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, 2008. The results of operations for the three months ended March 31, 2009 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 high-speed Internet service ("DSL"), 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 8.

On October 26, 2008, we entered into a definitive merger agreement to acquire Embarq Corporation ("EMBARQ") in a stock-for-stock transaction. Under the terms of the agreement, EMBARQ shareholders will receive 1.37 CenturyTel shares for each share of EMBARQ common stock they own at closing. On December 31, 2008, EMBARQ had outstanding approximately 142.4 million shares of common stock and $5.7 billion of long-term debt. As of December 31, 2008, the two companies had a combined operating presence in 33 states with approximately 7.7 million access lines and two million broadband customers. Completion of the transaction is subject to the receipt of regulatory approvals, including approvals from the Federal Communications Commission and certain state public service commissions, as well as other customary closing conditions. Subject to these conditions, we anticipate closing this transaction in the second quarter of 2009. During the first quarter of 2009, we incurred approximately $6.9 million of acquisition related costs associated with our pending acquisition of EMBARQ. Such costs are reflected in selling, general and administrative expense in our first quarter 2009 consolidated statement of income. As discussed in Note 11, during the first quarter of 2009 we incurred an $8.0 million pre-tax charge (which is reflected in Other income (expense)) associated with our $800 million bridge facility that we obtained in connection with entering into the EMBARQ merger agreement.

As discussed further in Note 5, upon the payment of lump sum distributions in early 2009 related to our Supplemental Executive Retirement Plan, we recognized a settlement loss of approximately $7.7 million in the first quarter of 2009 (such amount is reflected in selling, general and administrative expense). In addition, due to Internal Revenue Code Section 162(m) limitations, a portion of the lump sum distributions made in the first quarter of 2009 are not deductible for income tax purposes and thus increased our effective income tax rate. Such increase in our effective tax rate was partially offset by a reduction to our deferred tax asset valuation allowance associated with state net operating loss carryforwards. See "Income Tax Expense" below for additional information.

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. In an attempt 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 broadband, and other additional services that may become available in the future due to advances in technology, wireless spectrum sales by the Federal Communications Commission or improvements in our infrastructure, (iii) provide our broadband and 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 and (vi) 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 intercarrier compensation and the Universal Service Fund described in our prior filings with the Securities and Exchange Commission ("SEC")); 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 regulatory approvals 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 SEC; 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 our business and our pending acquisition of EMBARQ are described in greater detail in Item 1A to our Form 10-K for the year ended December 31, 2008, as updated and supplemented by our subsequent SEC reports. 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 March 31, 2009 Compared to Three Months Ended March 31, 2008

Net income attributable to CenturyTel, Inc. was $67.2 million and $88.8 million for the first quarter of 2009 and 2008, respectively. Diluted earnings per share for the first quarter of 2009 and 2008 was $.67 and $.82, respectively. The decline in the number of average diluted shares outstanding is primarily attributable to share repurchases after March 31, 2008.

                                                                      Three months
                                                                     ended March 31,
                                                                  2009             2008
                                                               (Dollars, except per share
                                                                        amounts,
                                                                and shares in thousands)

Operating income                                               $  164,337          183,493
Interest expense                                                  (52,032 )        (50,122 )
Other income (expense)                                             (1,818 )          8,663
Income tax expense                                                (43,107 )        (53,028 )
Net income                                                         67,380           89,006
Less: Net income attributable to noncontrolling interests            (226 )           (246 )
Net income attributable to CenturyTel, Inc.                    $   67,154           88,760

Basic earnings per share                                       $      .67              .83

Diluted earnings per share                                     $      .67              .82

Average basic shares outstanding                                   99,126          106,142

Average diluted shares outstanding                                 99,144          106,675

Operating income decreased $19.2 million (10.4%) due to a $12.2 million (1.9%) decrease in operating revenues and a $6.9 million (1.5%) increase in operating expenses.

Operating Revenues

                                  Three months
                                 ended March 31,
                               2009            2008
                             (Dollars in thousands)

Voice                      $    209,918        220,480
Network access                  192,844        208,698
Data                            139,937        126,772
Fiber transport and CLEC         41,498         39,633
Other                            52,188         53,031
                           $    636,385        648,614

The $10.6 million (4.8%) decrease in voice revenues is primarily due to (i) a $7.3 million decrease due to a 6.5% decline in the average number of access lines and (ii) a $3.1 million decrease in custom calling feature revenues primarily due to the continued migration of customers to bundled service offerings at a lower effective rate.

