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, 2008. The results of operations for the three months and six months ended June 30, 2009 are not necessarily indicative of the results of operations which might be expected for the entire year.

On July 1, 2009, we merged with Embarq Corporation in a transaction that substantially expanded the size and scope of our business. As a result of this merger, we are now an integrated communications company primarily engaged in providing an array of communications services in 33 states, including local and long distance voice, data, Internet access, broadband, and satellite video services. In certain local and regional markets, we also sell communications equipment and provide fiber transport, competitive local exchange carrier, security monitoring, and other communications, professional and business information services. We operate approximately 7.3 million access lines and serve approximately 2.1 million broadband customers, based on operating data as of June 30, 2009. For additional information on our legacy revenue sources prior to the merger, see Note 8. For additional information on the merger, see Note 2. For additional information on Embarq Corporation, which is now our wholly-owned subsidiary, see the periodic reports filed by it with the Securities and Exchange Commission.

During the second quarter and first six months of 2009, we incurred approximately $22.5 million and $29.4 million of acquisition related costs associated with our acquisition of Embarq. Such costs are reflected in selling, general and administrative expense in our second quarter and six months ended June 30, 2009 consolidated statements of income. As discussed in Note 2, 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 currently being reflected as non-deductible for income tax purposes and thus increased our effective income tax rate. See Note 7 for additional information. Certain merger related costs incurred during the first six months of 2009 are also non-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 (the "FCC") 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 integrate Embarq into our operations, including realizing the anticipated benefits of the transaction and retaining and hiring key personnel; our ability to effectively manage our expansion opportunities; 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; unanticipated increases in our capital expenditures; 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 acquisition of Embarq are described in greater detail in Item 1A of Part II of 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 June 30, 2009 Compared to Three Months Ended June 30, 2008

Net income attributable to CenturyTel, Inc. was $69.0 million and $92.2 million for the second quarter of 2009 and 2008, respectively. Diluted earnings per share for the first quarter of 2009 and 2008 was $.68 and $.88, respectively. The decline in the number of average diluted shares outstanding is primarily attributable to share repurchases subsequent to June 30, 2008.

Three months ended June 30, 2009 2008 (Dollars, except per share amounts, and shares in thousands)

Operating income                                               $  149,443          180,690
Interest expense                                                  (44,937 )        (49,166 )
Other income (expense)                                              7,635           13,204
Income tax expense                                                (42,813 )        (52,264 )
Net income                                                         69,328           92,464
Less: Net income attributable to noncontrolling interests            (298 )           (297 )
Net income attributable to CenturyTel, Inc.                    $   69,030           92,167

Basic earnings per share                                       $      .68              .88

Diluted earnings per share                                     $      .68              .88

Average basic shares outstanding                                   99,414          103,644

Average diluted shares outstanding                                 99,450          103,999

Operating income decreased $31.2 million (17.3%) due to a $23.6 million (3.6%) decrease in operating revenues and a $7.6 million (1.6%) increase in operating expenses.

Operating Revenues

                                  Three months
                                 ended June 30,
                               2009            2008
                             (Dollars in thousands)

Voice                      $    207,603        219,901
Network access                  190,366        207,904
Data                            142,923        131,060
Fiber transport and CLEC         41,764         43,166
Other                            51,813         56,075
                           $    634,469        658,106

The $12.3 million (5.6%) decrease in voice revenues is primarily due to (i) an $8.0 million decrease due to a 6.8% decline in the average number of access lines and (ii) a $3.4 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 33,500 during the second quarter of 2009 compared to a decline of 30,600 during the second 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 330,000 and 380,000 lines for the last half of 2009 (including anticipated access line loss from the Embarq properties acquired on July 1, 2009).

Network access revenues decreased $17.5 million (8.4%) in the second quarter of 2009 primarily due to (i) a $7.7 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 $4.1 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 $3.2 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 $11.9 million (9.1%) substantially due to an $11.6 million increase in DSL-related revenues primarily due to growth in the number of DSL customers.

Fiber transport and CLEC revenues decreased $1.4 million (3.2%) primarily due to
(i) a $1.6 million decrease in CLEC revenues due to the divestiture of six CLEC markets that were consummated in the second and third quarters of 2008 and (ii) a $1.2 million decrease due to CLEC customer disconnects. Such decreases were partially offset by a $2.0 million increase in revenues of our incumbent fiber transport business.

