Overview

We are one of the largest yellow pages directories publishers in the United States as measured by revenues, and we believe that we are one of the nation's leading online local search providers. Our products include print yellow pages, print white pages, Superpages.com, our online local search resource, and Superpages Mobile, our information directory for wireless subscribers. We are the exclusive official publisher of Verizon print directories in the markets in which Verizon is currently the incumbent local exchange carrier. We use the Verizon brand on our print directories in these and other specified markets. We are also the exclusive official publisher of print directories in the Maine, New Hampshire, and Vermont markets where FairPoint Communications, Inc. purchased local exchange assets from Verizon.

Chapter 11 Bankruptcy Filings

On March 31, 2009 (the "Petition Date"), the Company and its domestic subsidiaries filed voluntary petitions for reorganization under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division (the "Bankruptcy Court"). The cases are being jointly administered under Case No. 09-31828.

Subject to certain exceptions under the Bankruptcy Code, our Chapter 11 bankruptcy filing automatically enjoined, or stayed, the continuation of any judicial or administrative proceedings or other actions against Idearc or our property to recover on, collect or secure a claim arising prior to the Petition Date. Thus, for example, most creditor actions to obtain possession of property from Idearc, or to create, perfect or enforce any lien against the property of Idearc, or to collect on monies owed or otherwise exercise rights or remedies with respect to a pre-petition claim are enjoined unless and until the Bankruptcy Court lifts the automatic stay.

The filing of the Chapter 11 bankruptcy petitions constituted an event of default under our senior secured credit facility and the indenture governing the 8% senior unsecured notes due in 2016, and the debt obligations under those instruments became automatically and immediately due and payable, although any actions to enforce such payment obligations are automatically stayed under the applicable bankruptcy law. In anticipation of this action, the total outstanding debt obligations of $9,267 million were classified as current maturities of long-term debt in the accompanying consolidated balance sheet at December 31, 2008. Based on the bankruptcy petition, our total outstanding debt obligations as of September 30, 2009 are included in liabilities subject to compromise in the accompanying consolidated balance sheet.

Likewise, the filing of Chapter 11 bankruptcy constituted an event of default under our interest rate swap agreements. As a result, these interest rate swap agreements are no longer deemed financial instruments required to be remeasured at fair value each reporting period, but are now liabilities which are recorded based on management's estimate of the amount to settle the obligations. We recorded these net liabilities as of the bankruptcy Petition Date in the amount of $496 million. These net liabilities are classified under liabilities subject to compromise in the accompanying consolidated balance sheet as of September 30, 2009. See Note 6 to our consolidated financial statements included in this report for additional information related to liabilities subject to compromise.

Reorganization Process

We are currently operating as a "debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. In general, a debtor-in-possession is authorized under Chapter 11 to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. Our business continues to generate positive cash flow necessary for daily operations and as such, it is not expected that debtor-in-possession financing will be needed.

Immediately after filing the Chapter 11 bankruptcy petitions, we began notifying all known current or potential creditors of the bankruptcy filing. Vendors are, however, being paid for goods furnished and services provided after the Petition Date in the ordinary course of business.

Several bankruptcy hearings have been held since the Company filed for Chapter 11 bankruptcy. The Bankruptcy Court granted interim approval of several of Idearc's "first day" motions, including the payment of certain pre-petition and post-petition obligations of Idearc related to employee wages, salaries and benefits and certain customer obligations, as well as the continuation of certain customer programs. Also, the Bankruptcy Court authorized the banks to pay outstanding obligations (checks, EFTs, etc.) without interruption in the usual and normal course of business. Additionally, we paid an adequacy protection payment of $250 million ($188 million of secured debt principal and $62 million of accrued interest) to the agent of secured lenders under its senior secured credit facilities (the "Lenders") for pro rata distribution to the Lenders and holders of the swap agreements that reduced pre-petition obligations. We have retained legal and financial professionals to advise and assist us with the bankruptcy proceedings. From time to time, we have sought and may continue to seek Bankruptcy Court approval for the retention of additional professionals.

