Overview

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") included herein should be read in conjunction with MD&A and the other information included in our annual report on Form 10-K for the year ended December 31, 2007. The results of operations for the nine months ended September 30, 2008 are not necessarily indicative of the results of operations which might be expected for the entire year.

We are an integrated communications company engaged primarily in providing an array of communications services to customers in 25 states. We currently derive our revenues from providing (i) local exchange and long distance voice services,
(ii) network access services, (iii) data services, which includes both high-speed ("DSL") and dial-up Internet services, as well as special access and private line services, (iv) fiber transport, competitive local exchange and security monitoring services and (v) other related services. For additional information on our revenue sources, see Note 7 to our financial statements included in Item 1 of Part I of this quarterly report.

As further discussed in Note 5, during the first nine months of 2008, we recognized an $8.2 million curtailment loss (reflected in selling, general and administrative expense) in connection with amending our Supplemental Executive Retirement Plan ("SERP"). We also recognized a $4.5 million pre-tax gain (reflected in other income (expense)) upon liquidation of our investments in marketable securities in the SERP trust in the second quarter of 2008.

In the third quarter of 2008, we recorded a one-time pre-tax gain of approximately $3.2 million related to the sale of a non-operating investment. In the third quarter of 2007, we recorded a one-time pre-tax gain of approximately $10.4 million related to the sale of our interest in a real estate partnership.

In separate transactions in May and July 2008, we sold the assets of six of our northern CLEC markets. Results of operations for these markets are included in our consolidated results of operations up to the respective sales dates.

On April 30, 2007, we acquired all of the outstanding stock of Madison River Communications Corp. ("Madison River"). See Note 2 for additional information. We have reflected the results of operations of the Madison River properties in our consolidated results of operations beginning May 1, 2007. On October 26, 2008, we entered into a definitive agreement to acquire Embarq Corporation. See Note 11.

We recognized approximately $49.0 million of network access revenues in the second quarter of 2007 in connection with the settlement of a dispute with a carrier and approximately $42.2 million of revenues in the third quarter of 2007 (of which $25.4 million is reflected in network access revenues and $16.8 million is reflected in data revenues) in connection with the lapse of a regulatory monitoring period.

Effective January 1, 2007, we changed our relationship with our provider of satellite television service from a revenue sharing arrangement to an agency relationship and, in connection therewith, we received in the second quarter of 2007 a non-recurring reimbursement of $5.9 million, of which $4.1 million was reflected as a reduction of cost of services and the remainder was reflected as revenues. This change has also resulted in us recognizing lower recurring revenues and lower recurring operating costs compared to our prior method of accounting for this arrangement.

During the last several years (exclusive of acquisitions and certain non-recurring favorable adjustments), we have experienced revenue declines in our voice and network access revenues primarily due to the loss of access lines and minutes of use. To mitigate these declines, we hope to, among other things,
(i) promote long-term relationships with our customers through bundling of integrated services, (ii) provide new services, such as video and wireless, and other additional services that may become available in the future due to advances in technology, spectrum sales or improvements in our infrastructure,
(iii) provide our premium services to a higher percentage of our customers, (iv) pursue acquisitions of additional communications properties if available at attractive prices, (v) increase usage of our networks, (vi) provide greater penetration of broadband services and (vii) market our products to new customers.