Other revenues decreased $4.3 million (7.6%) primarily due to a decrease in certain non-regulated product sales and service offerings.

Operating Expenses

                                                                      Three months
                                                                     ended June 30,
                                                                   2009            2008
                                                                 (Dollars in thousands)

Cost of services and products (exclusive of depreciation and
amortization)                                                  $    235,732        239,626
Selling, general and administrative                                 120,742        106,836
Depreciation and amortization                                       128,552        130,954
                                                               $    485,026        477,416

Cost of services and products decreased $3.9 million (1.6%) primarily due to (i) a $2.8 million decrease in CLEC expenses primarily due to a reduction in costs due to the above-described divestiture of six CLEC markets, (ii) a $2.4 million decrease in plant operations expenses primarily due to lower maintenance and repairs costs and (iii) a $2.4 million decrease in access expense. Such decreases were partially offset by a $6.2 million increase in DSL-related expenses due to growth in the number of DSL customers.
Selling, general and administrative expenses increased $13.9 million (13.0%) primarily due to $22.5 million of acquisition related costs associated with our acquisition of Embarq. Such increase was partially offset by (i) a $7.7 million curtailment loss recorded in the second quarter of 2008 related to our Supplemental Executive Retirement Plan (see Note 5) and (ii) a $2.6 million decrease in marketing expenses.

Depreciation and amortization decreased $2.4 million (1.8%) primarily due a $7.1 million reduction in depreciation expense due to certain assets becoming fully depreciated. Such decrease was partially offset by a $4.9 million increase due to higher levels of plant in service.

Interest Expense

Interest expense decreased $4.2 million (8.6%) in the second quarter of 2009 compared to the second quarter of 2008 primarily due to a $1.7 million decrease due to the favorable resolution of transaction tax audit issues, a $1.3 million decrease as a result of a decrease in average debt outstanding and a $1.2 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 $7.6 million for the second quarter of 2009 compared to $13.2 million for the second quarter of 2008. The second quarter of 2008 included a $4.5 million gain realized upon the liquidation of our investments in marketable securities in our SERP trust.

Income Tax Expense

Our effective income tax rate was 38.3% and 36.2% for the three months ended June 30, 2009 and June 30, 2008, respectively. Such increase in the effective tax rate was caused by certain of our Embarq merger related integration costs which are considered non-deductible for income tax purposes.

Net income attributable to CenturyTel, Inc. was $136.2 million and $180.9 million for the first six months of 2009 and 2008, respectively. Diluted earnings per share for the first six months of 2009 and 2008 was $1.35 and $1.70, respectively. The decline in the number of average diluted shares outstanding is attributable to share repurchases after June 30, 2008.

                                                                        Six months
                                                                      ended June 30,
                                                                  2009             2008
                                                                (Dollars, except per share
                                                                         amounts,
                                                                 and shares in thousands)

Operating income                                               $  313,780           364,183
Interest expense                                                  (96,969 )         (99,288 )
Other income (expense)                                              5,817            21,867
Income tax expense                                                (85,920 )        (105,292 )
Net income                                                        136,708           181,470
Less: Net income attributable to noncontrolling interests            (524 )            (543 )
Net income attributable to CenturyTel, Inc.                    $  136,184           180,927

Basic earnings per share                                       $     1.35              1.71

Diluted earnings per share                                     $     1.35              1.70

Average basic shares outstanding                                   99,270           104,893

Average diluted shares outstanding                                 99,297           105,337

Operating income decreased $50.4 million (13.8%) due to a $35.9 million (2.7%) decrease in operating revenues and a $14.5 million (1.5%) increase in operating expenses.

Operating Revenues

                                   Six months
                                 ended June 30,
                              2009            2008
                             (Dollars in thousands)

Voice                      $   417,521         440,381
Network access                 383,210         416,602
Data                           282,860         257,832
Fiber transport and CLEC        83,262          82,799
Other                          104,001         109,106
                           $ 1,270,854       1,306,720

The $22.9 million (5.2%) decrease in voice revenues is primarily due to
(i) a $15.3 million decrease due to a 6.7% decline in the average number of access lines and (ii) a $6.5 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 65,000 during the first six months of 2009 compared to a decline of 58,000 during the first six months 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 330,000 and 380,000 lines (including anticipated access line loss from the Embarq properties acquired on July 1, 2009).