As required by the Bankruptcy Code, the United States Trustee for the Northern District of Texas appointed an official committee of unsecured creditors (the "Creditors' Committee"). The Creditors' Committee and its legal representatives have a right to be heard on all matters that come before the Bankruptcy Court with respect to Idearc. There can be no assurance that the Creditors' Committee will support Idearc's positions on matters to be presented to the Bankruptcy Court in the future or on any proposed plan of reorganization. Disagreements between Idearc and the Creditors' Committee could protract the Chapter 11 proceedings, delaying our emergence from the Chapter 11 bankruptcy proceedings, and thus negatively impact our ongoing operations.

Under Section 365 and other relevant sections of the Bankruptcy Code, we may assume, assume and assign, or reject certain executory contracts and unexpired leases, including, without limitation, leases of real property and equipment, subject to the approval of the Bankruptcy Court and certain other conditions. Any description of an executory contract or unexpired lease in this report, including, where applicable, our express termination rights or a quantification of obligations, must be read in conjunction with, and is qualified by, any overriding rejection rights under Section 365 of the Bankruptcy Code.

Plan of Reorganization

On May 15, 2009, the Company submitted a joint plan of reorganization (the "Plan") and disclosure statement for consideration by the Bankruptcy Court and the affected creditors. The Plan and disclosure statement described the anticipated organization, operations and financing of the reorganized entity. Among other things, the Plan resolved the Company's pre-petition obligations, set forth the revised capital structure of the newly reorganized entity and provided for the corporate governance subsequent to emergence from bankruptcy. Specifically, the disclosure statement contained certain information about the Company's pre-petition operating and financial history, the events which led up to the commencement of bankruptcy and significant events that have occurred while operating under Chapter 11 of the Bankruptcy Code. The disclosure statement also described the terms and provisions of the Plan, including certain effects of confirmation of the Plan, certain risk factors associated with securities to be issued under the Plan, certain alternatives to the Plan, the manner in which distribution would be made under the Plan, and the confirmation process and the voting procedures that holders of claims and interests entitled to vote under the Plan must follow for their votes to be counted.

On September 8, 2009, Idearc filed the first amended joint plan of reorganization (the "Amended Plan") and disclosure statement with revised financial forecasts and the capital structure anticipated at emergence from bankruptcy. The Bankruptcy Court approved our disclosure statement, as it related to the Amended Plan, on September 10, 2009. With the approval of the disclosure statement, we began soliciting votes from our creditors to accept or reject the Amended Plan. The Bankruptcy Court has set the voting deadline for 6:00 p.m. (CST) on November 13, 2009. The hearing at which the Bankruptcy Court will consider confirmation of the Amended Plan is scheduled to commence on December 9, 2009. However, there can be no assurance at this time that the Amended Plan will be confirmed by the Bankruptcy Court or that any such plan will be implemented successfully and on a timely basis.

Under the Amended Plan, if ultimately confirmed by the Bankruptcy Court, allowed secured credit facilities claims will become parties to and be bound by a new term loan agreement in exchange for the cancellation of outstanding debt obligations. The new term loans will be in an aggregate principal amount equal to $2.75 billion and will mature on the sixth anniversary of the bankruptcy emergence date. The new term loans will bear interest at an annual rate of LIBOR plus 800 basis points with a LIBOR floor of 3.0%. In addition, new issue common stock will

be distributed to the holders of allowed secured credit facility claims, which will represent 95% of the new common stock to be issued and outstanding on the bankruptcy emergence date. New issue common stock will also be distributed to holders of allowed unsecured note claims, allowed unsecured credit facilities claims and allowed general unsecured claims, which will represent 5% of the new common stock to be issued and outstanding on the bankruptcy emergence date. Finally, under the priority order of claims established in the Amended Plan, any claim for damages arising from the purchase or sale of any old securities, or any claim for reimbursement, contribution, or indemnification on account of any such claim will be impaired and will receive no distributions.