In addition to historical information, this management's discussion and analysis includes certain forward-looking statements that are based on current expectations only, and are subject to a number of risks, uncertainties and assumptions, many of which are beyond our control. Actual events and results may differ materially from those anticipated, estimated or projected if one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect. Factors that could affect actual results include but are not limited to: the timing, success and overall effects of competition from a wide variety of competitive providers; the risks inherent in rapid technological change; the effects of ongoing changes in the regulation of the communications industry (including the FCC's proposed rules regarding inter-carrier compensation and the Universal Service Fund described elsewhere herein); our ability to effectively adjust to changes in the communications industry; our ability to successfully complete our pending merger with Embarq, including timely receiving all shareholder and regulatory approvals, obtaining related financing and realizing the anticipated benefits of the transaction; our ability to effectively manage our expansion opportunities, including successfully integrating newly-acquired businesses into our operations and retaining and hiring key personnel; possible changes in the demand for, or pricing of, our products and services; our ability to successfully introduce new product or service offerings on a timely and cost-effective basis; our continued access to credit markets on favorable terms; our ability to collect our receivables from financially troubled communications companies; our ability to pay a $2.80 per common share dividend annually, which may be affected by changes in our cash requirements, capital spending plans, cash flows or financial position; our ability to successfully negotiate collective bargaining agreements on reasonable terms without work stoppages; the effects of adverse weather; other risks referenced from time to time in this report or other of our filings with the Securities and Exchange Commission; and the effects of more general factors such as changes in interest rates, in tax rates, in accounting policies or practices, in operating, medical or administrative costs, in general market, labor or economic conditions, or in legislation, regulation or public policy. These and other uncertainties related to the business and our plans are described in greater detail in Item 1A to our Form 10-K for the year ended December 31, 2007, as updated and supplemented by our subsequent SEC reports, including Item 1A to this report. You should be aware that new factors may emerge from time to time and it is not possible for us to identify all such factors nor can we predict the impact of each such factor on the business or the extent to which any one or more factors may cause actual results to differ from those reflected in any forward-looking statements. You are further cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to update any of our forward-looking statements for any reason.

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

Net income was $84.7 million and $113.2 million for the third quarter of 2008 and 2007, respectively. Diluted earnings per share for the third quarter of 2008 and 2007 was $.84 and $1.01, respectively. We recorded $42.2 million of non-recurring operating revenues in third quarter 2007 upon expiration of a regulatory monitoring period. The decline in the number of average diluted shares outstanding is attributable to share repurchases that have occurred since the beginning of the third quarter of 2007.

                                                   Three months
                                                ended September 30,
                                            2008                    2007
                                        (Dollars, except per share amounts,
                                             and shares in thousands)

Operating income                     $          180,727                224,185
Interest expense                                (49,483 )              (55,176 )
Other income (expense)                            4,113                 14,761
Income tax expense                              (50,624 )              (70,568 )
Net income                           $           84,733                113,202

Basic earnings per share             $              .84                   1.04

Diluted earnings per share                          .84                   1.01

Average basic shares outstanding                100,402                108,996

Average diluted shares outstanding              100,988                112,229

Operating income decreased $43.5 million (19.4%) as a $58.8 million (8.3%) decrease in operating revenues was partially offset by a $15.3 million (3.2%) decrease in operating expenses.

Operating Revenues

                                  Three months
                               ended September 30,
                               2008            2007
                             (Dollars in thousands)

Voice                      $     218,253       229,862
Network access                   205,385       248,490
Data                             132,631       134,630
Fiber transport and CLEC          38,006        41,811
Other                             55,798        54,040
                           $     650,073       708,833

The $11.6 million (5.1%) decrease in voice revenues was primarily attributable to (i) a $5.7 million decrease due to a 5.8% decline in the average number of access lines; (ii) a $2.8 million decrease in custom calling feature revenues primarily due to the continued migration to bundled service offerings at a lower effective rate; and (iii) a $2.3 million decline as a result of a decrease in revenues associated with extended area calling plans.

Access lines declined 35,900 (1.7%) during the third quarter of 2008 (which includes disconnecting approximately 1,400 Madison River internal lines) compared to a decline of 34,400 (1.6%) during the third quarter of 2007. We believe the decline in the number of access lines during 2008 and 2007 is primarily due to the displacement of traditional wireline telephone services by other competitive services. We are targeting our access line loss to be between 5.5% and 6.5% for the full year 2008.

Network access revenues decreased $43.1 million (17.3%) in the third quarter of 2008 primarily due to (i) $25.4 million of one-time revenue recorded in third quarter 2007 upon expiration of the previously mentioned regulatory monitoring period; (ii) a $9.4 million decrease as a result of lower intrastate revenues due to a reduction in intrastate minutes (principally due to the loss of access lines and the displacement of minutes by wireless, electronic mail and other optional calling services); (iii) a $4.8 million decrease in the partial recovery of lower operating costs through revenue sharing arrangements and return on rate base; and (iv) a $2.7 million reduction in revenues from the federal Universal Service Fund primarily due to an increase in the nationwide average cost per loop factor used by the Federal Communications Commission to allocate funds among all recipients. We believe that intrastate minutes will continue to decline in 2008, although we cannot precisely estimate the magnitude of such decrease.

