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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009

Commission file number:  1-32939

IDEARC INC.

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s telephone number, including area code:  (972) 453-7000

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 x   No o

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

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

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

As of November 2, 2009, there were 148,111,009 shares of the Registrant’s common stock outstanding.

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FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  You should not place undue reliance on these statements.  These forward-looking statements include statements that reflect the current views of our senior management with respect to our financial performance and future events with respect to our business and industry in general.  Statements that include the words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “forecast,” “estimate,” “expect,” “preliminary,” “intend,” “plan,” “project,” “outlook” and similar statements of a future or forward-looking nature identify forward-looking statements.  Forward-looking statements address matters that involve risks and uncertainties.  Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements.  We believe that these factors include, but are not limited to, the following:

·                  risks related to the impact of our ongoing Chapter 11 bankruptcy could have on our corporate image, normal business operations, financial condition, liquidity or cash flow;

·                  risks related to our ability to successfully execute, confirm and consummate a plan of reorganization with respect to the Chapter 11 bankruptcy in a timely manner that will provide assurance for the long-term continued viability of our business;

·                  limitations on our operating and strategic flexibility during the pendency of the bankruptcy proceedings or under the terms of new debt agreements that may result from the reorganization;

·                  access to capital markets and increased borrowing costs resulting from our risks related to our Chapter 11 bankruptcy;

·                  risks associated with third-parties seeking and obtaining court approval to terminate or shorten the exclusivity period for us to propose and confirm a plan of reorganization, to appoint a Chapter 11 trustee or to convert the case to a Chapter 7 bankruptcy;

·                  risks related to our declining revenue, including a reduction in customer advertising spend and contract cancellations resulting from the current economic downturn;

·                  changes in our competitive position due to competition from other yellow pages directories publishers and other traditional and new media and our ability to anticipate or respond to changes in technology and user preferences;

·                  declining use of print yellow pages directories;

·                  changes in the availability and cost of paper and other raw materials used to print our directories and our reliance on third-party providers for printing and distribution services;

·                  increased credit risk associated with our reliance on small- and medium-sized businesses as clients, in particular in the current economic downturn;

·                  changes in our operating performance;

·                  our ability to attract and retain qualified executives;

·                  our ability to maintain good relations with our unionized employees;

·                  changes in U.S. labor, business, political and/or economic conditions;

·                  changes in governmental regulations and policies and actions of regulatory bodies;

·                  the outcome of pending or future litigation and other claims; and

·                  risks associated with our obligations under agreements entered into with Verizon in connection with our spin-off.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this and other reports we file with the Securities and Exchange Commission, including the information in “Item 1A. Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2008 and as updated in this Quarterly Report on Form 10-Q for the period ending September 30, 2009.  If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate.

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PART I - FINANCIAL INFORMATION

Item 1.            Financial Statements.

Idearc Inc. and Subsidiaries

Debtor and Debtor-In-Possession

Consolidated Statements of Operations

(Unaudited)

See Notes to Consolidated Financial Statements.

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Idearc Inc. and Subsidiaries

Debtor and Debtor-In-Possession

Consolidated Balance Sheets

(Unaudited)

See Notes to Consolidated Financial Statements.

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Idearc Inc. and Subsidiaries

Debtor and Debtor-In-Possession

Consolidated Statements of Cash Flows

(Unaudited)

See Notes to Consolidated Financial Statements.

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Idearc Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note 1

Chapter 11 Bankruptcy Filings

Idearc Inc. and its subsidiaries (collectively, “Idearc”, “We”, “Our” or the “Company”) is one of the nation’s largest providers of yellow and white pages directories and related advertising products.  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, the Company’s Chapter 11 bankruptcy filings automatically enjoined, or stayed, the continuation of any judicial or administrative proceedings or other actions against the Company or its property to recover on, collect or secure a claim arising prior to the Petition Date. Thus, for example, most creditor actions to obtain possession of property from the Company, or to create, perfect or enforce any lien against the property of the Company, or to collect on monies owed or otherwise exercise rights or remedies with respect to a 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 the Company’s 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, the 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 the Company’s 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.  The Company 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 for additional information related to liabilities subject to compromise.

Reorganization Process

The Company is 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.  The Company 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, the Company 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.

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Several bankruptcy hearings have been held since the Company filed for Chapter 11 bankruptcy.  The Bankruptcy Court granted interim approval of several of the Company’s “first day” motions, including the payment of certain pre-petition and post-petition obligations of the Company 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, the Company paid an adequacy protection payment of $250 million ($188 million of secured debt principal and $62 million of accrued interest) to the agent of its 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. The Company retained legal and financial professionals to advise and assist the Company with the bankruptcy proceedings. From time to time, the Company has 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 the Company. There can be no assurance that the Creditors’ Committee will support the Company’s positions on matters to be presented to the Bankruptcy Court in the future or on any proposed plan of reorganization. Disagreements between the Company and the Creditors’ Committee could protract the Chapter 11 proceedings, delaying the Company’s emergence from the Chapter 11 bankruptcy proceedings, and thus negatively impact the Company’s ongoing operations.

