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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

Commission File Number 333-56365

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

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

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

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

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

        Documents incorporated by reference: None

INDEX

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

PART I—FINANCIAL INFORMATION

Cautionary Note Regarding Forward-Looking Statements

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

•

future performance generally,



•

our dividend policy and expectations regarding dividend payments,



•

business development activities,



•

future capital expenditures,



•

future interest expense,



•

distributions from minority investments and passive partnership interests,



•

net operating loss carry forwards,



•

technological developments and changes in the communications industry,



•

financing sources and availability,



•

regulatory support payments,



•

the effects of regulation and competition, and



•

pending litigation.

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

2

Item 1.    Financial Statements.

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

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets

		June 30, 2005			December 31, 2004
		(unaudited)
		(Dollars in thousands)
Assets
Current assets:
	Cash	$	6,692		3,595
	Accounts receivable, net		33,001		30,203
	Other		5,894		6,805
	Deferred income tax, net		784		—
	Assets of discontinued operations		90		102
Total current assets			46,461		40,705
Property, plant, and equipment, net			245,383		252,262
Other assets:
	Investments		41,238		37,749
	Goodwill		477,047		468,508
	Deferred income tax, net		90,449		—
	Deferred charges and other assets		12,598		19,912
Total other assets			621,332		526,169
Total assets		$	913,176		819,136
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
	Accounts payable	$	14,784		14,184
	Current portion of long-term debt and other long-term liabilities		659		624
	Demand notes payable		377		382
	Accrued interest payable		185		16,582
	Other accrued liabilities		17,412		15,872
	Dividends payable		13,768		—
	Income taxes payable		37		—
	Liabilities of discontinued operations		2,164		2,262
Total current liabilities			49,386		49,906
Long-term liabilities:
	Long-term debt, net of current portion		603,086		809,908
	Preferred shares subject to mandatory redemption		—		116,880
	Liabilities of discontinued operations		1,224		1,580
	Deferred credits and other long-term liabilities		5,879		12,667
Total long-term liabilities			610,189		941,035
Commitments and contingencies
Minority interest			10		11
Common stock subject to put options			—		1,136
Stockholders' equity (deficit):
	Common stock		350		94
	Additional paid-in capital		617,572		198,519
	Unearned compensation		(7,645	)	—
	Accumulated deficit		(354,920	)	(371,565	)
	Accumulated other comprehensive loss, net		(1,766	)	—
Total stockholders' equity (deficit)			253,591		(172,952	)
Total liabilities and stockholders' equity (deficit)		$	913,176		819,136

See accompanying notes to condensed consolidated financial statements.

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

		Three months ended June 30,					Six months ended June 30,
		2005			2004		2005		2004
		(Dollars in thousands)
Revenues		$	65,206		62,416		126,871		123,401
Operating expenses:
	Operating expenses, excluding depreciation and amortization and stock-based compensation		34,636		32,093		66,672		62,171
	Depreciation and amortization		13,106		12,299		26,116		24,700
	Stock-based compensation		685		44		1,092		88
Total operating expenses			48,427		44,436		93,880		86,959
Income from operations			16,779		17,980		32,991		36,442
Other income (expense):
	Net gain (loss) on sale of investments and other assets		(6	)	15		(184	)	199
	Interest and dividend income		720		454		1,272		758
	Interest expense		(9,588	)	(25,876	)	(26,558	)	(51,538	)
	Equity in net earnings of investees		2,796		2,639		5,452		5,054
	Realized and unrealized losses on interest rate swaps		—		(26	)	—		(112	)
	Other nonoperating, net		(1,582	)	—		(87,746	)	—
Total other expense			(7,660	)	(22,794	)	(107,764	)	(45,639	)
Income (loss) from continuing operations before income taxes			9,119		(4,814	)	(74,773	)	(9,197	)
Income tax benefit (expense)			(3,515	)	49		91,419		(174	)
Minority interest in income of subsidiaries			(1	)	—		(1	)	(1	)
Income (loss) from continuing operations			5,603		(4,765	)	16,645		(9,372	)
Income from discontinued operations			—		671		—		671
Net income (loss)		$	5,603		(4,094	)	16,645		(8,701	)
Weighted average shares outstanding:
	Basic		34,549		9,468		29,260		9,469
	Diluted		34,566		9,468		29,315		9,469
Basic and diluted earnings (loss) from continuing operations per share		$	0.16		(0.50	)	0.57		(0.99	)
Basic and diluted earnings from discontinued operations per share		$	—		0.07		—		0.07
Basic and diluted earnings (loss) per share		$	0.16		(0.43	)	0.57		(0.92	)

See accompanying notes to condensed consolidated financial statements.