The ultimate recovery to the holders of claims will not be finalized until confirmation of the Amended Plan. No assurance can be given as to what values, if any, will be ascribed in the Chapter 11 proceedings to each constituency or what types or amounts of distributions, if any, they would ultimately receive. The confirmed Amended Plan could result in holders of the Company's liabilities and/or securities, including common stock, receiving no distribution and cancellation of their holdings. Due to these uncertainties, the value of the Company's liabilities and securities, including its common stock, is highly speculative. Appropriate caution should be exercised with respect to existing and future investments in any of the liabilities and securities of the Company. At this time, there is no assurance the Company will be able to restructure as a going concern or successfully implement the Amended Plan.

For periods subsequent to the Chapter 11 bankruptcy filings, the guidance under the applicable reorganization accounting rules has been applied in preparing the accompanying consolidated financial statements. This guidance requires that the financial statements distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain expenses (including professional fees), realized gains and losses and provisions for losses that are realized from the reorganization process will be classified as reorganization items in the accompanying consolidated statement of operations. See Note 2 to our consolidated financial statements included in this report for additional information related to reorganization items. Additionally, in the accompanying consolidated balance sheet, liabilities are segregated between liabilities not subject to compromise and liabilities subject to compromise. Liabilities subject to compromise are reported at their pre-petition amounts or current unimpaired values, even if they may be settled for lesser amounts. See Note 6 to our consolidated financial statements included in this report for additional information related to liabilities subject to compromise.

Going Concern Matters

The accompanying consolidated financial statements and related notes have been prepared assuming that Idearc will continue as a going concern, although the Chapter 11 bankruptcy raises substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded assets or to the amounts classified as liabilities or any other adjustments that might be necessary should Idearc be unable to continue as a going concern.

Idearc continues to be operationally profitable and continues to provide positive operating cash flows. As such, debtor-in-possession financing is not expected to be required. However, we have incurred and will continue to incur significant costs associated with our reorganization process. These costs are being expensed as incurred. In addition, during 2008, we began implementing strategic organizational and market exit initiatives to improve ongoing operational efficiencies. These restructuring efforts have continued throughout 2009. See Note 3 to our consolidated financial statements included in this report for additional information related to restructuring.

Basis of Presentation

The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States. Pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "SEC"), the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal recurring items and accruals, necessary to fairly present the financial position, results of operations and cash flows of Idearc Inc. and its subsidiaries. These interim condensed financial statements do not contain all information and footnote disclosures normally included in financial statements and should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2008. The results for the interim periods are not necessarily indicative of results for the full year. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amount of assets and

liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements. Certain prior period amounts have been reclassified to conform to current year presentation.

The accompanying unaudited consolidated financial statements do not purport to reflect or provide for the consequences of the Chapter 11 bankruptcy proceedings. In particular, the financial statements do not purport to show
(i) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (ii) as to pre-petition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (iii) as to shareholders' equity (deficit) accounts, the effects of any changes that may be made in the Company's capitalization; or
(iv) as to operations, the effects of any changes that may be made to the Company's business.

New Initiatives

During 2009, we introduced several marketing initiatives, including the new SuperGuarantee program and its associated national advertising program. The SuperGuarantee program is a consumer focused program designed to make it easier and faster for consumers to find businesses they trust so that when a consumer chooses a client of Idearc, they can count on them to do the job right or we will step in and help to make it right.

Print Products Advertising Sales

Our print products advertising sales have continued to decline due to weaker economic conditions and competition from other advertising media. These declines in print products advertising sales will also impact print products revenue into 2010 due to the amortization method of accounting. For the three and nine months ended September 30, 2009, net print products advertising sales declined 22.4% and 19.5%, compared to the same periods in 2008, with multi-product advertising sales declining 20.8% and 17.9% for the same periods, respectively.