Data revenues decreased $2.0 million (1.5%) substantially due to $16.8 million of one-time revenue recorded in third quarter 2007 upon expiration of the previously mentioned regulatory monitoring period. Such decrease was partially offset by a $14.3 million increase in DSL-related revenues primarily due to growth in the number of DSL customers.

Fiber transport and CLEC revenues decreased $3.8 million (9.1%), of which $2.4 million was due to a decrease in CLEC revenues due to various billing disputes with certain carriers and $1.1 million was due to the sales of six CLEC markets that were consummated in the second and third quarters of 2008.

Operating Expenses

                                                                      Three months
                                                                   ended September 30,
                                                                   2008            2007
                                                                 (Dollars in thousands)

Cost of services and products (exclusive of depreciation and
amortization)                                                  $     242,243       246,430
Selling, general and administrative                                   98,751       101,612
Depreciation and amortization                                        128,352       136,606
                                                               $     469,346       484,648

Cost of services and products decreased $4.2 million (1.7%) primarily due a $5.2 million decrease in salaries and benefits and a $3.0 million decrease in expenses associated with our CLEC operations primarily due to the sales of six markets in 2008. Such decreases were partially offset by a $4.7 million increase in DSL-related expenses due to growth in the number of DSL customers.

Selling, general and administrative expenses decreased $2.9 million (2.8%) primarily due to a $2.9 million decrease in salaries and benefits.

Depreciation and amortization decreased $8.3 million (6.0%) primarily due to a $9.8 million reduction in depreciation expense due to certain assets becoming fully depreciated. Such decrease was partially offset by a $2.7 million increase due to higher levels of plant in service.

Interest Expense

Interest expense decreased $5.7 million (10.3%) in the third quarter of 2008 compared to the third quarter of 2007 primarily due to a $5.9 million decrease due to lower average interest rates.

Other Income (Expense)

Other income (expense) includes the effects of certain items not directly related to our core operations, including gains and losses from nonoperating asset dispositions and impairments, our share of income from our 49% interest in a cellular partnership, interest income and allowance for funds used during construction. Other income (expense) was $4.1 million for the third quarter of 2008 compared to $14.8 million for the third quarter of 2007. The third quarter of 2008 included a $3.2 million pre-tax gain related to the sale of a non-operating investment. The third quarter of 2007 included a pre-tax gain of approximately $10.4 million related to the sale of our interest in a real estate partnership.

Our share of income from our 49% interest in a cellular partnership decreased $1.9 million during the third quarter of 2008 compared to the third quarter of 2007. Such decrease was primarily due to unfavorable adjustments recorded in the third quarter of 2008 by the unaffiliated general partner upon completion of the audited financial statements of the partnership for the year ended December 31, 2007. We had previously recorded our share of the partnership income based on unaudited results of operations.

Income Tax Expense

The effective income tax rate was 37.4% and 38.4% for the three months ended September 30, 2008 and 2007, respectively.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Net income was $265.7 million and $303.3 million for the first nine months of 2008 and 2007, respectively. Diluted earnings per share for the first nine months of 2008 and 2007 was $2.55 and $2.68, respectively. We recorded an aggregate of $91.2 million of one-time operating revenues in 2007 (of which $49.0 million related to the settlement of a dispute with a carrier and $42.2 million related to the expiration of the above-described regulatory monitoring period). The decline in the number of average diluted shares outstanding is attributable to share repurchases that have occurred since the beginning of 2007.

Results of operations for the nine months ended September 30, 2007 include only five months of operations from our Madison River properties acquired April 30, 2007.

