• Regulatory and Legislative

• Fresh Start Accounting

• Basis of Presentation

• Revenues

• Operating Expenses

• Operational Restructuring Charges

• Results of Operations

• Off-Balance Sheet Arrangements

• Critical Accounting Policies

• New Accounting Standards

• Liquidity and Capital Resources

Overview
We are a leading communications provider in rural and small urban communities, offering an array of services, including broadband Internet access, local and long-distance phone, television and other high-capacity data services to residential, business and wholesale customers. We operate in 18 states with approximately 1.3 million access line equivalents (including voice access lines and HSD lines, which include DSL, wireless broadband, cable modem and fiber-to-the-premises) in service as of September 30, 2012.
We were incorporated in Delaware in February 1991 for the purpose of acquiring and operating incumbent telephone companies in rural and small urban markets. Many of our telephone companies have served their respective communities for over 80 years.
Access lines have historically been an important element of our business. Communications companies, including FairPoint, continue to experience a decline in access lines due to increased competition, including competition from CLECs, wireless carriers and cable television operators, increased availability of alternative communications services, including wireless and VoIP, and challenging economic conditions. While voice access lines are expected to continue to decline, we expect to offset a portion of this lost revenue with growth in special access, HSD and other broadband service revenue as we continue to build out our network to customers who did not previously have access to such products and to offer more competitive services to existing customers. In addition, due to issues with transitioning certain back-office functions from Verizon's integrated systems to our systems and the filing for bankruptcy protection under Chapter 11 of the Bankruptcy Code in October 2009, we lost significant market share in recent years. Our strategy is to leverage our ubiquitous network in our Northern New England operations to regain market share, particularly in the business and wholesale markets and for data services. We offer our IP/Multiple Protocol Label Switched network that is fiber-optic based (the "Next Generation Network") to support more HSD services and extend fiber into more communities across our Northern New England operations. This fiber-optic build supplies critical infrastructure known as "backhaul" for wireless carriers' traffic in the region, and addresses the increasing bandwidth needs being driven by new applications for smart phones, tablets and other wireless devices. There are more than 1,600 wireless towers in our Northern New England footprint, most of which we currently provide with cellular backhaul connectivity. Our recent Ethernet network expansion allows us to provide fiber based Ethernet cellular backhaul to more than half of these towers.

Regulatory and Legislative
We are subject to regulation primarily by federal and state governmental agencies. At the federal level, the FCC generally exercises jurisdiction over the facilities and services of communications common carriers, such as FairPoint, to the extent those facilities are used to provide, originate or terminate interstate or international communications. State regulatory commissions generally exercise jurisdiction over common carriers' facilities and services to the extent those facilities are used to provide,