Network access revenues decreased $33.4 million (8.0%) in the first six months of 2009 primarily due to (i) a $17.1 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) $8.2 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 $6.7 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 2009, although we cannot precisely estimate the magnitude of such decrease.

Data revenues increased $25.0 million (9.7%) substantially due to a $22.5 million increase in DSL-related revenues primarily due to growth in the number of DSL customers.

Fiber transport and CLEC revenues increased $463,000 (0.6%) primarily due to a $5.2 million increase in revenues of our incumbent fiber transport business. Such increase was substantially offset by a $3.2 million decrease in CLEC revenues primarily due to the divestiture of six CLEC markets that were consummated in the second and third quarters of 2008 and a $1.6 million decrease due to CLEC customer disconnects.

Other revenues decreased $5.1 million (4.7%) primarily due to a decrease in certain non-regulated product sales and service offerings.

Operating Expenses

                                                                       Six months
                                                                     ended June 30,
                                                                   2009            2008
                                                                 (Dollars in thousands)

Cost of services and products (exclusive of depreciation and
amortization)                                                  $    470,363        477,438
Selling, general and administrative                                 230,587        198,461
Depreciation and amortization                                       256,124        266,638
                                                               $    957,074        942,537

Cost of services and products decreased $7.1 million (1.5%) primarily due to (i) a $4.3 million decrease in CLEC expenses due to a reduction in costs as a result of the above-described divestiture of six CLEC markets, (ii) a $3.4 million decrease in access expense, (iii) a $3.4 million decrease in customer service related expenses; (iv) a $2.1 million reduction in expenses associated with new product offerings and (iv) a $1.9 million decrease in plant operations expenses primarily due to lower maintenance and repairs costs. Such decreases were partially offset by a $10.7 million increase in DSL-related expenses due to growth in the number of DSL customers.

Selling, general and administrative expenses increased $32.1 million (16.2%) primarily due to (i) $29.4 million of acquisition related costs associated with our acquisition of Embarq and (ii) a $5.2 million increase in bad debt expense. Such increases were partially offset by a $3.7 million decrease in marketing expense.

Depreciation and amortization decreased $10.5 million (3.9%) primarily due a $16.7 million reduction in depreciation expense due to certain assets becoming fully depreciated. Such decrease was partially offset by an $8.1 million increase due to higher levels of plant in service.

Interest Expense

Interest expense decreased $2.3 million (2.3%) in the first six months of 2009 compared to the first six months of 2008 due to a $2.6 million reduction due to lower average interest rates, a $1.7 million decrease due to the favorable resolution of transaction tax audit issues, partially offset by a $2.5 million increase as a result of an increase in average debt outstanding.

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 $5.8 million for the first six months of 2009 compared to $21.9 million for the first six months of 2008. Included in the first six months of 2009 is an $8.0 million pre-tax charge associated with our $800 million bridge credit facility (see Note 2 for additional information). Included in the first six months of 2008 is (i) a pre-tax gain of $4.5 million upon the liquidation of our investments in marketable securities in our SERP trust, (ii) a pre-tax gain of approximately $4.1 million from the sale of a nonoperating investment, and (iii) 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 $1.2 million in the first six months of 2009 compared to the first six months of 2008.

Income Tax Expense

Our effective income tax rate was 38.7% and 36.8% for the six months ended June 30, 2009 and June 30, 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 currently being reflected as non-deductible for income tax purposes pursuant to Internal Revenue Code Section 162(m) limitations. However, due to the consummation of the Embarq acquisition on July 1, 2009, we believe the payments could potentially be deductible. We plan to obtain a Private Letter Ruling from the Internal Revenue Service in relation to the treatment of these distributions. If a favorable ruling is received, the distributions will be treated as deductible and the income tax benefit will be recognized in the period such ruling is received. The treatment of the distributions as non-deductible 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. In addition, certain of our Embarq merger related integration costs are non-deductible for income tax purposes.

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 six month of 2009, we repaid a portion of these borrowings which has resulted in a negative working capital position as of June 30, 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 $482.2 million during the first six months of 2009 compared to $427.0 million during the first six months of 2008. Payments for income taxes decreased to $24.2 million during the first six months of 2009 from $136.1 million during the first six months of 2008 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 $130.6 million and $226.1 million for the six months ended June 30, 2009 and 2008, respectively. Payments for property, plant and equipment were $130.8 million in the first six months of 2009 and $114.4 million in the first six month of 2008. The first six months of 2009 capital expenditures included approximately $20 million related to the . . .