Results of Operations



Three Months Ended September 30, 2009 Compared to Three Months Ended
September 30, 2008



The following table sets forth our operating results for the three months ended
September 30, 2009 and 2008:



Three months ended September 30,            2009        2008       Change      % Change
                                                     (in millions, except %)
Operating Revenue
Print products                            $    543    $    659    $    (116 )     (17.6 )%
Internet                                        68          75           (7 )      (9.3 )
Other                                            -           1           (1 )    (100.0 )
Total operating revenue                        611         735         (124 )     (16.9 )

Operating Expense
Selling                                        167         176           (9 )      (5.1 )
Cost of sales (exclusive of
depreciation and amortization)                 137         151          (14 )      (9.3 )
General and administrative                     104         110           (6 )      (5.5 )
Depreciation and amortization                   17          19           (2 )     (10.5 )
Total operating expense                        425         456          (31 )      (6.8 )

Operating income                               186         279          (93 )     (33.3 )
Interest expense (income), net                  (3 )       162         (165 )        NM
Income before reorganization items and
provision for income taxes                     189         117           72        61.5
Reorganization items                            35           -           35          NM
Income before provision for income
taxes                                          154         117           37        31.6
Provision for income taxes                      53          44            9        20.5
Net income                                $    101    $     73    $      28        38.4 %

Operating Revenue

Operating revenue of $611 million for the three months ended September 30, 2009 decreased $124 million, or 16.9%, compared to $735 million for the three months ended September 30, 2008 for the reasons described below.

Print Products. Revenue from print products of $543 million for the three months ended September 30, 2009 decreased $116 million, or 17.6%, compared to $659 million for the three months ended September 30, 2008. This decline resulted from reduced advertiser renewals, partially offset by the addition of new advertisers and revenue from new product offerings. We continued to face competition in the print directory market and from other advertising media, including cable television, radio and the Internet. In addition, the impacts of weaker economic conditions have also contributed to declines in our print products revenue.

Internet. Internet revenue of $68 million for the three months ended September 30, 2009 decreased $7 million, or 9.3%, compared to $75 million for the three months ended September 30, 2008, primarily driven by declines in fixed fee advertising and weaker economic conditions.

Operating Expense

Operating expense of $425 million for the three months ended September 30, 2009 decreased $31 million, or 6.8%, compared to $456 million for the three months ended September 30, 2008 for the reasons described below.

Selling. Selling expense of $167 million for the three months ended September 30, 2009 decreased $9 million, or 5.1%, compared to $176 million for the three months ended September 30, 2008. This decrease resulted primarily from lower employee related costs and sales commissions, partially offset by increased costs associated with our national advertising campaign.

Cost of Sales. Cost of sales of $137 million for the three months ended September 30, 2009 decreased $14 million, or 9.3%, compared to $151 million for the three months ended September 30, 2008. This decrease was primarily related to lower employee related costs, lower printing and distribution costs, and lower Internet traffic costs.

General and Administrative. General and administrative expense of $104 million for the three months ended September 30, 2009 decreased $6 million, or 5.5%, compared to $110 million for the three months ended September 30, 2008. The decrease was largely the result of lower bad debt expense in 2009 and a contract settlement with a former reseller in the third quarter of 2008. These decreases were partially offset by increased employee severance costs related to our ongoing strategic organizational and market exit initiatives, and the impact of recording settlement losses in the three months ended September 30, 2009. Bad debt expense of $56 million for the three months ended September 30, 2009, decreased by $4 million, or 6.7%, compared to $60 million for the three months ended September 30, 2008. The decreased bad debt expense was influenced by reductions in revenue for 2009 as the result of the current weak economic environment. Bad debt expense as a percent of total operating revenue was 9.2% for the three months ended September 30, 2009 compared to 8.2% for the three months ended September 30, 2008.

