
services to be performed by our independent registered public accounting firm.

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PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) Financial Statements

The financial statements filed as part of this Annual Report are listed in the index to the financial statements under "Item 8.
Financial Statements and Supplementary Data" in this Annual Report, which index to the financial statements is incorporated herein by reference.

(b) Exhibits

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

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.

FAIRPOINT COMMUNICATIONS, INC.Date: May 27, 2010

By:

/s/ DAVID L. HAUSERName:  David L. Hauser
Title:Chief Executive Officer and
            Chairman of the Board of Directors


Pursuant
to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.

Signatures

Title

Date/s/ DAVID L. HAUSER David L. Hauser

Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)

May 27, 2010/s/ LISA R. HOOD Lisa R. Hood

Senior Vice President and Corporate Controller, Interim Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

May 27, 2010/s/ THOMAS F. GILBANE, JR. Thomas F. Gilbane, Jr.

Director

May 27, 2010/s/ ROBERT S. LILIEN Robert S. Lilien

Director

May 27, 2010/s/ CLAUDE C. LILLY Claude C. Lilly

Director

May 27, 2010/s/ JANE E. NEWMAN Jane E. Newman

Director

May 27, 2010/s/ MICHAEL R. TUTTLE Michael R. Tuttle

Director

May 27, 2010


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Exhibit Index

Exhibit No.

Description2.1

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

First Amendment to Master Services Agreement, dated as of July 6, 2007, by and between FairPoint and Capgemini U.S. LLC.(3)


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Exhibit No.

Description2.17

Second Amendment to Master Services Agreement, dated as of February 25, 2008, by and between FairPoint and Capgemini U.S. LLC.(5)2.18

Letter Agreement, dated as of January 17, 2008, by and between FairPoint and Capgemini U.S. LLC.(7)2.19

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

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

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

Partnership Interest Purchase Agreement, dated as of January 15, 2007, by and among Verizon Wireless of the East LP, Cellco Partnership d/b/a Verizon Wireless and Taconic Telephone Corp.(9)2.23

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

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

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

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

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

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

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

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

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

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

Indenture, dated as of March 31, 2008, by and between Northern New England Spinco Inc. and U.S. Bank National Association.(6)4.2

First Supplemental Indenture, dated as of March 31, 2008, by and between FairPoint Communications, Inc. and U.S. Bank National Association.(6)4.3

Second Supplemental Indenture, dated as of July 17, 2009, by and between FairPoint Communications, Inc. and U.S. Bank National Association.(13)


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Exhibit No.

Description4.4

Registration Rights Agreement, dated as of March 31, 2008, by and among FairPoint Communications, Inc., Banc of America Securities LLC, Lehman Brothers Inc. and Morgan Stanley & Co.
Incorporated.(6)4.5

Form of 131/8% Senior Note due 2018 (included in Exhibit 4.1).(6)4.6

Indenture, dated as of July 29, 2009, by and between FairPoint Communications, Inc. and U.S. Bank National Association.(13)4.7

Form of 131/8% Senior Note due 2018 (included in Exhibit 4.6).(13)10.1

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

Amendment, Waiver, Resignation and Appointment Agreement, dated as of January 21, 2009, by and among FairPoint, Lenders party thereto, Lehman Commercial Paper Inc. and Bank of America, N.A.(14)10.3

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

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

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

Debtor-in-Possession Credit Agreement, dated as of October 27, 2009, by and among FairPoint Communications, Inc., FairPoint Logistics, Inc., Bank of America, N.A., as administrative agent, and lenders
party thereto.(15)10.7

First Amendment to Debtor-in-Possession Credit Agreement, dated as of December 1, 2010, by and among FairPoint Communications, Inc., FairPoint Logistics, Inc., Bank of America N.A., as administrative
agent, and the lenders party thereto.*10.8

Second Amendment to Debtor-in-Possession Credit Agreement, dated as of December 10, 2010, by and among FairPoint Communications, Inc., FairPoint Logistics, Inc., Bank of America N.A., as administrative
agent, and the lenders party thereto.*10.9

Third Amendment to Debtor-in-Possession Credit Agreement, dated as of December 15, 2009, by and among FairPoint Communications, Inc., FairPoint Logistics, Inc., Bank of America N.A., as administrative
agent, and the lenders party thereto.*


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Exhibit No.