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

			Three months ended June 30,									Six months ended June 30,
			2005					2004				2005			2004
			(Dollars in thousands)
Net income (loss)					$	5,603				(4,094	)		16,645				(8,701	)
Other comprehensive income (loss):
	Available-for-sale securities:
		Unrealized holding loss arising during period	$	—				(710	)			—			(1,146	)
		Less reclassification for gain included in net income		—				(67	)			—			(214	)
						—				(777	)		—				(1,360	)
	Cash flow hedges:
		Change in net unrealized gain, net of tax benefit of $3.3 million as of the three months ended June 30, 2005 and net of tax benefit of $1.0 million for the six months ended June 30, 2005				(5,479	)			—			(1,766	)			—
		Reclassification adjustment				—				26			—				103
Other comprehensive income (loss)						(5,479	)			(751	)		(1,766	)			(1,257	)
Comprehensive income (loss)					$	124				(4,845	)		14,879				(9,958	)

See accompanying notes to condensed consolidated financial statements.

5

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

					Six months ended June 30,
					2005			2004
					(Dollars in thousands)
Cash flows from operating activities:
	Net income (loss)				$	16,645		(8,701	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities of continuing operations:
	Income from discontinued operations					—		(671	)
	Dividends and accretion on shares subject to mandatory redemption					2,362		9,660
	Loss on preferred stock subject to mandatory redemption					9,899		—
	Deferred income taxes					(92,706	)	—
	Amortization of debt issue costs					1,095		2,301
	Depreciation and amortization					26,116		24,700
	Loss on early retirement of debt					77,847		—
	Minority interest in income of subsidiaries					1		1
	Income from equity method investments					(5,452	)	(5,054	)
	Other non cash items					1,230		(898	)
	Changes in assets and liabilities arising from operations:
		Accounts receivable and other current assets				(1,795	)	(2,094	)
		Accounts payable and accrued expenses				(17,717	)	861
		Income taxes				(342	)	(182	)
		Other assets/liabilities				110		83
			Total adjustments			648		28,707
				Net cash provided by operating activities of continuing operations		17,293		20,006
Cash flows from investing activities of continuing operations:
	Acquisitions of telephone properties, net of cash acquired					(16,449	)	—
	Net capital additions					(9,652	)	(16,599	)
	Distributions from investments					4,791		8,799
	Net proceeds from sales of investments and other assets					174		356
	Other, net					(281	)	(234	)
		Net cash used in investing activities of continuing operations				(21,417	)	(7,678	)
Cash flows from financing activities of continuing operations:
	Net proceeds from issuance of common stock					431,921		—
	Debt issue and offering costs					(8,468	)	(3,719	)
	Proceeds from issuance of long-term debt					638,484		107,035
	Repayments of long-term debt					(847,842	)	(111,561	)
	Repurchase of preferred and common stock					(129,278	)	(1,002	)
	Payment of fees and penalties associated with early retirement of long term debt					(61,037	)	—
	Payment of deferred transaction fee					(8,445	)	—
	Proceeds from exercise of stock options					184		—
	Dividends paid to common stockholders					(7,788	)	—
		Net cash provided by (used in) financing activities of continuing operations				7,731		(9,247	)
		Net cash contributed from continuing operations to discontinued operations				(510	)	(912	)
		Net increase in cash				3,097		2,169
Cash, beginning of period						3,595		5,603
Cash, end of period					$	6,692		7,772

See accompanying notes to condensed consolidated financial statements.

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

(1)    Organization and Basis of Financial Reporting

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

(2)    Initial Public Offering and Other Transactions

(a)    General

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

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

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

•

$176.7 million to repay in full all outstanding loans under the Company's old credit facility (including accrued interest);



•

$122.1 million to repurchase $115.0 million aggregate principal amount of the Company's 9¹/2% senior subordinated notes due 2008, or the 9¹/2% notes, pursuant to the tender offer and consent solicitation for such notes (including accrued interest, tender premiums and consent payments);



•

$51.8 million to repurchase $50.8 million aggregate principal amount of the Company's floating rate callable securities due 2008, or the floating rate notes, pursuant to the tender offer and consent solicitation for such notes (including accrued interest, tender premiums and consent payments);



•

$193.4 million to repurchase $173.1 million aggregate principal amount of the Company's 12¹/2% senior subordinated notes due 2010, or the 12¹/2% notes, pursuant to the tender offer and consent solicitation for such notes (including accrued interest, tender premiums and consent payments);

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•

$274.9 million to repurchase $223.0 million aggregate principal amount of the Company's 11⁷/8% senior notes due 2010, or the 11⁷/8% notes, pursuant to the tender offer and consent solicitation for such notes (including accrued interest, tender premiums and consent payments);



•

$129.2 million to repurchase all of the Company's series A preferred stock subject to mandatory redemption, or the series A preferred stock, from the holders thereof (together with accrued and unpaid dividends thereon);



•

$10.6 million to repay a substantial portion of the Company's subsidiaries' outstanding long-term debt (including accrued interest);



•

$7.0 million to repay in full a promissory note issued by the Company in connection with a past acquisition;



•

$18.4 million to invest in temporary investments pending the redemption of the 9¹/2% notes and the floating rate notes not tendered in the tender offers for such notes; and



•

$44.4 million to pay fees and expenses, including underwriting discounts of $27.8 million, $8.2 million of debt issuance costs associated with the credit facility and a transaction fee of approximately $8.4 million paid to Kelso & Company, one of the Company's investors.