Under Section 365 and other relevant sections of the Bankruptcy Code, the Company may assume, assume and assign, or reject certain executory contracts and unexpired leases, including, without limitation, leases of real property 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, the Company’s 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, the Company 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 the Company’s disclosure statement, as it related to the Amended Plan, on September 10, 2009.  With the approval of the disclosure statement, the Company has begun soliciting votes from its 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.

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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 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 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 the Company will continue as a going concern, although the Chapter 11 bankruptcy raises substantial doubt about the Company’s 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 the Company be unable to continue as a going concern.

The Company continues to be operationally profitable and provide positive operating cash flows.  As such, debtor-in-possession financing is not expected to be required. However, the Company has incurred and will continue to incur significant costs associated with its reorganization process. These costs are being expensed as incurred. In addition, during 2008, the Company began implementing strategic organizational and market exit initiatives to improve ongoing operational efficiencies.  These reorganization efforts have continued throughout 2009.  See Note 3 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

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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.

Recent Accounting Pronouncements

Enhanced Disclosures for Postretirement Benefit Plan Assets

In December 2008, the Financial Accounting Standards Board (“FASB”) amended the disclosure requirement of assets held in an employer’s defined benefit pension or other postretirement plan.  Effective for periods after December 15, 2009, the Company will disclose for each major category of plan assets, its valuation within the fair value hierarchy.

Interim Disclosures about Fair Value of Financial Instruments

In April 2009, the FASB amended the disclosure requirements for the fair value of financial instruments.  The guidance requires publicly traded companies to disclosure the fair value of financial instruments in interim reporting periods and in the annual financial statements. The guidance enhances consistency in financial reporting by increasing the frequency of fair value disclosures to a quarterly basis for any financial instruments. The Company adopted the new disclosure requirements effective for the quarter ended June 30, 2009. See Note 5 for additional information on fair value disclosures.

Subsequent Events

In June 2009, the FASB issued accounting guidance that requires companies to recognize in the financial statements the effects of subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. An entity shall disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued.  Companies are not permitted to recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date and before financial statements are issued. Some non-recognized subsequent events must be disclosed to keep the financial statements from being misleading.  For such events a company must disclose the nature of the event, an estimate of its financial effect, or a statement that such an estimate cannot be made. The accounting guidance applies prospectively for interim or annual financial periods ending after June 15, 2009. The Company adopted the new accounting rules associated with subsequent events effective for the quarter ended June 30, 2009 consolidated financial statements and disclosures.

The Company evaluates events and transactions that occur after the balance sheet date as potential subsequent events. This evaluation was performed through November 6, 2009, the date on which the Company’s accompanying consolidated financial statements were issued.

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Note 2

Reorganization Items

During the three and nine months ended September 30, 2009, the Company recorded $35 million and $440 million, respectively, of reorganization items on a separate line item in the consolidated statements 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, realized gains and losses, and provisions for losses resulting from the reorganization of the business.

The following table displays the details of reorganization items for the three and nine months ended September 30, 2009:

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.  This resulted in a non-cash charge of $279 million that was recognized as a reorganization item in the accompanying consolidated statement of operations.

Deferred losses in accumulated other comprehensive loss associated with the interest rate swaps were remeasured to reflect the component of forecasted interest rate payments that are likely to occur. This resulted in non-cash charges of $21 million and $145 million that were recognized as reorganization items in the accompanying consolidated statement of operations for the three and nine months ended September 30, 2009, respectively.

Other reorganization expenses of $14 million and $16 million for the three and nine months ended September 30, 2009, respectively, primarily consist of professional fees incurred directly associated with the reorganization of the business under Chapter 11 of the Bankruptcy Code.

Cash paid for reorganization items for the nine months ended September 30, 2009 totaled $13 million, primarily representing payment of professional fees directly associated with the reorganization of the business under Chapter 11 of the Bankruptcy Code.

Note 3

Restructuring

During the three and nine months ended September 30, 2009, the Company recorded $6 million and $19 million, respectively, of restructuring charges associated with its ongoing strategic organizational, market exit and pre-petition capital restructuring initiatives, which began during 2008. The $19 million includes $10 million of professional fees associated with pre-petition capital restructuring costs.

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The following table sets forth the restructuring costs that are included in general and administrative expense in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2009, and 2008:

The following table sets forth the balance of the restructuring accrual at September 30, 2009, and details the changes in the accrued liability through the first nine months of 2009:

The Company anticipates there will be additional restructuring charges in subsequent periods.