Interest Expense (Income), Net

Interest expense, net of interest income, of ($3) million for the three months ended September 30, 2009 decreased $165 million compared to $162 million for the three months ended September 30, 2008. Since the bankruptcy filing date, interest associated with our debt and interest rate swap agreements is not being accrued.

Reorganization Items

During the three months ended September 30, 2009, we recorded $35 million of reorganization items on a separate line item in the accompanying consolidated statement of operations, in accordance with provisions established by the applicable reorganization accounting rules. Reorganization items represent charges that are directly associated with the process of reorganizing the business under Chapter 11 of the Bankruptcy Code, and include certain expenses (including professional fees), realized gains and losses, and provisions for losses resulting from the reorganization of the business.

Deferred losses in accumulated other comprehensive loss associated with the interest rate swap agreements were remeasured to reflect the component of forecasted interest rate payments that are likely to occur. This resulted

in a non-cash charge of $21 million that was recognized as a reorganization item in the accompanying consolidated statement of operations for the three months ended September 30, 2009.

Other reorganization expenses of $14 million for the three months ended September 30, 2009, primarily consists of professional fees incurred directly associated with the reorganization of the business under Chapter 11 of the Bankruptcy Code.

Provision for Income Taxes

Provision for income taxes of $53 million for the three months ended September 30, 2009 increased $9 million, or 20.5%, compared to $44 million for the three months ended September 30, 2008, primarily due to higher pre-tax income as discussed above, offset by the impact of discrete items. The effective tax rate was 34.4% for the three months ended September 30, 2009 compared to 37.6% for the three months ended September 30, 2008. The results for the three months ended September 30, 2009 and 2008 include the effects of discrete items. The Company anticipates the effective tax rate, including interest expense and other one-time discrete items, to approximate 29% for 2009. The full year effective tax rate for 2008 was 34.4%.

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

The following table sets forth our operating results for the nine months ended September 30, 2009 and 2008:

Nine months ended September 30,             2009        2008       Change      % Change
                                                     (in millions, except %)
Operating Revenue
Print products                            $  1,723    $  2,038    $    (315 )     (15.5 )%
Internet                                       211         223          (12 )      (5.4 )
Other                                            2           3           (1 )     (33.3 )
Total operating revenue                      1,936       2,264         (328 )     (14.5 )

Operating Expense
Selling                                        528         541          (13 )      (2.4 )
Cost of sales (exclusive of
depreciation and amortization)                 436         461          (25 )      (5.4 )
General and administrative                     334         306           28         9.2
Depreciation and amortization                   51          59           (8 )     (13.6 )
Total operating expense                      1,349       1,367          (18 )      (1.3 )

Operating income                               587         897         (310 )     (34.6 )
Interest expense, net                          148         491         (343 )     (69.9 )
Income before reorganization items and
provision (benefit) for income taxes           439         406           33         8.1
Reorganization items                           440           -          440          NM
Income (loss) before provision
(benefit) for income taxes                      (1 )       406         (407 )        NM
Provision (benefit) for income taxes            (1 )       146         (147 )        NM
Net income                                $      -    $    260    $    (260 )    (100.0 )%

Operating Revenue

Operating revenue of $1,936 million for the nine months ended September 30, 2009 decreased $328 million, or 14.5%, compared to $2,264 million for the nine months ended September 30, 2008 for the reasons described below.

Print Products. Revenue from print products of $1,723 million for the nine months ended September 30, 2009 decreased $315 million, or 15.5%, compared to $2,038 million for the nine months ended September 30, 2008. This decline resulted from reduced advertiser renewals, partially offset by the addition of new advertisers and revenue from new product offerings. We continued to face competition in the print directory market and from other advertising media, including cable television, radio and the Internet. In addition, the impacts of weaker economic conditions have also contributed to declines in our print products revenue.

. . .