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

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

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

(b)    Issuance of Common Stock

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

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

(c)    Dividends

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

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

(3)    Income Taxes

        The Company's accounting policy is to report income tax expense for interim reporting periods using an estimated annual effective income tax rate. However, the effects of significant or unusual items are not considered in the estimated annual effective tax rate. The tax effect of such events is recognized in the interim period in which the event occurs.

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

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

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

9

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

(4)    Stock-Based Compensation

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

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

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

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

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

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

		Three months ended June 30,						Six months ended June 30,
		2005			2004			2005			2004
Net income (loss), as reported		$	5,603		$	(4,094	)	$	16,645		$	(8,701	)
Stock-based compensation expense included in reported net income, net of tax			427			44			681			88
Stock-based compensation determined under fair value based method, net of tax			(360	)		(241	)		(708	)		(480	)
Pro forma net income (loss)		$	5,670		$	(4,291	)	$	16,618		$	(9,093	)
Basic earnings (loss) per share:
	As reported	$	0.16		$	(0.43	)	$	0.57		$	(0.92	)
	Pro forma		0.16			(0.45	)		0.57			(0.96	)
Diluted earnings (loss) per share:
	As reported	$	0.16		$	(0.43	)	$	0.57		$	(0.92	)
	Pro forma		0.16			(0.45	)		0.57			(0.96	)

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

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(5)    Acquisitions

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

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

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

		Three months ended June 30,					Six months ended June 30,
		2005		2004			2005		2004
		(in thousands)
Revenues		$	65,706	$	63,915		$	128,869	$	126,398
Income (loss) from continuing operations			5,549		(4,930	)		16,428		(9,700	)
Net income (loss)			5,549		(4,259	)		16,428		(9,029	)
Earnings (loss) per share:
	Basic	$	0.16	$	(0.45	)	$	0.56	$	(0.95	)
	Diluted		0.16		(0.45	)		0.56		(0.95	)

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

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(6)    Discontinued Operations and Restructure Charges

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

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

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

(7)    Interest Rate Swap Agreements

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

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

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

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

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

(8)    Investments

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

	March 31, 2005		December 31, 2004
Current assets	$	1,860	$	1,545
Property, plant and equipment, net		35,824		34,525
Total assets	$	37,684	$	36,070
Current liabilities	$	341	$	3,682
Partners' capital		37,343		32,388
	$	37,684	$	36,070

	Three months ended March 31,				Six months ended March 31,
	2005		2004		2005		2004
Revenues	$	39,763	$	37,441	$	80,644	$	74,468
Operating income		33,846		31,935		67,357		62,346
Net income		33,955		32,203		67,729		62,944

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

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(9)    Long Term Debt

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

		June 30, 2005			December 31, 2004
		(In thousands)
Senior secured notes, variable rates ranging from 5.4375% to 7.25% at June 30, 2005, due in 2011		$	598,280		$	—
Senior secured notes, variable rates ranging from 6.44% to 8.75% at December 31, 2004, due 2005 to 2007			—			182,357
Senior subordinated notes due 2008:
	Fixed rate notes, 9.50%		—			115,207
	Variable rate notes, 6.4875% at December 31, 2004		—			75,000
Senior subordinated notes, 12.50%, due 2010			—			193,000
Senior notes, 11.875%, due 2010			2,050			225,000
Senior notes to RTFC:
	Fixed rate, ranging from 8.2% to 9.20%, due 2014		3,415			2,278
	Variable rate, 6.15% at December 31, 2004, due 2009		—			3,415
Subordinated promissory notes, 7.00%, due 2005			—			7,000
First mortgage notes to Rural Utilities Service, fixed rates ranging from 4.96% to 10.78%, due 2005 to 2016			—			6,034
Senior notes to RTB, fixed rates ranging from 7.50% to 8.00%, due 2008 to 2014			—			1,141
	Total outstanding long-term debt		603,745			810,432
Less current portion			(659	)		(524	)
	Total long-term debt, net of current portion	$	603,086		$	809,908

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

Year ending June 30, 2005 (In thousands)
2006	$	659
2007		696
2008		734
2009		440
2010		2,205
Thereafter		599,011
	$	603,745

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        The Company has entered into a credit facility consisting of a revolving facility in an aggregate principal amount of up to $100.0 million and a term facility in an aggregate principal amount of $588.5 million. On the closing date of the offering (February 8, 2005), the Company drew $566.0 million against the term facility. In addition, on May 2, 2005, the Company drew $22.4 million of borrowings under the delayed draw facility of the credit facility. The Company incurred approximately $9.4 million of debt issuance costs associated with entering into the credit facility and subsequent amendments thereto.

