Voice.   We derive our local service revenues by providing local exchange telephone services in our franchised service areas, including basic dial-tone service through our regular switched network, generally for a fixed monthly charge.  Normalized for acquisitions, dispositions and other adjustments, access lines declined 5.7% in 2007, 4.8% in 2006 and 4.3% in 2005.  We believe these declines in the number of access lines were primarily due to the displacement of traditional wireline telephone services by other competitive services.  Based on our planned results for recent sales and retention initiatives, we are targeting our access line loss to be between 4.5% and 6.0% in 2008.

We offer enhanced voice services (such as call forwarding, conference calling, caller identification, selective call ringing and call waiting) to our local exchange customers for additional charges.  In 2007, we continued to expand the availability of enhanced voice services offered in certain service areas.  At December 31, 2007, over 60% of both our business and residential customers subscribed to one or more enhanced voice services.

We derive our long distance revenues by providing retail long distance services based on either usage or pursuant to flat-rate calling plans.  At December 31, 2007, we provided long distance services to nearly 1.3 million lines.    Exclusive of the long distance lines associated with Madison River, our long distance lines declined slightly in 2007, principally due to competitive factors.  We anticipate that most of our long distance service will be provided as part of an integrated bundle with our other service offerings, including our local exchange telephone service offering.

Network access.   We derive our network access revenues primarily from (i) providing services to various carriers and customers in connection with the use of our facilities to originate and terminate their interstate and intrastate voice transmissions and (ii) receiving universal support funds which allows us to recover a portion of our costs under federal and state cost recovery mechanisms (see “Regulation and Competition Relating to Incumbent Local Exchange Operations” below).  Our revenues for switched access services depend primarily on the level of call volume.

Certain of our interstate network access revenues are based on tariffed access charges prescribed by the Federal Communications Commission (“FCC”); the remainder of such revenues are derived under revenue sharing arrangements with other local exchange carriers (“LECs”) administered by the National Exchange Carrier Association (“NECA”), a quasi-governmental non-profit organization formed by the FCC in 1983 for such purposes.

Certain of our intrastate network access revenues are derived through access charges that we bill to intrastate long distance carriers and other LEC customers. Such intrastate network access charges are based on tariffed access charges, which are subject to state regulatory commission approval. Additionally, certain of our intrastate network access revenues, along with intrastate and intra-LATA (Local Access and Transport Areas) long distance revenues, are derived through revenue sharing arrangements with other LECs.

The Telecommunications Act of 1996 (the “1996 Act”) allows local exchange carriers to file access tariffs on a streamlined basis and, if certain criteria are met, deems those tariffs lawful.  Tariffs that have been “deemed lawful” in effect nullify an interexchange carrier’s ability to seek refunds should the earnings from the tariffs ultimately result in earnings above the authorized rate of return prescribed by the FCC.  Certain of our telephone subsidiaries file interstate tariffs with the FCC using this streamlined filing approach.  Since July 2004, we have recognized billings from our tariffs as revenue since we believe such tariffs are “deemed lawful”.

Data.   We derive   our data revenues primarily from monthly recurring charges for providing Internet access services (both high-speed and dial-up services) and data transmission services over special circuits and private lines.   We began offering traditional dial-up Internet access services to our telephone customers in 1995.  In late 1999, we began offering high-speed Internet access services, a premium-priced broadband data service.  As of December 31, 2007, approximately 84% of our access lines were broadband-enabled.  At December 31, 2007, we provided high-speed Internet access services to over 555,000 customers and dial-up services to nearly 68,000 customers.  During 2007, we added over 186,000 high-speed Internet customers (which includes approximately 58,000 from the Madison River acquisition).

Our data revenue also includes amounts billed to our business customers for dedicated circuits used for various purposes, including connecting the customer’s offices or networks to our networks.

Fiber transport and CLEC .  Our fiber transport and CLEC revenues include revenues from our fiber transport, competitive local exchange carrier (“CLEC”) and security monitoring businesses.