Access lines declined 31,700 (1.6%) during the first quarter of 2009 compared to a decline of 27,400 (1.3%) during the first quarter of 2008. We believe the decline in the number of access lines during 2009 and 2008 is primarily due to the displacement of traditional wireline telephone services by other competitive services and recent economic conditions. Based on our current retention initiatives, we estimate that our access line loss will be between 5.7% and 6.7% in 2009.

Network access revenues decreased $15.9 million (7.6%) in the first quarter of 2009 primarily due to (i) an $8.9 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); (ii) a $3.9 million decrease in interstate revenues primarily due to the partial recovery of lower operating costs through revenue sharing arrangements and return on rate base; and (iii) a $3.5 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 2009, although we cannot precisely estimate the magnitude of such decrease.

Data revenues increased $13.2 million (10.4%) substantially due to an $11.0 million increase in DSL-related revenues primarily due to growth in the number of DSL customers.

Fiber transport and CLEC revenues increased $1.9 million (4.7%) primarily due to a $3.2 million increase in revenues of our incumbent fiber transport business. Such increase was partially offset by a $1.5 million decrease in CLEC revenues due to the sales of six CLEC markets that were consummated in the second and third quarters of 2008.

Other revenues decreased $843,000 (1.6%) primarily due to a $1.3 million decrease in directory revenues.

Operating Expenses

                                                                      Three months
                                                                     ended March 31,
                                                                   2009            2008
                                                                 (Dollars in thousands)

Cost of services and products (exclusive of depreciation and
amortization)                                                  $    234,631        237,812
Selling, general and administrative                                 109,845         91,625
Depreciation and amortization                                       127,572        135,684
                                                               $    472,048        465,121

Cost of services and products decreased $3.2 million (1.3%) primarily due to a $3.3 million decrease in plant operations expenses primarily due to lower maintenance and repairs costs and a $2.4 million decrease in CLEC expenses primarily due to a reduction in costs due to the above-described sale of six CLEC markets. Such decreases were partially offset by a $4.0 million increase in DSL-related expenses due to growth in the number of DSL customers.

Selling, general and administrative expenses increased $18.2 million (19.9%) primarily due to (i) a $7.7 million settlement charge related to our Supplemental Executive Retirement Plan (see Note 5); (ii) $6.9 million of acquisition related costs associated with our pending acquisition of EMBARQ and
(iii) a $4.9 million increase in bad debt expense.

Depreciation and amortization decreased $8.1 million (6.0%) primarily due a $10.6 million reduction in depreciation expense due to certain assets becoming fully depreciated. Such decrease was partially offset by a $4.2 million increase due to higher levels of plant in service.

Interest Expense

Interest expense increased $1.9 million (3.8%) in the first quarter of 2009 compared to the first quarter of 2008 primarily due to a $3.8 million increase as a result of an increase in average debt outstanding which was partially offset by a $1.4 million reduction 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 $(1.8) million for the first quarter of 2009 compared to $8.7 million for the first quarter of 2008. Included in the first quarter of 2009 is an $8.0 million charge associated with our $800 million bridge credit facility (see Note 11 for additional information). Included in the first quarter of 2008 is a pre-tax gain of approximately $4.1 million from the sale of a nonoperating investment and a $3.4 million pre-tax charge related to terminating all of our existing derivative instruments in the first quarter of 2008. Our share of income from our 49% interest in a cellular partnership increased $1.4 million in first quarter 2009 compared to first quarter 2008.

Income Tax Expense

Our effective income tax rate was 39.1% and 37.4% for the three months ended March 31, 2009 and March 31, 2008, respectively. The lump sum distributions attributable to certain executive officers that were made in connection with discontinuing the Supplemental Executive Retirement Plan (see Note 5) are non-deductible for income tax purposes pursuant to Internal Revenue Code Section 162(m) limitations. Such treatment resulted in the recognition of approximately $6.7 million of income tax expense in the first quarter of 2009 above amounts that would have been recognized had such payments been deductible for income tax purposes. Such increase in income tax expense was partially offset by a $5.8 million reduction in income tax expense caused by a reduction to our deferred tax asset valuation allowance associated with state net operating loss carryforwards due to a law change in one of our operating states that we believe will allow us to utilize our net operating loss carryforwards in the future. Prior to the law change, such net operating loss carryforwards were fully reserved as it was more likely than not that these carryforwards would not be utilized prior to expiration.