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

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

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

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

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

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

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

•

The Company may use all of its available cash accumulated after April 1, 2005 plus certain incremental funds to pay dividends, but may not in general pay dividends in excess of such amount. "Available cash" is defined in the credit facility as Adjusted EBITDA (a) minus (i) interest expense, (ii) repayments of indebtedness (unless funded by debt or equity), (iii) capital expenditures (unless funded by long-term debt, equity or the proceeds from asset sales or insurance recovery events), (iv) cash taxes, (v) cash consideration paid for acquisitions (unless funded by debt or equity), (vi) cash paid to make certain investments, and (vii) certain non-cash items excluded from Adjusted EBITDA and paid in cash and (b) plus certain non-cash items excluded from Adjusted EBITDA and received in cash. "Adjusted EBITDA" is defined in the credit facility as Consolidated Net Income (which is defined in the credit facility and includes distributions from investments) (a) plus the following to the extent deducted from Consolidated Net Income: provision for income taxes, interest expense, depreciation, amortization, losses on sales of assets and other extraordinary losses, and certain other non-cash items, and (b) minus, to the extent included in Consolidated Net Income, gains on sales of assets and other extraordinary gains and all non-cash items.



•

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

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

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

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

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

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(10)    Earnings Per Share

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

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

		Three months ended June 30,		Six months ended June 30,
		2005	2004	2005	2004
Contingent stock options		833	833	833	833
Shares excluded as effect would be anti-dilutive:
	Stock options	241	416	241	416
	Restricted stock	466	—	466	—
	Restricted stock units	33	27	33	27
Total		1,573	1,276	1,573	1,276

(11)    Litigation

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

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

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

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

Overview

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

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

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

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

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

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

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        On February 8, 2005, we consummated the offering and entered into the credit facility. We used net proceeds received from the offering, together with borrowings under the term facility of the credit facility, to, among other things, repay all outstanding loans under our old credit facility, repurchase all of our series A preferred stock and consummate tender offers and consent solicitations in respect of our outstanding 9¹/2% notes, floating rate notes, 12¹/2% notes and 11⁷/8% notes. On March 10, 2005, we redeemed the remaining outstanding 9¹/2% notes and floating rate notes. On May 2, 2005, we redeemed the remaining outstanding 12¹/2% notes.

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

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

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

Revenues

        We derive our revenues from:

•

Local calling services.    We receive revenues from providing local exchange telephone services, including monthly recurring charges for basic service, usage charges for local calls and service charges for special calling features.



•

Universal Service Fund high cost loop support.    We receive payments from the Universal Service Fund to support the high cost of our operations in rural markets. This revenue stream fluctuates 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. The national average cost per loop in relation to our average cost per loop has increased, and we believe that the national average cost per loop will likely continue to increase in relation to our average cost per loop. As a result, the payments we receive from the Universal Service Fund have declined and will likely continue to decline.



•

Interstate access revenue.    These revenues are primarily based on a regulated return on rate base and recovery of allowable expenses associated with the origination and termination of toll calls both to and from our customers. Interstate access charges to long distance carriers and other customers are based on access rates filed with the Federal Communications Commission. These revenues also include Universal Service Fund payments for local switching support, long term support and interstate common line support.

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•

Intrastate access revenue.    These revenues consist primarily of charges paid by long distance companies and other customers for access to our networks in connection with the origination and termination of long distance telephone calls both to and from our customers. Intrastate access charges to long distance carriers and other customers are based on access rates filed with the state regulatory agencies.



•

Long distance services.    We receive revenues from long distance services we provide to our residential and business customers. In addition, Carrier Services provides communications providers not affiliated with us with wholesale long distance services.



•

Data and Internet services.    We receive revenues from monthly recurring charges for services, including high speed data, special access, private lines, Internet and other services.



•

Other services.    We receive revenues from other services, including billing and collection, directory services and sale and maintenance of customer premise equipment.

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

	Revenues								% of Revenues
	Three months ended June 30,				Six months ended June 30,				Three months ended June 30,				Six months ended June 30,
	2005		2004		2005		2004		2005		2004		2005		2004
Revenue Source
Local calling services	$	15,982	$	15,767	$	31,599	$	31,348	25	%	25	%	25	%	25	%
Universal service fund-high cost loop		4,707		5,850		9,503		11,303	7	%	9	%	7	%	9	%
Interstate access revenues		20,083		17,772		36,963		34,678	31	%	28	%	30	%	28	%
Intrastate access revenues		9,534		10,325		19,617		21,036	15	%	17	%	15	%	17	%
Long distance services		4,798		4,205		9,480		8,249	7	%	7	%	8	%	7	%
Data and Internet services		5,937		4,459		11,529		8,486	9	%	7	%	9	%	7	%
Other services		4,165		4,038		8,180		8,301	6	%	7	%	6	%	7	%
Total	$	65,206	$	62,416	$	126,871	$	123,401	100	%	100	%	100	%	100	%

Operating Expenses

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

•

Operating expenses include cash expenses incurred in connection with the operation of our central offices and outside plant facilities and related operations. In addition to the operational costs of owning and operating our own facilities, we also purchase long distance services from the regional bell operating companies, large independent telephone companies and third party long distance providers. In addition, our operating expenses include expenses relating to sales and marketing, customer service and administration and corporate and personnel administration.