Description10.10

Fourth Amendment to Debtor-in-Possession Credit Agreement, dated as of January 13, 2010, by and among FairPoint Communications, Inc., FairPoint Logistics, Inc., Bank of America N.A., as administrative agent,
 and the lenders party thereto.*10.11

Fifth Amendment to Debtor-in-Possession Credit Agreement, dated as of January 28, 2010, by and among FairPoint Communications, Inc., FairPoint Logistics, Inc., Bank of America N.A., as administrative
agent, and the lenders party thereto.*10.12

Sixth Amendment to Debtor-in-Possession Credit Agreement, dated as of January 29, 2010, by and among FairPoint Communications, Inc., FairPoint Logistics, Inc., Bank of America N.A., as administrative
agent, and the lenders party thereto.*10.13

Seventh Amendment to Debtor-in-Possession Credit Agreement, dated as of February 8, 2010, by and among FairPoint Communications, Inc., FairPoint Logistics, Inc., Bank of America N.A., as administrative
agent, and the lenders party thereto.*10.14

Eighth Amendment to Debtor-in-Possession Credit Agreement, dated as of February 24, 2010, by and among FairPoint Communications, Inc., FairPoint Logistics, Inc., Bank of America N.A., as administrative
agent, and the lenders party thereto.*10.15

Ninth Amendment to Debtor-in-Possession Credit Agreement, dated as of February 26, 2010, by and among FairPoint Communications, Inc., FairPoint Logistics, Inc., Bank of America N.A., as administrative
agent, and the lenders party thereto.*10.16

Tenth Amendment to Debtor-in-Possession Credit Agreement, dated as of March 9, 2010, by and among FairPoint Communications, Inc., FairPoint Logistics, Inc., Bank of America N.A., as administrative agent,
 and the lenders party thereto.*10.17

Eleventh Amendment to Debtor-in-Possession Credit Agreement, dated as of April 30, 2010, by and among FairPoint Communications, Inc., FairPoint Logistics, Inc., Bank of America N.A., as administrative
agent, and the lenders party thereto.*10.18

Debtor-in-Possession Subsidiary Guaranty, dated as of October 30, 2009, by and among certain subsidiaries of FairPoint Communications, Inc. and Bank of America, N.A.(15)10.19

Debtor-in-Possession Pledge Agreement, dated as of October 30, 2009, by and among FairPoint Communications, Inc., FairPoint Logistics, Inc., certain subsidiaries of FairPoint Communications, Inc.
and Bank of America, N.A.(15)10.20

Debtor-in-Possession Security Agreement, dated as of October 30, 2009, by and among FairPoint Communications, Inc., FairPoint Logistics, Inc., certain subsidiaries of FairPoint Communications, Inc.
and Bank of America, Inc.(15)10.21

Amended and Restated Tax Sharing Agreement, dated as of November 9, 2000, by and among FairPoint and its Subsidiaries.(16)10.22

Employment Agreement, dated as of June 11, 2009, by and between FairPoint and David L. Hauser.(17)10.23

Registration Rights Letter Agreement, dated as of July 1, 2009, by and between FairPoint and David L. Hauser.(17)10.24

Change in Control and Severance Agreement, dated as of March 14, 2007, by and between FairPoint and Peter G. Nixon.(18)10.25

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


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Exhibit No.

Description10.26

Change in Control and Severance Agreement, dated as of September 3, 2008, by and between FairPoint and Alfred C. Giammarino.(19)10.27

FairPoint Amended and Restated 1998 Stock Incentive Plan.(20)10.28

FairPoint Amended and Restated 2000 Employee Stock Incentive Plan.(21)10.29

FairPoint 2005 Stock Incentive Plan.(12)10.30

FairPoint Communications, Inc. 2008 Annual Incentive Plan.(22)10.31

FairPoint Communications, Inc. 2008 Long Term Incentive Plan.(22)10.32

Nonqualified Deferred Compensation Adoption Agreement.(11)10.33

Nonqualified Deferred Compensation Plan Document.(11)10.34

Form of February 2005 Restricted Stock Agreement.(23)10.35

Form of Director Restricted Stock AgreementFairPoint Communications, Inc. 2005 Stock Incentive Plan.(24)10.36

Form of Director Restricted Unit AgreementFairPoint Communications, Inc. 2005 Stock Incentive Plan.(24)10.37

Form of Non-Director Restricted Stock AgreementFairPoint Communications, Inc. 2005 Stock Incentive Plan.(25)10.38

Form of Non-Director Restricted Stock AgreementFairPoint Communications, Inc. 2008 Long Term Incentive Plan.(19)10.39

Form of Performance Unit Award Agreement 2008-2009 Award (Performance Unit Award, dated as of April 1, 2008, by and between FairPoint and Eugene B. Johnson).(26)10.40

Form of Performance Unit Award Agreement 2008-2010 Award.(22)10.41

Form of Performance Unit Award Agreement 2009-2011 Award.(27)10.42

Form of Director Restricted Unit AgreementFairPoint Communications, Inc. 2008 Long Term Incentive Plan.(27)10.43

FairPoint Communications, Inc. Restricted Stock Award Agreement, dated as of July 1, 2009, by and between FairPoint and David L. Hauser.(17)10.44

FairPoint Communications, Inc. Non-Qualified Stock Option Award Agreement, dated as of July 1, 2009, by and between FairPoint and David L. Hauser. (17)10.45

FairPoint Communications, Inc. Performance Unit Award Agreement for Performance Period Beginning July 1, 2009 and Ending December 31, 2010, dated as of July 1, 2009, by and between FairPoint and
David L. Hauser. (17)10.46

FairPoint Communications, Inc. Performance Unit Award Agreement for Performance Period Beginning July 1, 2009 and Ending December 31, 2011, dated as of July 1, 2009, by and between FairPoint and
David L. Hauser. (17)10.47

Stipulation filed with the Maine Public Utilities Commission, dated December 12, 2007.(28)10.48

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


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Exhibit No.