Note 4

Earnings Per Share

Basic earnings per share are computed by dividing net income by the number of weighted-average common shares outstanding during the reporting period. Diluted earnings per share are calculated to give effect to all potentially dilutive common shares that were outstanding during the reporting period. The effect of potentially dilutive common shares for the three and nine months ended September 30, 2009 and the three and nine months ended September 30, 2008 was not material.

The following table illustrates the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2009 and the three and nine months ended September 30, 2008:

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Note 5

Additional Financial Information

The tables that follow provide additional financial information related to the Company’s consolidated financial statements.

Balance Sheet

As a result of the Company filing for Chapter 11 bankruptcy, there has been a reclassification of certain liabilities from accounts payable and accrued liabilities to liabilities subject to compromise.  See Note 6 for additional information related to liabilities subject to compromise.

The following table displays the components of accounts payable and accrued liabilities:

The following table displays items previously classified as accounts payable and accrued liabilities at December 31, 2008 that are now categorized as liabilities subject to compromise:

Comprehensive Income

The following table displays the computation of total comprehensive income (loss):

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As of December 31, 2008, the Company discontinued hedge accounting associated with its interest rate swap agreements and as a result, all 2009 activities related to the interest rate swap agreements were recorded to the consolidated statement of operations.  See Note 7 for further discussion of debt obligations and interest rate swap agreements.

As of September 30, 2009, the balance in accumulated other comprehensive loss of $136 million includes an unrealized loss of $53 million (net of tax of $30 million) related to the unrealized losses on cash flow hedges and ineffectiveness and an unrealized loss of $83 million (net of tax of $51 million) associated with adjustments for pension and post-employment benefits.

As of December 31, 2008, the balance in accumulated other comprehensive loss of $222 million includes an unrealized loss of $166 million (net of tax of $87 million) related to the unrealized losses on cash flow hedges and ineffectiveness and an unrealized loss of $56 million (net of tax of $36 million) associated with adjustments for pension and post-employment benefits.

Fair Values of Financial Instruments

The fair values of cash and cash equivalents, trade receivables, short-term investments and accounts payable approximate their carrying amounts due to their short-term nature. The fair values of debt instruments are determined based on debt with similar maturities and credit quality discounted at current quoted market rates.  The filing of Chapter 11 bankruptcy constituted an event of default under the Company’s 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.  The Company 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.

The following table sets forth the carrying amount and fair value for total debt obligations and derivative liabilities at September 30, 2009 and December 31, 2008:

Note 6

Liabilities Subject To Compromise

Liabilities subject to compromise refers to both secured and unsecured obligations that will be settled under the plan of reorganization.  The applicable reorganization accounting rules require pre-petition liabilities, including those that became known after filing the bankruptcy petitions that are subject to compromise to be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts.  These liabilities represent the estimated amount expected to be resolved on known or potential claims through the Chapter 11 process, and remain subject to future adjustments from negotiated settlements, actions of the Bankruptcy Court and non-acceptance of certain executory contracts and unexpired leases.  Liabilities subject to compromise also include items that may be assumed under the plan of reorganization, and may be subsequently reclassified to liabilities not subject to compromise.  The Company has classified all of its debt obligations of $9,079 million, including its secured debt, as liabilities subject to compromise.  Liabilities subject to compromise also include certain pre-petition liabilities, including certain accrued taxes, accrued interest and accrued expenses.  The Company’s cash from operations was favorably impacted by the stay of payment of interest.

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The table below identifies the principal categories of liabilities subject to compromise:

Note 7

Debt Obligations and Derivative Instruments

Chapter 11 Bankruptcy Filings

On March 31, 2009, the Company and its domestic subsidiaries filed voluntary petitions in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division seeking reorganization relief under the provisions of Chapter 11 of Title 11 of the United States Code.  The filing of the Chapter 11 petitions constituted an event of default under certain of the Company’s debt obligations and interest rate swap agreements, and those debt obligations and interest rate swap agreements became automatically and immediately due and payable.  However, under applicable bankruptcy law, an automatic stay of action to collect, assert, or recover a claim against the Company is now in effect.  The Company’s debt obligations of $9,079 million are classified as liabilities subject to compromise in the accompanying consolidated balance sheet as of September 30, 2009. The debt obligations balance reflects the payment of a court approved adequacy protection payment of $250 million ($188 million of secured debt principal and $62 million of accrued interest) made in April 2009 to the agent of the Company’s secured lenders under its senior secured credit facilities.