•

Depreciation and amortization includes depreciation of our communications network and equipment.



•

Stock based compensation consists of non-cash compensation charges incurred in connection with the employee stock options, restricted stock units and restricted stock granted to our executive officers and directors, and stockholder appreciation rights agreements granted to one

21

of our current executive officers and one of our former executive officers. The stockholder appreciation rights agreements were all settled during March of 2005.

Acquisitions

        We intend to continue to pursue selective acquisitions:

•

On May 2, 2005, we completed the Berkshire acquisition for a purchase price of approximately $20.4 million, subject to adjustment. Berkshire is an independent local exchange carrier that provides voice communication, cable and internet services to over 7,200 access line equivalents serving five communities in New York State. Berkshire's communities of service are adjacent to those of Taconic Telephone Corp., one of the Company's subsidiaries.



•

On April 22, 2005, we entered into an agreement and plan of merger under which Bentleyville would become an indirect wholly owned subsidiary of the Company and Bentleyville's stockholders would receive approximately $11.0 million in cash in the aggregate, subject to adjustment based on whether the amount of Bentleyville's cash and cash equivalents is greater than or less than $1.5 million at closing. Bentleyville, which has approximately 3,586 access line equivalents, provides telecommunications, cable and internet services to rural areas of Southwestern Pennsylvania which are adjacent to our existing operations in Pennsylvania. The Bentleyville acquisition is expected to close during the third quarter of 2005.



•

During 2004, we did not complete any acquisitions.

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

Stock Based Compensation

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

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

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Results of Operations

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

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

	Three months ended June 30,					Three months ended June 30,
	2005			% of revenue		2004			% of revenue
Revenues	$	65,206		100.0	%	$	62,416		100.0	%
Operating expenses		34,636		53.1	%		32,093		51.4	%
Depreciation and amortization		13,106		20.1	%		12,299		19.7	%
Stock based compensation		685		1.1	%		44		0.1	%
Total operating expenses		48,427		74.3	%		44,436		71.2	%
Income from operations		16,779		25.7	%		17,980		28.8	%
Net (loss) gain on sale of investments and other assets		(6	)	(0.0	)%		15		0.0	%
Interest and dividend income		720		1.1	%		454		0.7	%
Interest expense		(9,588	)	(14.7	)%		(25,876	)	(41.5	)%
Equity in net earnings of investees		2,796		4.3	%		2,639		4.2	%
Realized and unrealized losses on interest rate swaps		—		—			(26	)	0.0	%
Other non-operating, net		(1,582	)	(2.4	)%		—		—
Total other expense		(7,660	)	(11.7	)%		(22,794	)	(36.6	)%
Income (loss) from continuing operations before income taxes		9,119		14.0	%		(4,814	)	(7.8	)%
Income tax benefit (expense)		(3,515	)	(5.4	)%		49		0.1	%
Minority interest in income of subsidiaries		(1	)	(0.0	)%		—		0.0	%
Income (loss) from continuing operations		5,603		8.6	%		(4,765	)	(7.7	)%
Income from discontinued operations		—		0.0	%		671		1.1	%
Net income (loss)	$	5,603		8.6	%	$	(4,094	)	(6.6	)%

Revenues

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

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

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

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

23

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

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

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

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

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

Operating Expenses

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

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

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

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

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

24

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

        Income tax (expense) benefit.    Income tax expense of $3.5 million was recorded for the three months ended June 30, 2005. Our accounting policy is to report income tax expense for interim reporting periods using an estimated annual effective income tax rate. However, the effects of significant or unusual items are not considered in the estimated annual effective tax rate. The tax effect of such events is recognized in the interim period in which the event occurs. The tax rate for the second quarter of 2005 was approximately 38.5%, as compared to 0.1% for the second quarter of 2004. The higher tax rate in 2005 resulted primarily from taxable income during the second quarter of 2005 versus losses incurred in prior periods. Exclusive of unusual items affecting the tax rate, we are anticipating an effective annual tax rate of 41.7% for 2005.