originate or terminate intrastate communications. In addition, pursuant to the Telecommunications Act of 1996, which amended the Communications Act of 1934, state and federal regulators share responsibility for implementing and enforcing the domestic pro-competitive policies introduced by that legislation. The Telecom Group and our Northern New England operations operate under different regulatory regimes in certain respects. For example, concerning interstate access, all of the Telecom Group regulated interstate services of FairPoint were regulated under a rate-of-return model, while all of the rate-regulated interstate services provided by the Northern New England operations were regulated under a price cap model. On May 10, 2010, we received FCC approval to convert our Telecom Group operations in Maine and Vermont to the price cap model. These operations converted to interstate price cap regulation on July 1, 2010. We have obtained permission to continue to operate our Telecom Group ILECs outside of Maine and Vermont under the rate-of-return or average schedule regime by obtaining a waiver of the FCC's "all-or-nothing" rule. Without this permission, the all-or-nothing rule would require that all of our regulated operations be operated under the price cap model for federal regulatory purposes. In March 2012, we filed a petition with the FCC to convert the interstate special access services of our rate-of-return Telecom Group companies to price cap regulation, effective January 1, 2013. The FCC has not yet issued an order on this petition. In addition, while all of our operations generally are subject to obligations that apply to all LECs, our non-rural operations are subject to additional requirements concerning interconnection, non-discriminatory network access for competitive communications providers and other matters, subject to substantial oversight by state regulatory commissions. In addition, the FCC has ruled that our Northern New England operations must comply with the regulations applicable to the Bell Operating Companies. On October 27, 2011, the FCC adopted an Order and Further Notice of Proposed Rulemaking on Universal Service and Intercarrier Compensation reform. On November 18, 2011, the FCC released its comprehensive and landmark order to modify the nationwide system of universal support and the Intercarrier Compensation system (referred to hereafter as the "FCC CAF/ICC Order"). In this order, the FCC replaced the existing Universal Service Fund ("USF") for price cap carriers with its CAF. The intent of the CAF is to bring high speed affordable broadband services to all Americans. The FCC CAF/ICC Order fundamentally reforms the Intercarrier Compensation ("ICC") system that governs how communications companies bill one another for handling traffic, gradually phasing down these charges. Together, the modifications to the CAF and ICC rules are intended to benefit consumers and promote the goals of the National Broadband Plan, which called for overhauling these two complex systems to address the goal of supporting broadband deployment as cost-effectively as possible.
In conjunction with the FCC CAF/ICC Order, the FCC adopted a Notice of Proposed Rulemaking to deal with related matters, including but not limited to: (i) the actual cost model to be adopted for CAF Phase II funding, (ii) treatment of originating access charges, (iii) modifications to CAF for rate-of-return ILECs,
(iv) development of CAF Phase II for mobility, (v) CAF Phase II reverse auction rules, (vi) remote areas funding and (vii) IP to IP interconnection issues. It is not known what decisions will be made on these issues or how they may impact us. In general, CAF Phase I is interim support provided to price cap carriers during the period in which the FCC establishes its permanent CAF funding rules for CAF Phase II. CAF Phase I includes certain support structures, including frozen support and optional interim support. CAF Phase I will continue until CAF Phase II is implemented, which is dependent on how long it takes the FCC to complete its CAF Phase II proceeding. Pursuant to the FCC CAF/ICC Order, during 2012, we are receiving monthly CAF Phase I frozen support, which is based on and equal to all forms of high-cost support we received during 2011. This support is considered transitional funding while the FCC is developing its CAF Phase II program. The FCC CAF/ICC Order anticipates that CAF Phase I frozen support payments in 2012 will be replaced by CAF Phase II starting in 2013. However, it is likely that it may take longer for the FCC to complete its CAF Phase II proceeding and that CAF Phase I frozen support will continue into a portion or all of 2013. FCC rules require that if we continue receiving CAF Phase I frozen support beyond 2012, we will have specific broadband spending obligations starting in 2013. According to the FCC rules, in 2013 we will need to spend one-third of the frozen support to "build and operate broadband-capable networks used to offer the provider's own retail broadband service in areas substantially unserved by an unsubsidized competitor." Should we continue to receive CAF Phase I frozen support in 2014 we will need to spend two-thirds of that support to "build and operate broadband-capable networks used to offer the provider's own retail broadband service in areas substantially unserved by an unsubsidized competitor" and in 2015 this spend obligation goes to 100%.

Pursuant to the revised CAF programs, we were offered $4.8 million of one-time funding under the FCC's CAF Phase I incremental support program. Under this program we can use some or all of this support subject to certain restrictions. Those restrictions exclude the use of the funding in census blocks where there is an unsubsidized competitor, where we have capital spending plans in the next three years to provide broadband services, or where we have made a regulatory commitment. Further, we must build to one currently unserved location for every $775 in funding and must complete construction within three years and provide services at minimum speeds of 4 megabits per second down to the subscriber and 1 megabits per second up from the subscriber. We have notified the FCC that we will accept $2.0 million of CAF Phase I incremental support funding, which will primarily be used in Vermont. On September 10, 2012, we filed a petition with the FCC asking it to waive its rules to allow us to use the remaining $2.8 million of CAF Phase I incremental support funding to bring high speed broadband services to 697 customer locations in the state of Maine.