Other than the adequacy protection payment of principal and interest discussed above, the Company did not make any scheduled principal payments in 2009 or any interest payments since February 2009.  As stipulated in the debt credit agreement, the interest rate was automatically changed to the Prime Rate (called the Alternative Base Rate or “ABR”) plus a basis point spread on the revolving credit facility, Tranche A Facility, and Tranche B Facility which equates to an all-in interest rate of 5.75%, 5.75% and 6.25%, respectively.  However, since the filing of the bankruptcy petitions, interest associated with the debt and interest rate swap agreements is not being accrued.

In accordance with guidance under the applicable reorganization accounting rules, the debt issuance costs should be viewed as valuations of the related debt obligations.  When the debt obligations become allowed claims and the allowed claims differ from the net carrying amount of the debt obligations, the recorded amount should be adjusted to the amount of the allowed claims (thereby adjusting existing debt issuance costs to the extent necessary to report debt obligations at this allowed amount).  Through September 30, 2009, the Bankruptcy Court had not classified any of the debt obligations as allowed claims.  Therefore, the debt obligations have been categorized under liabilities subject to compromise in the accompanying consolidated balance sheet as of September 30, 2009.  The debt issuance costs of $73 million as of September 30, 2009 have not been adjusted.  The Company may be required to record these amounts or a portion thereof in the consolidated statement of operations as a reorganization item if the Bankruptcy Court ultimately determines that a portion of the debt obligation is subject to compromise. See Note 6 for additional information related to liabilities subject to compromise.

Due to the bankruptcy filing, the Company’s 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.  The Company recorded these net liabilities as of the bankruptcy Petition Date in the amount of $496 million.  These liabilities are classified under liabilities subject to compromise in the accompanying consolidated balance sheet as of September 30, 2009. Accordingly, the Company recorded a loss of $279 million which represented the difference in the carrying amount of the liability

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prior to the bankruptcy Petition Date and the expected amount of the allowed claim.  The loss was recognized during the three months ended March 31, 2009 in the consolidated statement of operations as a reorganization item.  See Note 2 for a further explanation of reorganization items.

On September 10, 2009, the Bankruptcy Court approved the Company’s disclosure statement, as it relates to the Amended Plan.  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 aggregate principal amount equal to $2.75 billion and will mature on the sixth anniversary of the bankruptcy emergence date.  As such, a portion of the forecasted interest payments on the original, higher principal debt are not probable of occurring, therefore, the deferred losses in accumulated other comprehensive loss associated with the interest rate swaps were remeasured from $228 million to $83 million as of September 30, 2009.  The $145 million remeasurement difference was recognized as a reorganization item in the accompanying consolidated statement of operations during 2009.  The remaining deferred balance of $83 million ($53 million net of tax) in accumulated other comprehensive loss will be amortized to the statement of operations using the effective interest method over the remaining period of the forecasted interest payments, once interest payments on the debt obligations resume, or upon emergence from bankruptcy, it will be evaluated in accordance with the applicable reorganization accounting rules.  Any additional reduction in the proposed debt level would result in deferred losses recorded in accumulated other comprehensive loss being remeasured and recognized as reorganization expense in the consolidated statement of operations.  See Note 2 for a further explanation of reorganization items.

Debt Obligations

Outstanding debt obligations are as follows:

Senior Secured Credit Facilities

On November 17, 2006, the Company entered into senior secured credit facilities totaling $6,265 million, which consisted of: (a) Tranche A term loan facility of approximately $1,515 million (the “Tranche A Facility”), (b) Tranche B term loan facility of $4,750 million (the “Tranche B Facility”), and (c) a $250 million revolving credit facility. The revolving credit facility originally matured on November 17, 2011. The senior secured credit facilities are guaranteed by substantially all of Idearc’s subsidiaries and are secured by substantially all present and future assets of Idearc Inc. and its subsidiaries.

On October 24, 2008, the Company initiated borrowings of $247 million under its existing $250 million revolving credit facility, leaving available funds at December 31, 2008 of approximately $0.3 million ($250 million revolving credit facility less $247 million in initiated borrowings less $2.7 million in letters of credit outstanding). The borrowing under the revolving credit facility allowed the Company to increase its cash position in order to preserve financial flexibility in light of the uncertainty in the credit markets. In accordance with the terms of the senior secured credit facility, the proceeds from the borrowing are intended for general corporate purposes. The

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agreement calls for the Company to pay a commitment fee of 0.375% for the unused portion of the revolving credit facility, calculated based on the daily unused amount and payable on a quarterly basis.

Payments of principal under the Tranche A Facility were originally due quarterly beginning in 2009, and a final payment due at maturity on November 15, 2013. Principal payments under the Tranche A Facility originally amortized as a percentage of the total term loan in an amount per quarter equal to the following: 2009 — 1.25%; 2010 — 2.50%; 2011 — 3.75%; 2012 — 5.00%; 2013 (first three quarters) — 12.50%; Maturity — 12.50%. The Tranche B Facility was originally payable in equal quarterly installments beginning in 2007 in an amount equal to 0.25% per quarter, with the balance due on the maturity date of November 17, 2014.