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

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

	Six months ended June 30,					Six months ended June 30,
	2005			% of revenue		2004			% of revenue
Revenues	$	126,871		100.0	%	$	123,401		100.0	%
Operating expenses		66,672		52.6	%		62,171		50.4	%
Depreciation and amortization		26,116		20.6	%		24,700		20.0	%
Stock based compensation		1,092		0.9	%		88		0.1	%
Total operating expenses		93,880		74.1	%		86,959		70.5	%
Income from operations		32,991		25.9	%		36,442		29.5	%
Net (loss) gain on sale of investments and other assets		(184	)	(0.1	)%		199		0.2	%
Interest and dividend income		1,272		1.0	%		758		0.6	%
Interest expense		(26,558	)	(20.9	)%		(51,538	)	(41.8	)%
Equity in net earnings of investees		5,452		4.3	%		5,054		4.1	%
Realized and unrealized losses on interest rate swaps		—		—			(112	)	(0.1	)%
Other non-operating, net		(87,746	)	(69.2	)%		—		—
Total other expense		(107,764	)	(84.9	)%		(45,639	)	(37.0	)%
Loss from continuing operations before income taxes		(74,773	)	(59.0	)%		(9,197	)	(7.5	)%
Income tax benefit (expense)		91,419		72.1	%		(174	)	(0.1	)%
Minority interest in income of subsidiaries		(1	)	(0.0	)%		(1	)	(0.0	)%
Income (loss) from continuing operations		16,645		13.1	%		(9,372	)	(7.6	)%
Income from discontinued operations		—		0.0	%		671		0.5	%
Net income (loss)	$	16,645		13.1	%	$	(8,701	)	(7.1	)%

Revenues

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

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

25

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

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

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

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

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

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

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

Operating Expenses

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

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

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

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

26

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

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

        Income tax (expense) benefit.    Income tax benefits of $23.8 million were recorded primarily due to the taxable loss in the six months ended June 30, 2005, driven by the expenses incurred from the transactions. In addition, we reported income tax benefits of $66.0 million from the recognition of deferred tax benefits from the reversal of the deferred tax valuation allowance resulting from the Company's expectation of generating future taxable income following the transactions. During the six months ended June 30, 2004, the income tax expense related primarily to income taxes owed in certain states. Our accounting policy is to report income tax expense for interim reporting periods using an estimated annual effective income tax rate. However, the effects of significant or unusual items are not considered in the estimated annual effective tax rate. The tax effect of such events is recognized in the interim period in which the event occurs. The tax rate for the six months ended June 30, 2005 was approximately 122.3%, as compared to 1.9% for the six months ended June 30, 2004. The higher tax rate in 2005 resulted primarily from unusual items occurring during the first half of 2005, which included a reduction of the valuation allowance for deferred tax assets of $66.0 million and deferred tax benefits of $29.3 million related to the extinguishment of debt. The income tax benefit for 2005 also includes $1.6 million for an adjustment of our net deferred tax assets to an expected federal income tax rate of 35% from 34%, in anticipation of higher levels of taxable income in subsequent periods. Exclusive of unusual items affecting the tax rate, we are anticipating an effective annual tax rate of 41.7% for 2005.

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

Liquidity and Capital Resources

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

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

27

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

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

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

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

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

        We used net proceeds received from the offering, together with approximately $566.0 million of borrowings under the term facility of our credit facility, to, among other things, repay all outstanding loans under our old credit facility, repurchase all of our series A preferred stock and consummate tender offers and consent solicitations in respect of our outstanding 9¹/2% notes, floating rate notes, 12¹/2% notes and 11⁷/8% notes. On March 10, 2005, we redeemed the remaining outstanding 9¹/2% notes

28

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

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

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

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

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

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

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

29

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

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

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

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

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

Summary of Contractual Obligations

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

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

		Payments due by period
		Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
		(Dollars in thousands)
Contractual obligations:
	Debt maturing within one year	$	659	$	659	$	—	$	—	$	—
	Long term debt		603,086		—		1,430		2,645		599,011
	Operating leases(1)		12,029		3,286		4,605		1,601		2,537
	Non-compete agreements		60		20		40		—		—
	Minimum purchase contract		6,140		5,485		655		—		—
	Total contractual cash obligations	$	621,974	$	9,450	$	6,730	$	4,246	$	601,548

(1)

Real property lease obligations of $4.5 million associated with the discontinued operations discussed in note (6) to our condensed consolidated financial statements are stated in this table at total contractual amounts. However, we have negotiated lease terminations or subleases on these properties to reduce the total obligation. Operating leases from continuing operations of $7.5 million are also included.

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

	Fair Value of Contracts at Period-End
	Total			Less than 1 year		1-3 years		3-5 years		More than 5 years
	(Dollars in thousands)
Source of fair value:
Derivative financial instruments(1)	$	(2,830	)	(1,332	)	(634	)	(583	)	(281	)

(1)

Fair value of interest rate swaps at June 30, 2005 was provided by the counterparties to the underlying contracts using consistent methodologies.

Critical Accounting Policies

        Our critical accounting policies are as follows:

•

Revenue Recognition;



•

Allowance for doubtful accounts;



•

Accounting for income taxes; and



•

Valuation of long-lived assets, including goodwill.

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

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

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

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

31

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

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

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

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

•

significant underperformance relative to expected historical or projected future operating results;



•

significant regulatory changes that would impact future operating revenues;



•

significant negative industry or economic trends; and



•

significant changes in the overall strategy in which we operate our overall business.