In compliance with the FCC revised rules for ICC, we have revised intrastate access offerings in all operating areas to reduce terminating switched access rates as the first step in the ICC transition. FCC rules allow us to recover a portion of the lost intercarrier compensation from end users through an access recovery charge ("ARC"). For the 2012 interstate tariff period (July 1, 2012 through June 30, 2013), the maximum ARC rate for residential and single line businesses is $0.50 and for multi-line businesses is $1.00. We have filed ARC rates ranging from $0.00 up to the maximum ARC rates for our operating areas, with the rates varying by operating area based on calculations in accordance with FCC rules. Where the ARC rates are not sufficient to recover the eligible amount for recovery, we are eligible to recover such additional amounts through the CAF/ICC. Beginning July 1, 2012, we became eligible and will recover CAF/ICC for our rate-of-return regulated Telecom Group operations. ARC rates and CAF/ICC amounts are reset effective July 1 of each year in the annual FCC tariff filings.
In Vermont, our Northern New England service territory operated under an alternative form of regulation since 2006 known as an Amended Incentive Regulation Plan. That plan expired on March 31, 2011. On March 23, 2011, we entered into a Memorandum of Understanding with the Vermont Department of Public Services whereby they agreed to seek approval of the 2011 Incentive Regulation Plan ("2011 IRP") before the VPSB. The Board approved the 2011 IRP on January 18, 2012, and that plan is effective retroactively to April 1, 2011. We believe the 2011 IRP will decrease the scope of retail telecommunications regulation for us in Vermont, providing us with increased ability to compete in the Vermont telecommunications marketplace. Under the 2011 IRP, our exposure to annual retail service quality penalties has been decreased from $10.5 million to $1.65 million and we have pricing discretion with respect to existing and new services other than basic local exchange service. Pursuant to pricing flexibility in Vermont under the incentive regulation plan, we have discontinued issuing customer credits for federal USF amounts received. Prior to this order, we were required to return a portion of the USF we received to our customers through credits on their bills. This change is expected to reduce USF credits returned to our customers by up to approximately $2.4 million in 2012 and will continue as a permanent change.
New legislation was recently signed into law in both Maine and New Hampshire, which we believe will decrease the scope of retail telecommunications regulation for us, eliminating many of the state specific Merger conditions and providing us with increased ability to compete in the Maine and New Hampshire telecommunications marketplace. Under the Maine legislation, our exposure to annual retail service quality penalties, beginning with Maine's fiscal year ending July 31, 2013, will be decreased from $12.5 million to $2.0 million and we will have pricing discretion with respect to existing and new telecommunications services other than provider of last resort services. In New Hampshire, beginning August 10, 2012, the effective date of the legislation, our exposure to annual retail service quality penalties was eliminated and we have pricing discretion with respect to existing and new telecommunications services other than basic local exchange service and certain services provided to customers who qualify for the federal lifeline discount.
We anticipate that, together, these significant changes in both federal and state regulation will not have a material impact in 2012. However, in the long run, we are uncertain of the ultimate impact as federal and state regulation continues to evolve.
Fresh Start Accounting
On October 26, 2009, we filed the Chapter 11 Cases. On January 13, 2011, the Bankruptcy Court entered the Confirmation Order, which confirmed the Plan. On January 24, 2011, the Effective Date, we substantially consummated our reorganization through a series of transactions contemplated by the Plan, and the Plan became effective pursuant to its terms.
As of the Effective Date, we were required to adopt fresh start accounting in accordance with guidance under the applicable reorganization accounting rules, pursuant to which our reorganization value, which represents the fair value of an entity before considering liabilities and approximates the amount a willing buyer would pay for the assets of the entity immediately after the reorganization, was allocated to the fair value of assets in conformity with guidance under the applicable accounting rules for business combinations, using the purchase method of accounting for business combinations. The amount remaining after allocation of the reorganization value to the fair value of identified tangible and intangible assets was reflected as goodwill, which was subject to periodic evaluation for impairment and was later determined to be completely impaired at September 30, 2011. In addition to fresh start accounting, our condensed consolidated financial statements reflect all effects of the transactions contemplated by the Plan. Therefore, our condensed consolidated statements of financial position and condensed consolidated statements of operations are not comparable in many respects to our condensed consolidated statements of financial position and condensed consolidated statements of operations for periods prior to our adoption of fresh start accounting and prior to accounting for the effects of the Plan, including certain of the historical financial statements contained herein.
While the adoption of fresh start accounting presents the results of operations of a new reporting entity, we believe the comparison of combined results of the nine months ended September 30, 2012 versus the nine months ended September 30, 2011 provides the best analysis of the results of operations. The only statement of operations items impacted by the reorganization are