Derivative Instruments and Hedging Activities

The Company has interest rate swap agreements with major financial institutions with notional amounts totaling $5,500 million. These interest rate swap agreements consist of four separate swap transactions with $2,700 million originally maturing on June 29, 2012, $1,100 million originally maturing on September 30, 2010, $800 million originally maturing on March 31, 2012 and $900 million with annual notional reductions of $200 million originally maturing on March 31, 2012.  Under the interest rate swap agreements, the Company paid fixed rate interest at rates ranging from 4.86% to 5.15% and received floating rate interest based on the three month LIBOR to hedge the variability in cash flows attributable to changes in the benchmark interest rate. These swap agreements comply with debt covenants under the senior secured credit facilities that required at least 50% of total outstanding debt be subject to fixed interest rates through June 2009. The Company does not enter into derivative financial instruments for trading or speculative purposes.

In addition, on August 18, 2008, the Company entered into an interest rate swap arrangement which resulted in the de-designation of the $1,100 million swap maturing on September 30, 2010. In this arrangement, the remaining life of the $1,100 million swap was combined with a basis swap and re-designated as a cash flow hedge. In the interest rate swap agreement, the Company paid interest based on the three month LIBOR rate and received interest based on the one month LIBOR rate plus an 8.5 basis point spread. The interest rate swap agreement was intended to hedge the variability in cash flows attributable to changes in interest rates on the remaining monthly variable interest payments on borrowings under the Tranche A facility through the original maturity of the swap agreement on September 30, 2010.

As of December 31, 2008, the Company determined the interest rate swap agreements no longer qualified for hedge accounting as the future payments on the underlying debt were no longer probable of occurring but reasonably possible of occurring beyond the maturity of the existing swaps.  As such, the deferred interest rate swaps losses in accumulated other comprehensive loss were frozen and on January 1, 2009, the Company began amortizing these losses using the effective interest method over the remaining life of the interest rate swaps.   As of the bankruptcy Petition Date, the Company ceased amortization because interest payments on the underlying debt were stopped.  As of September 30, 2009, $28 million was amortized from accumulated other comprehensive loss to interest expense ($18 million net of tax) in the accompanying consolidated statements of operations. As previously mentioned, the Company remeasured the interest rate swaps deferred losses in accumulated other comprehensive loss from $228 million to $83 million to reflect the component of forecasted interest payments that are likely to occur.  The $145 million remeasurement difference, which represents the component of forecasted interest payments that are unlikely to occur, was recognized as a reorganization item in the consolidated statement of operations during 2009.  The remaining deferred balance of $83 million ($53 million net of tax) in accumulated other comprehensive loss will be amortized to the statement of operations using the effective interest method over the remaining period of the forecasted interest payments, once interest payments on the debt obligations resume, or upon emergence from bankruptcy, it will be evaluated in accordance with the applicable reorganization accounting rules.  See Note 2 for a further explanation of reorganization items.

Senior Unsecured Notes

The outstanding senior unsecured notes of $2,850 million were originally issued under an indenture dated November 17, 2006. During the second quarter of 2007, the Company completed an offer to exchange substantially all of the outstanding senior unsecured notes, which were originally issued in a private placement pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended (the “Securities Act”), for an equal principal amount of a new issue of senior unsecured notes registered under the Securities Act. The senior unsecured notes

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originally matured on November 17, 2016. Interest was payable semiannually (at 8% per year) in cash to holders of record of senior unsecured notes. The senior unsecured notes were guaranteed by substantially all subsidiaries of Idearc Inc. The senior unsecured notes are general unsecured obligations of Idearc Inc. and are effectively subordinated to all secured indebtedness of Idearc Inc. to the extent of the value of the assets securing this secured indebtedness. Idearc Inc. has no independent assets or operations. The guarantees by its subsidiaries are full and unconditional and joint and several and any subsidiaries of Idearc Inc., other than the subsidiary guarantors, are minor.

Note 8

Pension and Other Post-Employment Benefit Costs

The Company provides pension and post-employment benefits to many of its employees.  The Company’s pension plans are noncontributory defined benefit pension plans.  The post-employment health care and life insurance plans for the Company’s retirees and their dependents are both contributory and non-contributory and include a limit on the Company’s share of cost for recent and future retirees.