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

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

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New Accounting Standards

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

Inflation

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

        We have entered into interest rate swaps to manage our exposure to fluctuations in interest rates on our variable rate indebtedness. The fair value of these swaps was a net liability of approximately $2.8 million at June 30, 2005. The fair value indicates an estimated amount we would have paid to cancel the contracts or transfer them to other parties. In connection with our credit facility, on February 8, 2005, we entered into three interest rate swap agreements, with notional amounts of $130.0 million each, to effectively convert a portion of our variable interest rate exposure to fixed rates ranging from 5.76% to 6.11%. These swap agreements expire beginning December 31, 2007 through December 31, 2009. On April 7, 2005, we entered into two additional interest rate swap agreements, one with the notional amount of $50.0 million which will fix the interest rate at 6.69% beginning on April 29, 2005 and ending on March 31, 2011 and one with the notional amount of $50.0 million which will fix the interest rate at 6.72% beginning on June 30, 2005 and ending on March 31, 2012.

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

Item 4. Controls and Procedures.

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

33

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

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

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

•

Adding additional levels of review and oversight with respect to our computation of earnings per share; and



•

Adding additional staff to our accounting team, including a Director of SEC and Financial Reporting.

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

        Other than as described above, there have been no changes in our "internal controls over financial reporting" (as defined in Rule 3a-15(f) of the Exchange Act) during the period covered by this Quarterly Report that have materially affected, or that are reasonably likely to materially affect, our internal controls over financial reporting. In response to the Sarbanes-Oxley Act of 2002, we are continuing a comprehensive review of our disclosure controls and procedures and will improve such controls and procedures as necessary to assure their effectiveness.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

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

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

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

Unregistered Sales of Equity Securities

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

Restrictions on Payment of Dividends

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

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

•

We may use all of our available cash accumulated after April 1, 2005 plus certain incremental funds to pay dividends, but we may not in general pay dividends in excess of such amount. "Available cash" is defined in our credit facility as Adjusted EBITDA (a) minus (i) interest expense, (ii) repayments of indebtedness (unless funded by debt or equity), (iii) capital expenditures (unless funded by long-term debt, equity or the proceeds from asset sales or insurance recovery events), (iv) cash taxes, (v) cash consideration paid for acquisitions (unless funded by debt or equity), (vi) cash paid to make certain investments, and (vii) certain non-cash items excluded from Adjusted EBITDA and paid in cash and (b) plus certain non-cash items excluded from Adjusted EBITDA and received in cash. "Adjusted EBITDA" is defined in our credit facility as Consolidated Net Income (which is defined in our credit facility and includes distributions from investments) (a) plus the following to the extent deducted from Consolidated Net Income: provision for income taxes, interest expense, depreciation, amortization, losses on sales of assets and other extraordinary losses, and certain other non-cash items, and (b) minus,

35

to the extent included in Consolidated Net Income, gains on sales of assets and other extraordinary gains and all non-cash items.

•

We may not pay dividends if a default or event of default under our credit facility has occurred and is continuing or would exist after giving effect to such payment, if our leverage ratio is above 5.00 to 1.00 or if we do not have at least $10 million of cash on hand (including unutilized commitments under our credit facility's revolving facility).

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

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

Item 3. Defaults Upon Senior Securities.

        Not applicable.

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

        Not applicable.

Item 5. Other Information.

        Not applicable.

Item 6. Exhibits.

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

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SIGNATURES

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

	FAIRPOINT COMMUNICATIONS, INC.
Date: August 12, 2005	By:	/s/  JOHN P. CROWLEY
		Name:  John P. Crowley Title:    Executive Vice President              and Chief Financial Officer