                                                    Nine months
                                                ended September 30,
                                           2008                    2007
                                        (Dollars, except per share amounts,
                                             and shares in thousands)

Operating income                     $         544,910                 624,104
Interest expense                              (148,771 )              (159,804 )
Other income (expense)                          25,437                  28,131
Income tax expense                            (155,916 )              (189,094 )
Net income                           $         265,660                 303,337

Basic earnings per share             $            2.57                    2.77

Diluted earnings per share           $            2.55                    2.68

Average basic shares outstanding               103,396                 109,478

Average diluted shares outstanding             104,086                 114,086

Operating income decreased $79.2 million (12.7%) due to a $42.9 million (2.1%) decrease in operating revenues and a $36.3 million (2.6%) increase in operating expenses.

Operating Revenues

                                   Nine months
                               ended September 30,
                              2008            2007
                             (Dollars in thousands)

Voice                      $   658,634         664,435
Network access                 621,987         726,091
Data                           390,463         338,700
Fiber transport and CLEC       120,805         120,851
Other                          164,904         149,602
                           $ 1,956,793       1,999,679

The $5.8 million (.9%) decrease in voice revenues is primarily due to (i) a $16.0 million decrease due to a 5.8% decline in the average number of access lines (exclusive of our Madison River properties); (ii) a $7.8 million decrease in custom calling feature revenues primarily due to the continued migration to bundled service offerings at a lower effective rate; and (iii) a $5.7 million decline as a result of a decrease in revenues associated with extended area calling plans. Such decreases were partially offset by $18.5 million of additional revenues attributable to the Madison River properties acquired April 30, 2007 and a $7.0 million increase in long distance revenues attributable to an increase in the percentage of our customer base on fixed rate unlimited calling plans and the implementation of rate increases on several rate plans in late 2007 and early 2008.

Access lines declined 93,900 (4.4%) during the first nine months of 2008 (inclusive of Madison River) compared to a decline of 85,600 (4.1%) during the first nine months of 2007 (exclusive of Madison River). We believe the decline in the number of access lines during 2008 and 2007 is primarily due to the displacement of traditional wireline telephone services by other competitive services. We are targeting our access line loss to be between 5.5% and 6.5% for the full year 2008.

Network access revenues decreased $104.1 million (14.3%) in the first nine months of 2008 primarily due to (i) the $49.0 million of one-time revenue recorded in second quarter 2007 upon settlement of a dispute with a carrier;
(ii) $25.4 million of one-time revenues recorded in third quarter 2007 upon expiration of the previously described regulatory monitoring period; (iii) a $22.3 million decrease as a result of lower intrastate revenues due to a reduction in intrastate minutes (principally due to the loss of access lines and the displacement of minutes by wireless, electronic mail and other optional calling services); (iv) an $11.1 million decrease in the partial recovery of lower operating costs through revenue sharing arrangements and return on rate base; and (v) a $10.7 million reduction in revenues from the federal Universal Service Fund primarily due to an increase in the nationwide average cost per loop factor used by the Federal Communications Commission to allocate funds among all recipients. Such decreases were partially offset by $14.3 million of additional revenues contributed by Madison River. We believe that intrastate minutes will continue to decline in 2008, although we cannot precisely estimate the magnitude of such decrease.

Data revenues increased $51.8 million (15.3%) substantially due to (i) a $46.6 million increase in DSL-related revenues primarily due to growth in the number of DSL customers and (ii) $17.7 million of additional revenues contributed by Madison River. Such increases were partially offset by $16.8 million of one-time revenues recorded in third quarter 2007 upon expiration of the previously described regulatory monitoring period.

Fiber transport and CLEC revenues remained flat as a $2.1 million decrease in CLEC revenues due to customer disconnects was substantially offset by $2.1 million of additional revenues contributed by Madison River.

Other revenues increased $15.3 million (10.2%) primarily due to (i) $8.2 million of additional revenues contributed by Madison River; (ii) a $1.5 million increase in directory revenues (primarily due to unfavorable prior year settlements in 2007); and (iii) a $1.3 million increase in nonrecurring revenues due to prior year settlements in 2008.