depreciation expense, interest expense and reorganization items. Those effects of fresh start accounting are discussed in more detail in the respective sections below.
Basis of Presentation
We view our business of providing data, voice and communication services to residential, business and wholesale customers as one reportable segment as defined in the Segment Reporting Topic of the ASC.
Beginning in the second quarter of 2012, we reclassified certain revenues from voice services revenues to data and Internet services revenues to more accurately reflect the underlying service provided. For comparative purposes, we have reclassified the prior periods to be consistent with the current period presentation.
Revenues
We derive our revenues from:
• Voice services. We receive revenues from our telephone operations from the provision of local exchange, long-distance, local private line, wire maintenance, voice messaging and value-added services. Included in long-distance services revenue are revenues received from regional toll calls. Value-added services are a family of services that expand the utilization of the network, including products such as caller ID, call waiting and call return. The provision of local exchange services not only includes retail revenues but also includes local wholesale revenues from unbundled network elements, interconnection revenues from CLECs and wireless carriers, and some data transport revenues. Voice services revenues in 2011 also include USF payments for high-cost support, local switching support, long-term support and Interstate Common Line Support. Voice services revenues in 2012 include CAF Phase I frozen support payments which replaced all forms of high-cost USF payments pursuant to the FCC CAF/ICC Order.

• Access. We receive revenues for the provision of network access, including interstate access and intrastate access.

Network access revenues are earned from end-user customers and long-distance and other competing carriers who use our local exchange facilities to provide usage services to their customers. Special access revenues originate from carriers and end-users that buy dedicated local and interexchange capacity to support their private networks, including wireless carriers to backhaul voice and data traffic from cell towers to mobile telephone switching offices. Switched access revenues are derived from fixed and usage-based charges paid by carriers for access to our local network.
Interstate access revenues are earned on charges to long-distance carriers and other customers for access to our networks in connection with the origination and termination of interstate telephone 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 FCC.
Intrastate access 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 intrastate 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.
• Data and Internet services. We receive revenues from monthly recurring charges for services, including HSD, Internet and other services.

• Other services. We receive revenues from other services, including miscellaneous projects on behalf of third party requests, video services (including cable television and video-over-DSL), billing and collection, directory services, public (coin) telephone and the sale and maintenance of customer premise equipment. Other services also includes revenue we receive from late payment charges to end-users and interexchange carriers.