In late 2000, we began offering competitive local exchange telephone services as part of a bundled service offering to small to medium-sized businesses in Monroe and Shreveport, Louisiana.  In February 2002, we purchased the fiber network and customer base of KMC’s operations in Monroe and Shreveport, Louisiana and in June 2005, we purchased the fiber assets in 16 metropolitan markets from KMC which allowed us to offer broadband and competitive local exchange services to customers in these markets.  We intend to focus our efforts on the CLEC markets with the most promise, and are exploring our alternatives with respect to the remaining markets.  As of December 31, 2007, our competitive local exchange markets provided service over 1,200 miles of fiber.

Under the name “LightCore”, we sell fiber capacity to other carriers and businesses over a network that encompassed, at December 31, 2007, over 9,900 miles of fiber in the central United States.  We began our fiber transport business during 2001, when we began selling capacity over a 700-mile fiber optic ring that we constructed in southern and central Michigan.  In June 2003, we acquired the assets of Digital Teleport, Inc., a regional communications company providing wholesale data transport services to other communications carriers over its fiber optic network located in Missouri, Arkansas, Oklahoma and Kansas.  We have used the network to sell services to new and existing customers and to reduce our reliance on third party transport providers.  In addition, in December 2003, we acquired additional fiber transport assets in Arkansas, Missouri and Illinois from Level 3 Communications, Inc. to provide services similar to those described above.

In addition to the above-described fiber network, in connection with our 2007 acquisition of Madison River, we acquired ownership in a 2,400 route mile fiber network located in six states which provides us the opportunity to expand our fiber network business and further reduce our reliance on third-party transport providers.

We offer 24-hour burglary and fire monitoring services to over 10,500 customers in select markets in Louisiana, Arkansas, Mississippi, Texas and Ohio.

Other.   We derive our “other revenues” principally by (i) leasing, selling, installing and maintaining customer premise telecommunications equipment and wiring, (ii) providing billing and collection services to third parties, (iii) participating in the publication of local telephone directories, which allows us to share in revenues generated by the sale of yellow page and related advertising to businesses, and (iv) offering our new services described below under the heading “-Recent Product Developments”.  We also provide printing, database management and direct mail services and cable television services.

From time to time, we also make investments in other domestic or foreign communications companies.

For further information on regulatory, technological and competitive changes that could impact our revenues, see “Regulation and Competition” under this Item 1 below and “Risk Factors and Cautionary Statements” under Item 1A below.  For more information on the financial contributions of our various services, see Item 7 of this annual report.

Recent Product Developments

Since 2005, we have offered in conjunction with EchoStar Communications Corporation (“EchoStar”) co-branded DISH Network satellite television service in substantially all of our local exchange service areas.  Effective January 1, 2007, we changed our relationship with EchoStar from a revenue sharing arrangement to an agency relationship.  In late 2005, we initiated our switched digital television service to the LaCrosse, Wisconsin market and, in October 2007, we commenced a second switched digital video service offering to our Columbia, Missouri market.

            We also offer wireless communications services through a reselling arrangement with a nationwide wireless carrier and wireless broadband Internet services in select locations in certain markets in eight states.

Federal Financing Programs

Certain of our telephone subsidiaries receive long-term financing from the Rural Utilities Service (“RUS”), a federal agency that has historically provided long-term financing to telephone companies at relatively attractive interest rates.  Approximately 14% of our plant is pledged to secure obligations of our telephone subsidiaries to the RUS.  For additional information regarding our financing, see our consolidated financial statements included in Item 8 herein.

Sales and Marketing

 

We maintain local offices in most of the larger population centers within our service territories.  These offices are typically staffed by local residents and provide sales and customer support services in the community.  We also rely on our call center personnel to promote sales of services that meet the distinctive needs of our customers.  In addition, our strategy is to enhance our communications services by offering comprehensive bundling of services and deploying new technologies to build upon the strong reputation we enjoy in our markets and to further promote customer loyalty.

Most of our services are offered under our “CenturyTel” brand name.  However, we sell fiber capacity on our networks under the brand name “LightCore.”  In addition, our satellite television service is offered on a co-branded basis with EchoStar under the DISH Network name.