Net Periodic Cost (Income)

The following tables summarize the benefit costs (income) related to the Company’s pension and post-employment health care and life insurance plans for the three and nine months ended September 30, 2009 and 2008:

The Company recorded pension settlement losses of $2 million and $9 million for the three and nine months ended September 30, 2009, respectively, and settlement gains of $3 million for the nine months ended September 30, 2008, related to employees that received lump-sum distributions. These charges were recorded in accordance with the applicable accounting rules for settlements and curtailments of defined benefit pension plans and for termination benefits, which require that settlement (gains) losses be recorded once prescribed payment thresholds have been reached. This activity represents a pro rata recognition of the previously unrecognized (gains) losses associated with separated and retired employees.

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Note 9

Employee Benefits

Savings Plans Benefits

The Company sponsors defined contribution savings plans to provide opportunities for eligible employees to save for retirement on a tax-deferred basis. Substantially all of the Company’s employees are eligible to participate in these plans. The Company previously offered three defined contribution plans for the benefit of current and former employees. These three plans were collectively merged effective December 31, 2008 into one plan, and renamed The Idearc Savings Plan. Under this plan, a certain percentage of eligible employee contributions are matched with Company cash allocated to the participants’ current investment elections. The Company recognizes savings plan expenses based on its matching obligation attributable to participating employees.  For the three and nine months ended September 30, 2009, the Company recorded savings plan expenses of $6 million and $18 million, respectively. For the three and nine months ended September 30, 2008, the Company recorded savings plan expenses of $6 million and $22 million, respectively.

Severance Benefits

For the three and nine months ended September 30, 2009, the Company paid severance benefits of $2 million and $5 million, respectively.  For the three and nine months ended September 30, 2008, the Company paid severance benefits of $6 million and $16 million, respectively.

Note 10

Stock-Based Compensation

Effective March 4, 2008, the Company adopted the Idearc Inc. 2008 Incentive Compensation Plan (the “2008 Plan”), subject to the approval of the Company’s stockholders.  The 2008 Plan was approved by the Company’s stockholders on May 1, 2008.  The 2008 Plan permits the grant of cash and equity-based incentive compensation awards, including restricted stock and restricted stock units, performance shares and performance share units, stock options, stock appreciation rights, deferred stock units and other stock-based awards and performance-based cash incentive awards.  The maximum number of shares of Idearc common stock authorized for issuance under the 2008 Plan is 12 million.  During 2008, the Company granted awards under the 2008 Plan to employees and non-management directors.

Effective November 16, 2006, the Company adopted the Idearc Inc. Long-Term Incentive Plan (the “2006 Plan”).  The 2006 Plan permits the grant of cash and equity-based incentive compensation awards, including restricted stock, restricted stock units, performance shares, performance units, stock options, and other awards, such as stock appreciation rights and cash incentive awards. The maximum number of shares of Idearc common stock authorized for issuance under the 2006 Plan was 2.5 million. Pursuant to the terms of the 2008 Plan, the Company will not issue more than 350,000 shares under the 2006 Plan after December 31, 2007. During 2007 and 2008, the Company granted awards under the 2006 Plan to employees and non-management directors.

Restricted Stock

The 2006 and 2008 Plans provide for grants of restricted stock.  These awards are classified as equity awards.  The fair value of the restricted unit is determined based on the price of Idearc common stock on the date of the grant.

During 2008, certain employees were granted restricted stock awards as part of the Company’s 2008 long-term incentive compensation program.  These restricted stock awards under the 2008 Plan vest in two equal installments on December 31, 2009, and December 31, 2010. Additionally, our non-management directors were granted restricted stock awards that vested on May 1, 2009.

During 2007, certain employees and our non-management directors were granted restricted stock awards. These employee awards vest in three equal annual installments beginning on the first anniversary of the grant date. The non-management director awards vest on the third anniversary of the grant date.

Dividends are not payable on unvested restricted stock awards. However, if the Company declares and pays a dividend on Idearc common stock, dividend equivalents are granted in an amount equal to the dividend that would have been paid on the unvested restricted stock awards as if they were vested. Dividend equivalents on employee

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restricted stock awards are granted in the form of restricted stock units. Each restricted stock unit will be settled for one share of Idearc common stock on the applicable vesting date. Dividend equivalents on non-management director restricted stock awards are paid in cash on the applicable vesting date. Dividend equivalents are subject to the same vesting, forfeiture and other terms applicable to the corresponding restricted stock awards.

A portion of the cost related to these restricted stock awards is included in the Company’s stock-based compensation expense for the three and nine months ended September 30, 2009 and 2008.

Changes in the Company’s outstanding restricted stock awards for the nine months ended September 30, 2009, were as follows:

Performance Units and Performance Share Units

The 2006 and 2008 Plans provide for grants of performance units and performance share units that can be settled in cash, shares of Idearc common stock, or a combination thereof.  These awards are classified as either liability or equity awards based on the criteria established by the applicable accounting rules for stock-based compensation.