Operating Expenses

                                                                       Nine months
                                                                   ended September 30,
                                                                  2008            2007
                                                                 (Dollars in thousands)

Cost of services and products (exclusive of depreciation and
amortization)                                                  $   719,681         686,349
Selling, general and administrative                                297,212         290,525
Depreciation and amortization                                      394,990         398,701
                                                               $ 1,411,883       1,375,575

Cost of services and products increased $33.3 million (4.9%) primarily due to
(i) $25.3 million of additional costs incurred by the Madison River properties;
(ii) a $10.1 million increase in DSL-related expenses due to growth in the number of DSL customers; and (iii) a $4.1 million increase due to a one-time reimbursement of costs received from our satellite television service provider in the second quarter of 2007 in connection with the change in our arrangement, as mentioned above. Such increases were partially offset by a $3.5 million decrease in salaries and benefits.

Selling, general and administrative expenses increased $6.7 million (2.3%) due to (i) an $11.8 million increase in marketing expenses; (ii) an $8.2 million increase due to expenses related to the curtailment loss associated with our SERP; and (iii) $7.0 million of additional costs incurred by Madison River. Such increases were partially offset by (i) a $5.2 million decrease in operating taxes; (ii) a $5.0 million decrease in bad debt expense (most of which is attributable to a favorable settlement with a carrier in first quarter 2008);
(iii) a $4.8 million decrease in salaries and benefits; and (iv) a $2.1 million decrease in information technology expenses.

Depreciation and amortization decreased $3.7 million (.9%) primarily due to a $27.6 million reduction in depreciation expense due to certain assets becoming fully depreciated. Such decrease was partially offset by $14.9 million of additional depreciation and amortization incurred by Madison River and a $9.7 million increase due to higher levels of plant in service.

Interest Expense

Interest expense decreased $11.0 million (6.9%) in the first nine months of 2008 compared to the first nine months of 2007. A $13.8 million decrease due to lower average interest rates was partially offset by a $4.0 million increase due to increased average debt outstanding (primarily due to the $750 million of senior notes issued in March 2007 to fund the Madison River acquisition).

Other Income (Expense)

Other income (expense) includes the effects of certain items not directly related to our core operations, including gains and losses from nonoperating asset dispositions and impairments, our share of income from our 49% interest in a cellular partnership, interest income and allowance for funds used during construction. Other income (expense) was $25.4 million for the first nine months of 2008 compared to $28.1 million for the first nine months of 2007. Included in 2008 income are aggregate pre-tax gains of approximately $7.3 million from the sales of certain non-operating investments and a $4.5 million gain realized upon liquidation of our investments in marketable securities in our SERP trust. Also included in 2008 is a $3.4 million pre-tax charge related to terminating all of our existing derivative instruments. The first nine months of 2007 included a non-recurring pre-tax gain of $10.4 million related to the sale of our interest in a real estate partnership.

Income Tax Expense

The effective income tax rate was 37.0% and 38.4% for the nine months ended September 30, 2008 and 2007, respectively. We recorded a tax benefit of approximately $1.8 million in the first nine months of 2008 due to the resolution of certain income tax audit issues.

Excluding cash used for acquisitions, we rely on cash provided by operations to fund our operating and capital expenditures. Our operations have historically provided a stable source of cash flow which has helped us continue our long-term program of capital improvements.

The recent disruption in the credit markets has had a significant adverse impact on a number of financial institutions. To date, our liquidity has not been materially impacted by the current credit environment and we do not expect that it will materially impact us in the near future. To mitigate any potential adverse impact, during the third quarter of 2008 we borrowed funds under our existing credit facility to provide us with sufficient cash to meet our upcoming cash requirements through the end of 2008, including our fourth quarter 2008 dividend payment. We will continue to closely monitor our liquidity and the credit markets; however, we cannot predict with certainty the impact to us of any further disruption in the overall credit markets.

Net cash provided by operating activities was $667.2 million during the first nine months of 2008 compared to $789.4 million during the first nine months of 2007. Payments for income taxes aggregated $172.1 million and $115.2 million in the first nine months of 2008 and 2007, respectively. Our accompanying consolidated statements of cash flows identify major differences between net income and net cash provided by operating activities for each of these periods. For additional information relating to our operations, see Results of Operations.

Net cash used in investing activities was $286.8 million and $482.4 million for the nine months ended September 30, 2008 and 2007, respectively. We used $306.8 million of cash (net of cash acquired) to purchase Madison River Communications . . .