Network Architecture

 

Our local exchange carrier networks consist of central office hosts and remote sites, all with advanced digital switches (primarily manufactured by Nortel and Siemens) and operating with licensed software.  Our outside plant consists of transport and distribution delivery networks connecting each of our host central offices to our remote central offices, and ultimately to our customers.  As of December 31, 2007, we maintained over 252,000 miles of copper plant and approximately 20,000 miles of fiber optic plant in our local exchange networks.  Our fiber optic cable is the primary transport technology between our host and remote central offices and interconnection points with other incumbent carriers.  Most of our long distance service is provided directly through our own switches and network equipment, with the balance being provided through reselling arrangements with other long distance carriers.  We also maintain networks in connection with providing fiber transport and CLEC services.  For additional information on these networks, see “Services -  Fiber Transport and CLEC.”

Regulation and Competition Relating to Incumbent Local Exchange Operations

Traditionally, LECs operated as regulated monopolies having the exclusive right and responsibility to provide local telephone services in their franchised service territories.  (These LECs are sometimes referred to below as “incumbent LECs” or “ILECs”).  Consequently, most of our intrastate telephone operations have traditionally been regulated extensively by various state regulatory agencies (generally called public service commissions or public utility commissions) and our interstate operations have been regulated by the FCC under the Communications Act of 1934.  As we discuss in greater detail below, passage of the 1996 Act, coupled with state legislative and regulatory initiatives and technological changes, fundamentally altered the telephone industry by generally reducing the regulation of LECs and attracting a substantial increase in the number of competitors and capital invested in existing and new services. We anticipate that these trends toward reduced regulation and increased competition will continue.

The following description discusses some of the major industry regulations that affect our traditional telephone operations, but numerous other regulations not discussed below could also impact us.  Some legislation and regulations are currently the subject of judicial proceedings, legislative hearings and administrative proposals which could substantially change the manner in which the communications industry operates.  Neither the outcome of any of these developments, nor their potential impact on us, can be predicted at this time.  The impact of regulatory changes in the communications industry could have a substantial impact on our operations.  See Item 1A of this annual report below.

 

State regulation .  The local service rates and intrastate access charges of substantially all of our telephone subsidiaries are regulated by state regulatory commissions which typically have the power to grant and revoke certifications authorizing companies to provide communications services.  Most commissions have traditionally regulated pricing through “rate of return” regulation that focuses on authorized levels of earnings by LECs.  Historically, most of these commissions also (i) regulated the purchase and sale of LECs, (ii) prescribed depreciation rates and certain accounting procedures, (iii) enforced laws requiring LECs to provide universal service under publicly filed tariffs setting forth the terms, conditions and prices of their LEC services, (iv) oversaw implementation of several federal telecommunications laws including interconnection obligations and (v) regulated various other matters, including certain service standards and operating procedures.

In recent years, state legislatures and regulatory commissions in most of the 24 states in which our telephone subsidiaries operate have either reduced the regulation of LECs or have announced their intention to do so, and we expect this trend will continue.  Essentially, such relief comes in two forms: (i) full or partial deregulation through legislation or (ii) the ability to elect into or renew existing state alternative regulation through a regulatory proceeding.  Several states have implemented laws or rulings which require or permit LECs at the state level to either be deregulated for pricing or opt out of “rate of return” regulation in exchange for agreeing to alternative forms of regulation.   Such alternatives permit the LEC greater freedom to establish local service rates in exchange for agreeing not to charge rates in excess of specified caps.  As discussed further below, subsidiaries operating over 72% of our access lines in various states have agreed to be governed by alternative regulation plans, and we continue to explore our options for similar treatment in other states.  We believe that reduced regulatory oversight of certain of our telephone operations may allow us to offer new and competitive services faster than under the traditional regulatory process.  For a discussion of legislative, regulatory and technological changes that have introduced competition into the local exchange industry, see “Developments Affecting Competition.”