The following table summarizes revenues and the percentage of revenues from these sources (in thousands, except for percentage of revenues data):

                                            Three Months Ended            Three Months Ended
                                            September 30, 2012            September 30, 2011
                                                            % of                          % of
                                              $           Revenue           $           Revenue
Revenue Source:
Voice services                          $    111,337           46 %   $    117,583           45 %
Access                                        82,015           34 %         94,646           37 %
Data and Internet services                    36,793           15 %         32,854           13 %
Other services                                11,907            5 %         12,829            5 %
Total                                   $    242,052          100 %   $    257,912          100 %



                                                                                Predecessor
                                                                                  Company                     Combined
                                           Two Hundred Forty-Nine            Twenty-Four Days
                  Nine Months Ended       Days Ended September 30,                 Ended                 Nine Months Ended
                  September 30, 2012                2011                     January 24, 2011            September 30, 2011
                                 % of                        % of                            % of                       % of
                     $         Revenue          $          Revenue             $           Revenue          $         Revenue
Revenue
Source:
Voice services $   337,639         46 %   $    332,632         47 %     $    32,554            49 %   $   365,186         47 %
Access             253,524         35 %        256,109         36 %          23,023            35 %       279,132         36 %
Data and
Internet
services           106,243         14 %         86,945         12 %           7,960            12 %        94,905         12 %
Other services      36,573          5 %         33,264          5 %           2,841             4 %        36,105          5 %
Total          $   733,979        100 %   $    708,950        100 %     $    66,378           100 %   $   775,328        100 %

The following table summarizes access line equivalents (including voice access lines and HSD lines, which include DSL, wireless broadband, cable modem and fiber-to-the-premises) as of September 30, 2012 and 2011:

                              September 30, 2012    September 30, 2011    % Change
Access Line Equivalents:
Residential access lines                 602,530               662,562      (9.1 )%
Business access lines                    303,904               314,290      (3.3 )%
Wholesale access lines (1)                67,886                80,025     (15.2 )%
Total switched access lines              974,320             1,056,877      (7.8 )%
HSD subscribers                          322,551               312,475       3.2  %
Total access line equivalents          1,296,871             1,369,352      (5.3 )%

(1) Wholesale access lines include residential and business resale lines and unbundled network element platform lines.

Operating Expenses
Our recurring operating expenses consist of cost of services and sales, selling, general and administrative expenses and depreciation and amortization.
• Cost of Services and Sales. Cost of services and sales includes the following costs directly attributable to a service or product: salaries and wages, benefits (including stock based compensation), materials and supplies, contracted services, network access and transport costs, customer provisioning costs, computer systems support and cost of products sold. Aggregate customer care costs, which include billing and service provisioning, are allocated between cost of services and sales and selling, general and administrative expense.

• Selling, General and Administrative Expense. Selling, general and administrative expense includes salaries and wages and benefits (including stock based compensation), not directly attributable to a service or product, bad debt charges, taxes other than income, advertising and sales commission costs, customer billing, call center and information technology costs, professional service fees and rent for administrative space.

• Depreciation and Amortization. Depreciation and amortization includes depreciation of our communications network and equipment and amortization of intangible assets.

Operational Restructuring Charges
On September 8, 2011, we announced plans to reduce our workforce to better ensure that we are staffed appropriately to serve our customers well, while prudently managing expenses. The reduction eliminated approximately 400 positions, beginning in September 2011 and continuing through the end of 2011. Workforce reductions resulted in restructuring charges of $3.3 million during the three months ended September 30, 2011, consisting of severance and one-time incentive payments, which are included within cost of services and sales and selling, general and administrative expense in the condensed consolidated statement of operations.
Results of Operations
Three Months Ended September 30, 2012 Compared with Three Months Ended September 30, 2011
The following table sets forth the percentages of revenues represented by selected items reflected in our condensed consolidated statements of operations. The year-to-year comparisons of financial results are not necessarily indicative of future results (in thousands, except percentage of revenues data):

                                     Three Months Ended September 30,    Three Months Ended September 30,
                                                   2012                                2011
                                                              % of                                % of
                                            $               Revenue             $               Revenue
Revenues                             $    242,052               100  %   $    257,912               100  %
Operating expenses:
Costs of services and sales               105,502                44           120,149                47
Selling, general and administrative
expense                                    80,915                33            93,334                36
Depreciation and amortization              89,782                37            91,547                35
. . .