37

Exhibit Index

Exhibit No.	Description
2.1	Agreement and Plan of Merger, dated as of June 18, 2003, by and among FairPoint, MJD Ventures, Inc., FairPoint Berkshire Corporation and Berkshire Telephone Corporation.(1)
2.2	Agreement and Plan of Merger, dated as of April 22, 2005, by and among FairPoint, MJD Ventures, Inc., FairPoint Bentleyville Corporation and Bentleyville Communications Corporation.(2)
3.1	Eighth Amended and Restated Certificate of Incorporation of FairPoint.(3)
3.2	Amended and Restated By Laws of FairPoint.(3)
4.1	Indenture, dated as of March 6, 2003, by and between FairPoint and The Bank of New York, relating to FairPoint's $225,000,000 117/8% Senior Notes due 2010.(4)
4.2	Supplemental Indenture, dated as of January 20, 2005, by and between FairPoint and The Bank of New York, amending the Indenture dated as of March 6, 2003 between FairPoint and The Bank of New York.(3)
4.3	Form of Initial Senior Note due 2010.(4)
4.4	Form of Exchange Senior Note due 2010.(4)
10.1	Credit Agreement, dated as of February 8, 2005, by and among FairPoint, various lending institutions, Bank of America, N.A., CoBank ACB, General Electric Capital Corporation and Deutsche Bank Trust Company Americas.(3)
10.2	First Amendment to Credit Agreement, dated as of March 11, 2005, among FairPoint, various lending institutions, Bank of America, N.A., CoBank ACB, General Electric Capital Corporation and Deutsche Bank Trust Company Americas.(3)
10.3	Second Amendment and Consent to Credit Agreement, dated as of April 29, 2005, among FairPoint, various lending institutions, Bank of America, N.A., CoBank ACB, General Electric Capital Corporation and Deutsche Bank Trust Company Americas.(5)
10.4	Pledge Agreement, dated as of February 8, 2005, by FairPoint, ST Enterprises, Ltd., FairPoint Broadband, Inc., MJD Services Corp., MJD Ventures, Inc., C-R Communications, Inc., Comerco, Inc., GTC Communications, Inc., Ravenswood Communications, Inc., Utilities, Inc., FairPoint Carrier Services, Inc. and St. Joe Communications, Inc.(3)
10.5	Subsidiary Guaranty, dated as of February 8, 2005, by FairPoint Broadband, Inc., MJD Ventures, Inc., MJD Services Corp., ST Enterprises, Ltd. and FairPoint Carrier Services, Inc.(2)
10.6	Form of Swingline Note.(3)
10.7	Form of RF Note.(3)
10.8	Form of B Term Note.(3)
10.9	Amended and Restated Tax Sharing Agreement, dated as of November 9, 2000, by and among FairPoint and its Subsidiaries.(6)
10.10	Nominating Agreement, dated as of February 8, 2005.(3)
10.11	Affiliate Registration Rights Agreement, dated as of February 8, 2005.(3)
10.12	Employment Agreement, dated as of December 31, 2002, by and between FairPoint and Eugene B. Johnson.(4)

10.13	Letter Agreement, dated as of October 1, 2004, by and between FairPoint and Eugene B. Johnson.(7)
10.14	Agreement, dated as of October 1, 2004, by and between FairPoint and John P. Duda.(7)
10.15	Employment Agreement, dated as of January 20, 2000, by and between FairPoint and Walter E. Leach, Jr.(8)
10.16	Letter Agreement, dated as of December 15, 2003, by and between FairPoint and Walter E. Leach, Jr.(9)
10.17	Letter Agreement, dated as of November 11, 2002, by and between FairPoint and Peter G. Nixon.(4)
10.18	Letter Agreement, dated as of October 25, 2004, by and between FairPoint and Valeri A. Marks.(7)
10.19	Letter Agreement, dated as of November 13, 2002, by and between FairPoint and Shirley J. Linn.(4)
10.20	Letter Agreement, dated as of May 16, 2005, by and between FairPoint and John P. Crowley.(11)
10.21	FairPoint 1995 Stock Option Plan.(10)
10.22	FairPoint Amended and Restated 1998 Stock Incentive Plan.(10)
10.23	FairPoint Amended and Restated 2000 Employee Stock Incentive Plan.(9)
10.24	FairPoint 2005 Stock Incentive Plan.(3)
10.25	FairPoint Annual Incentive Plan.(3)
10.26	Form of Restricted Stock Agreement.(7)
10.27	Form of Director Restricted Stock Agreement.(12)
10.28	Form of Director Restricted Unit Agreement.(12)
21	Subsidiaries of FairPoint.*
31.1	Certification required by 18 United States Code Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certification required by 18 United States Code Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1	Certification required by 18 United States Code Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*†
32.2	Certification required by 18 United States Code Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*†
99.1	Risk factors.*

*

Filed herewith.

†

Pursuant to Securities and Exchange Commission Release No. 33-8238, this certification will be treated as "accompanying" this Quarterly Report on Form 10-Q and not "filed" as part of such report for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of Section 18 of the Securities Exchange Act of 1934 and this certification will not be

2

deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, 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 22, 2003.

(2)

Incorporated by reference to the Quarterly Report on Form 10-Q of FairPoint for the quarter ended March 31, 2005.

(3)

Incorporated by reference to the Annual Report on Form 10-K of FairPoint for the year ended December 31, 2004.

(4)

Incorporated by reference to the Annual Report on Form 10-K of FairPoint for the year ended December 31, 2002.

(5)

Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on May 4, 2005.

(6)

Incorporated by reference to the Quarterly Report on Form 10-Q of FairPoint for the period ended September 30, 2000.

(7)

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

(8)

Incorporated by reference to the Annual Report on Form 10-K of FairPoint for the year ended December 31, 1999.

(9)

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

(10)

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

(11)

Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on May 24, 2005.

(12)

Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on June 20, 2005.

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QuickLinks

INDEX
PART I—FINANCIAL INFORMATION
Cautionary Note Regarding Forward-Looking Statements
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited)
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited)
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Item 4. Controls and Procedures.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits.

SIGNATURES
Exhibit Index