Description10.49

Stipulation filed with the Vermont Public Service Board, dated January 8, 2008.(29)10.50

Stipulation filed with the New Hampshire Public Utilities Commission, dated January 23, 2008.(7)10.51

Letter Agreement, dated as of March 30, 2008, by and between the Staff of the New Hampshire Public Utilities Commission and Verizon Communications Inc.(6)10.52

Letter, dated as of May 12, 2009, from the Staff of the New Hampshire Public Utilities Commission to FairPoint.(17)11

Statement Regarding Computation of Per Share Earnings (included in the financial statements contained in this Annual Report).14.1

FairPoint Code of Business Conduct and Ethics.(30)14.2

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

Subsidiaries of FairPoint.(31)23.1

Consent of Ernst & Young LLP.*31.1

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

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

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

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

Order of the Maine Public Utilities Commission, dated February 1, 2008.(32)99.2

Order of the Vermont Public Service Board, dated February 15, 2008.(33)99.3

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


*Filed
herewith.Pursuant
to SEC Release No. 33-8238, this certification will be treated as "accompanying" this Annual Report on
Form 10-K and not "filed" as part of such report for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of Section 18 of the Exchange
Act and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically
incorporates it by reference.(1)Incorporated
by reference to the Registration Statement on Form S-4 of FairPoint, declared effective as of July 16, 2007.(2)Incorporated
by reference to the Current Report on Form 8-K of FairPoint filed on June 28, 2007.(3)Incorporated
by reference to the Current Report on Form 8-K of FairPoint filed on July 9, 2007.(4)Incorporated
by reference to the Current Report on Form 8-K of FairPoint filed on November 16, 2007.(5)Incorporated
by reference to the Current Report on Form 8-K of FairPoint filed on February 27, 2008.(6)Incorporated
by reference to the Current Report on Form 8-K of FairPoint filed on April 3, 2008.


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(7)Incorporated
by reference to the Current Report on Form 8-K of FairPoint filed on January 24, 2008.(8)Incorporated
by reference to the Annual Report on Form 10-K of FairPoint for the year ended December 31, 2007.(9)Incorporated
by reference to the Current Report on Form 8-K of FairPoint filed on January 19, 2007.(10)Incorporated
by reference to the Current Report on Form 8-K of FairPoint filed on April 10, 2007.(11)Incorporated
by reference to the Annual Report on Form 10-K of FairPoint for the year ended December 31, 2008.(12)Incorporated
by reference to the Annual Report on Form 10-K of FairPoint for the year ended December 31, 2004.(13)Incorporated
by reference to the Current Report on Form 8-K of FairPoint filed on August 3, 2009.(14)Incorporated
by reference to the Current Report on Form 8-K of FairPoint filed on January 22, 2009.(15)Incorporated
by reference to the Quarterly Report on Form 10-Q of FairPoint for the period ended September 30, 2009.(16)Incorporated
by reference to the Quarterly Report on Form 10-Q of FairPoint for the period ended September 30, 2000.(17)Incorporated
by reference to the Quarterly Report on Form 10-Q of FairPoint for the period ended June 30, 2009.(18)Incorporated
by reference to the Current Report on Form 8-K of FairPoint filed on March 19, 2007.(19)Incorporated
by reference to the Quarterly Report on Form 10-Q of FairPoint for the period ended September 30, 2008.(20)Incorporated
by reference to the Registration Statement on Form S-4 of FairPoint, declared effective as of August 9, 2000.(21)Incorporated
by reference to the Annual Report on Form 10-K of FairPoint for the year ended December 31, 2003.(22)Incorporated
by reference to the Current Report on Form 8-K of FairPoint filed on June 23, 2008.(23)Incorporated
by reference to the Registration Statement on Form S-1 of FairPoint, declared effective as of February 3, 2005.(24)Incorporated
by reference to the Current Report on Form 8-K of FairPoint filed on June 20, 2005.(25)Incorporated
by reference to the Current Report on Form 8-K of FairPoint filed on September 23, 2005.(26)Incorporated
by reference to the Current Report on Form 8-K of FairPoint filed on April 1, 2008.(27)Incorporated
by reference to the Current Report on Form 8-K of FairPoint filed on March 9, 2009.(28)Incorporated
by reference to the Current Report on Form 8-K of FairPoint filed on December 13, 2007.


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(29)Incorporated
by reference to the Current Report on Form 8-K of FairPoint filed on January 8, 2008.(30)Incorporated
by reference to the Annual Report on Form 10-K of FairPoint for the year ended December 31, 2005.(31)Incorporated
by reference to the Quarterly Report on Form 10-Q of FairPoint for the period ended March 31, 2008.(32)Incorporated
by reference to the Current Report on Form 8-K of FairPoint filed on February 6, 2008.(33)Incorporated
by reference to the Current Report on Form 8-K of FairPoint filed on February 21, 2008.


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