During 2008, certain employees were granted a target number of performance share units under the 2008 Plan as part of the Company’s 2008 long-term incentive compensation program.  The target number of performance share units may be increased (to a maximum of 200% of the target) or decreased (to zero) based on the Company’s total stockholder return (“TSR”) relative to the TSR of the individual stocks comprising a market benchmark (weighted 80%) and a competitor (weighted 20%) over a three-year measurement period.  The measurement period began on March 8, 2008, and will end in 2011 on the 20th trading day following the date the Company releases to the public its annual earnings for the year ending December 31, 2010.  Each performance share unit will be settled for one share of Idearc common stock.

Dividends are not payable on performance share units.  However, if the Company declares and pays a dividend on Idearc common stock, dividend equivalents are granted in an amount equal to the dividend that would have been paid on an equivalent number of shares of Idearc common stock.  Dividend equivalents are granted in the form of additional performance share units and are subject to the same vesting, forfeiture and other terms applicable to the performance share unit award.

This award is classified as an equity award.  All payments are subject to approval by the Human Resources Committee of the Company’s Board of Directors. The performance share unit award liability is measured at its fair value at the time of grant, which, for this purpose, was the date on which the Company’s stockholders approved the 2008 Plan. A portion of the cost related to this performance share unit liability is included in the Company’s stock-based compensation expense for the three and nine months ended September 30, 2009 and 2008.

During 2007, certain employees were granted a target number of performance units as part of the Company’s 2006 long-term incentive compensation program. The target number of performance units may be increased (to a maximum of 150% of the target) or decreased (to zero) based on the Company’s TSR relative to the TSR of a market benchmark over a measurement period beginning on January 1, 2007, and ending on December 31, 2009.  Each performance unit will be settled in cash upon vesting in an amount equal to the closing price of Idearc common stock on the last trading day in the measurement period.

Dividends are not payable on performance units. However, if the Company declares and pays a dividend on Idearc common stock, dividend equivalents are granted in an amount equal to the dividend that would have been paid on an equivalent number of shares of Idearc common stock. Dividend equivalents are granted in the form of additional performance units and are subject to the same vesting, forfeiture and other terms applicable to the performance unit award.

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This award is classified as a liability award.  All payments are subject to approval by the Human Resources Committee of the Company’s Board of Directors. The performance unit award liability is measured at its fair value at the end of each reporting period and will fluctuate based on the performance of Idearc common stock and Idearc’s TSR relative to the TSR of the market benchmark.  A portion of the cost related to this performance unit liability is included in the Company’s stock-based compensation expense for the three and nine months ended September 30, 2009 and 2008.

Changes in the Company’s outstanding performance units and performance share units for the nine months ended September 30, 2009, were as follows:

Stock Options

The 2006 and 2008 Plans provide for grants of stock options. These awards are classified as equity awards.

During 2008, certain employees were granted stock option awards under the 2006 and 2008 Plans. The stock option awards vest on the third anniversary of the grant date and have a ten year term.

A stock option holder may pay the option exercise price in cash by delivering unrestricted shares to the Company having a value at the time of exercise equal to the exercise price, by a cashless broker-assisted exercise, by a combination of these methods or by any other method approved by the Human Resources Committee of the Company’s Board of Directors. Options may not be re-priced without the approval of the Company’s stockholders.

The fair value of each option award is estimated on the grant date using the Black-Scholes option pricing model.  The model incorporates assumptions regarding inputs as follows:

·                  Expected volatility is a blend of implied volatility based on market-traded options on Idearc common stock and the historical volatility of Idearc stock over its history;

·                  Expected life is based on the SEC shortcut method as described in the SEC’s guidance on the valuation of equity share option grants; and

·                  The risk-free interest rate is determined using the U.S. Treasury zero-coupon issue with a remaining term equal to the expected life of the option.

A portion of the cost related to these stock option awards is included in the Company’s stock-based compensation expense for the three and nine months ended September 30, 2009 and 2008.

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Changes in the Company’s outstanding stock option awards for the nine months ended September 30, 2009 were as follows:

The stock-based compensation expense recognized for the three and nine months ended September 30, 2009, was $1 million and $6 million, respectively. For the three and nine months ended September 30, 2008, stock-based compensation expense was $2 million and $3 million, respectively. These costs are recorded as part of general and administrative expenses in the accompanying consolidated statements of operations.

As of  September 30, 2009, unrecognized compensation expense related to the unvested portion of the Company’s restricted stock, performance units, performance share units and stock options was approximately $5 million and is expected to be recognized over a weighted-average period of approximately 1.1 years.