Excluding cash used for acquisitions, we rely on cash provided by operations to fund our operating and capital expenditures. During the last few months of 2008, we borrowed against our long-term revolving credit facility and held excess cash to provide us flexibility in the challenging economic environment. As a result, our working capital position was positive as of December 31, 2008. During the first quarter of 2009, we repaid a portion of these borrowings which has resulted in a negative working capital position as of March 31, 2009, which is more representative of our typical working capital position. Our operations have historically provided a stable source of cash flow which has helped us continue our long-term program of capital improvements.

Net cash provided by operating activities was $230.2 million during both the first three months of 2009 and the first three months of 2008. Payments for income taxes decreased from $44.2 million during the first three months of 2008 to $851,000 during the first three months of 2009 due to overpayments of 2008 taxes that enabled us to lower our first quarter 2009 estimated tax payments. The lump sum distributions associated with the discontinuance of the Supplemental Executive Retirement Plan were paid in early 2009 and aggregated approximately $37 million. 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 $45.4 million and $76.3 million for the three months ended March 31, 2009 and 2008, respectively. Payments for property, plant and equipment were $45.5 million in the first quarter of 2009 and $54.7 million in the first quarter of 2008. Included in our first quarter 2009 capital expenditures was approximately $6.4 million related to the integration of EMBARQ. Our budgeted capital expenditures for 2009 are expected to be between $280-300 million, excluding nonrecurring capital expenditures expected to arise out of our pending EMBARQ acquisition.

During 2008, we paid an aggregate of approximately $149 million (of which $25 million was paid as a deposit in the first quarter of 2008 and the remainder was paid in April 2008) for 69 licenses in the Federal Communications Commission's ("FCC") auction of 700 megahertz ("MHz") wireless spectrum. The 700 MHz spectrum is not expected to be cleared for usage until mid-2009. We are still in the planning stages regarding the use of this spectrum. However, based on our preliminary analysis, we are considering developing wireless voice and data service capabilities based on equipment using LTE (Long-Term Evolution) technology. Given that this equipment is not expected to be commercially available until 2010, we do not expect our deployment to result in any material impact to our capital and operating budgets for 2009.

Net cash used in financing activities was $366.9 million during the first three months of 2009 compared to $150.8 million during the first three months of 2008. We made $292.0 million of debt payments (substantially all of which related to our revolving credit facility) in the first quarter of 2009 primarily from cash on hand. In the first quarter of 2008, we paid our $240 million Series F Senior Notes at maturity primarily using borrowings from our credit facility. In accordance with previously announced stock repurchase programs, we repurchased 2.6 million shares (for $95.6 million) in the first quarter of 2008. We have suspended our current share repurchase program pending completion of our acquisition of EMBARQ.

In June 2008, our Board of Directors determined to (i) increase our annual cash dividend to $2.80 from $.27 per share and (ii) declare a one-time dividend of $.6325 per share, which was paid in July 2008, effectively adjusting the total second quarter dividend to the new $.70 quarterly dividend rate. We plan to continue our current dividend practice through the consummation of the EMBARQ merger. Following the closing of the EMBARQ merger, we expect to continue our current dividend practice and resume share repurchases, subject to our intention to maintain investment grade credit ratings on our senior debt and any other factors that our board in its discretion deems relevant.

In the first quarter of 2008, we received a net cash settlement of approximately $20.7 million from the termination of all of our existing derivative instruments. See "Market Risk" below for additional information concerning the termination of these derivatives.

During 2008, we suffered a substantial loss on our pension plan assets. If our actual return on plan assets continues to be lower than our assumed rate of return, we will be required to contribute additional funds to our pension plan after 2009. For further information, see Part I, Item 3, of this report.

As discussed in Note 2, we have entered into a definitive agreement to merge with Embarq Corporation. Assuming we timely receive all regulatory approvals (and all other closing conditions are met), we hope to consummate the merger in the second quarter of 2009. In connection with the closing, we intend to finance our merger transaction expenses with (i) available cash of the combined company and (ii) proceeds from CenturyTel's or EMBARQ's existing revolving credit facilities. As previously announced, EMBARQ amended its credit facility in January 2009 to enable the facility to remain in place as an $800 million unsecured revolving credit facility after the completion of the pending merger through May 2011. The amendment will take effect only upon the completion of the merger and the satisfaction of certain other conditions specified in the amendment. See Note 11 for additional information.