Note 11

Income Taxes

Income taxes for the nine months ended September 30, 2009 and 2008 have been included in the accompanying consolidated financial statements on the basis of an estimated annual effective tax rate. In determining the estimated annual effective tax rate, the Company included interest expense and the tax effect of other discrete items. The Company anticipates the effective tax rate, including interest expense and other discrete items, to approximate 29% for 2009. The full year effective tax rate for 2008 was 34.4%. The decline in the effective tax rate is primarily due to a more favorable permanent tax deduction. The Company’s effective tax rate may be subject to changes in future periods as a result of potential changes in business operations and events related to the Chapter 11 bankruptcy proceedings.

Note 12

Litigation

On March 31, 2009, (the “Petition Date”), the Company and all of its domestic subsidiaries filed voluntary petitions in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division (the “Bankruptcy Court”) seeking reorganization relief under the provisions of Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”).  These Chapter 11 cases are being jointly administered under the caption In re: Idearc Inc. et al, Case No. 09-31828 (the “Chapter 11 Case”).  The Company continues to operate its business as a debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.  As of the Petition Date, virtually all pending litigation wherein the Company or any of its domestic subsidiaries is named as a defendant is stayed as to the Company and its domestic subsidiaries, and absent further order of the Bankruptcy Court, no party, subject to certain exceptions, may take any action, also subject to certain exceptions, to recover on pre-petition claims against the Company.  At this time, it is not possible to predict the outcome of the Chapter 11 Case or its effect on our business or the actions described below.

The Company is subject to various lawsuits and other claims in the normal course of business. In addition, from time to time, the Company receives communications from government or regulatory agencies concerning investigations or allegations of noncompliance with laws or regulations in jurisdictions in which the Company operates.

The Company establishes reserves for the estimated losses on specific contingent liabilities, including the matters described below, for regulatory and legal actions where the Company deems a loss to be probable and the

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amount of the loss can be reasonably estimated. In other instances, the Company is not able to make a reasonable estimate of liability because of the uncertainties related to the outcome and/or the amount or range of loss. The Company does not expect that the ultimate resolution of pending regulatory and legal matters in future periods, including the matters described below, will have a material effect on its financial condition or results of operations.

In October 2007, the Company received a proposed assessment from the State of New York related to sales and use tax on printing and mailing charges.  The proposed assessment relates to the audit period March 1998 through May 2005. On May 5, 2008, the State of New York issued a Notice of Determination to the Company for approximately $28 million. The Company filed its response on July 25, 2008 and any further action has been stayed beyond the outcome of a related matter.  The State of New York has also filed multiple proofs of claims in the Bankruptcy Court.

In late December 2008, the Company received tax assessments from the State of Washington related to operating taxes allegedly due on the Company’s inter-company transactions.  The proposed assessments totaling approximately $12.5 million relate to the audit period January 1, 2003 through June 30, 2008.  On February 19, 2009, the Company filed appeals to these assessments.  The first hearing on the Company’s appeals was held on October 20, 2009, before a Washington administrative law judge.  The Company does not expect a ruling on its appeals before the first quarter of 2010.  The State of Washington has also filed multiple proofs of claims in the Bankruptcy Court.

The Company was served with a lawsuit on January 29, 2009, originally filed on January 13, 2009, in the U.S. District Court for the Southern District of California.  The plaintiff in this case claims that the Company used plaintiff’s copyrighted material without a license in multiple publications across the country.  Plaintiff seeks an injunction and both statutory and actual damages.  As of February 6, 2009, the time for filing a responsive pleading had not yet run. This matter has been stayed by Idearc’s petition for relief filed with the United States Bankruptcy Court on March 31, 2009.

On April 20, 2009, a lawsuit was filed in the District Court of Tarrant County, Texas, against certain of the Company’s officers and directors (but not against the Company or its subsidiaries) on behalf of Jack B. Corwin as Trustee of The Jack B. Corwin Revocable Trust, and Charitable Remainder Stewardship Company of Nevada, and as Trustee of the Jack B. Corwin 2006 Charitable Remainder Unitrust.  The suit generally alleges that at various times in 2008 and 2009, the named Company officers and directors made false and misleading representations, or failed to state material facts which made their statements misleading, regarding the Company’s financial performance and condition.  The suit brings fraud and negligent misrepresentation claims and alleges violations of the Texas Securities Act and Section 27 of the Texas Business Commerce Code.  The plaintiffs seek unspecified compensatory damages, exemplary damages, and reimbursement for litigation expenses.  On June 3, 2009, the plaintiffs filed an amended complaint with the same allegations adding two additional Company directors as party defendants.  On June 26, 2009, the Bankruptcy Court entered an injunction prohibiting the prosecution of the Corwin litigation while the Company remains in bankruptcy. The Company plans to honor its indemnification obligations and vigorously defend the lawsuit on the defendants’ behalf.