We have available a five-year, $728 million revolving credit facility which expires in December 2011. Up to $150 million of the credit facility can be used for letters of credit, which reduces the amount available for other extensions of credit. Available borrowings under our credit facility are also effectively reduced by any outstanding borrowings under our commercial paper program. Our commercial paper program borrowings are effectively limited to the total amount available under our credit facility. As of March 31, 2009, we had approximately $276 million outstanding under our credit facility and no amounts outstanding under our commercial paper program.

Accounting for the Effects of Regulation

We currently account for our regulated telephone operations (except for the properties acquired from Verizon in 2002) in accordance with the provisions of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" ("SFAS 71"). Actions by regulators can provide reasonable assurance of the recognition of an asset, reduce or eliminate the value of an asset and impose a liability on a regulated enterprise. Such regulatory assets and liabilities are required to be recorded and, accordingly, reflected in the balance sheet of an entity subject to SFAS 71. We continuously monitor the ongoing applicability of SFAS 71 to our regulated telephone operations due to the changing regulatory, competitive and legislative environments. As of March 31, 2009, we believe that SFAS 71 still applies.

In September 2008, we filed a petition with the FCC to convert our remaining rate-of-return study areas to price cap regulation and, to the extent necessary, requested limited waivers of certain pricing and universal service high-cost support rules related to our election. Such petition to convert to price cap regulation was approved in April 2009 and will be effective as of July 1, 2009. As a result, we plan to discontinue the accounting requirements of SFAS 71 as of July 1, 2009. We are currently evaluating whether our pending EMBARQ acquisition would require us to discontinue the accounting requirements of SFAS 71 as of the merger closing date if that date precedes July 1, 2009.

Upon the discontinuance of SFAS 71, implementation of Statement of Financial Accounting Standards No. 101 ("SFAS 101"), "Regulated Enterprises - Accounting for the Discontinuance of Application of FASB Statement No. 71," will require the write-off of previously established regulatory assets and liabilities. Depreciation rates of certain assets established by regulatory authorities for our telephone operations subject to SFAS 71 have historically included a component for removal costs in excess of the related salvage value. Notwithstanding the adoption of Statement of Financial Accounting Standards No. 143 "Accounting for Asset Retirement Obligations" ("SFAS 143"), SFAS 71 requires us to continue to reflect this accumulated liability for removal costs in excess of salvage value even though there is no legal obligation to remove the assets. Therefore, we did not adopt the provisions of SFAS 143 for our telephone operations subject to SFAS 71. SFAS 101 further provides that the carrying amounts of property, plant and equipment are to be adjusted only to the extent the assets are impaired and that impairment shall be judged in the same manner as for nonregulated enterprises.

Our consolidated balance sheet as of March 31, 2009 included regulatory liabilities of approximately $220 million related to estimated removal costs embedded in accumulated depreciation (as described above). Upon the discontinuance of SFAS 71, such amount (on an after-tax basis) will be reflected as an extraordinary gain on our consolidated statement of income for the period in which the discontinuance takes effect.

When our regulated operations cease to qualify for the application of SFAS 71, we do not expect to record an impairment charge related to the carrying value of the property, plant and equipment of our regulated telephone operations. Additionally, upon the discontinuance of SFAS 71, we will be required to revise the lives of our property, plant and equipment to reflect the estimated useful lives of the assets. We do not expect such revisions in asset lives, or the elimination of other regulatory assets and liabilities, to have a material unfavorable impact on our results of operations. Upon the discontinuance of SFAS 71, we also will be required to eliminate certain intercompany transactions with regulated affiliates that currently are not eliminated under the application of SFAS 71. For the first quarter of 2009, approximately $53 million of revenues (and an equal amount of corresponding costs) would have been eliminated had we not been subject to the provisions of SFAS 71. For regulatory purposes, the accounting and reporting of our telephone subsidiaries will not be affected by the discontinued application of SFAS 71.

Item 3.
CenturyTel, Inc.

We are exposed to market risk from changes in interest rates on our long-term debt obligations. We have estimated our market risk using sensitivity analysis. Market risk is defined as the potential change in the fair value of a fixed-rate debt obligation due to a hypothetical adverse change in interest rates. Fair value on long-term debt obligations is determined based on a . . .