The following summary describes the alternative regulation plans applicable to us in Wisconsin, Missouri, Alabama and Arkansas, our four largest telephone markets.

·      Our Wisconsin access lines, except for those acquired from Verizon in 2000 (which continue to be regulated under “rate of return” regulation), are regulated under various alternative regulation plans developed jointly between the Wisconsin Public Service Commission and us.  Each of these alternative regulation plans permits us to adjust local rates within specified parameters if we meet certain quality-of-service and infrastructure-development commitments. These plans also include initiatives designed to promote competition.

·   All of our Missouri LECs are regulated under a price-cap regulation plan whereby basic service rates are adjusted annually based on an inflation-based factor; non-basic services may be increased without restriction up to 5% annually.   If the inflation-based factor were to decline as it has done in recent years, our revenues would be negatively impacted.

·      In 2005,  the state of Alabama passed legislation that essentially allowed telephone companies the option to phase in deregulation of certain LEC services.  In February 2007, our Alabama LECs opted to provide all local services (including bundled services but excluding certain basic telephone and optional calling services) on a deregulated and detariffed basis.  Certain basic telephone and optional calling services continue to be regulated and subject to a price cap.  Our Alabama properties acquired from Madison River operate under a separate alternative regulation plan under which local rates are still governed by the state public service commission.

·     Our Arkansas LECs acquired from Verizon Communications, Inc. are regulated under an alternative regulation plan under which rates can be adjusted based on an inflation-based factor.  Other local rates can be adjusted without commission approval; however, such rates are subject to commission review under certain conditions.   Our remaining Arkansas LECs have the option to increase rates up to certain specified amounts.

Notwithstanding the movement toward alternative regulation, LECs operating approximately 28% of our total access lines continue to be subject to “rate of return” regulation for intrastate purposes.  These LECs remain subject to the powers of state regulatory commissions to conduct earnings reviews and adjust service rates, either of which could lead to revenue reductions.

Federal regulation . Our telephone subsidiaries are required to comply with the Communications Act of 1934, which requires us to offer services at just and reasonable rates and on non-discriminatory terms, as well as the 1996 Act, which amended the Communications Act to promote competition and reform the Universal Service Program.

The FCC regulates interstate services provided by our telephone subsidiaries primarily by regulating the interstate access charges that we bill to long distance companies and other communications companies for use of our network in connection with the origination and termination of interstate voice and data transmissions. Additionally, the FCC has prescribed certain rules and regulations for telephone companies, including a uniform system of accounts and rules regarding the separation of costs between jurisdictions and, ultimately, between interstate services.  In addition, the FCC has responsibility for maintaining and administering the Universal Service Fund.  LECs must obtain FCC approval to use certain radio frequencies, or to transfer control of any such licenses.  The FCC retains the right to revoke these licenses if a carrier materially violates relevant legal requirements.

The FCC requires price-cap regulation of interstate access rates for the Regional Bell Operating Companies, and permits it for all other LECs. Under price-cap regulation, limits imposed on a company’s interstate rates are adjusted periodically to reflect inflation, productivity improvement and changes in certain non-controllable costs.  We have not elected price-cap regulation for our telephone operations, except for the properties we acquired from Verizon in 2002 which have continued to operate under price-cap regulation, as permitted under FCC rules for acquired properties.  All of our other operations continue to be governed by traditional rate-of-return regulation for interstate access charges, which permits us to set rates based on forecasted investment and expenses plus a return on investment, which is currently 11.25%.  In the last half of 2007, certain carriers filed a petition with the FCC seeking to convert their properties from rate of return regulation to price-cap regulation in the interstate jurisdiction.  In order to achieve this conversion, these carriers petitioned the FCC to make numerous rule changes that would provide a blueprint for rate of return carriers to opt into price-cap regulation.

In 2003, the FCC opened a broad intercarrier compensation proceeding with the ultimate goal of creating a uniform mechanism to be used by the entire telecommunications industry for payments between carriers originating, terminating, or carrying telecommunications traffic.  The FCC has received intercarrier compensation proposals from several industry groups, and in early 2005 solicited comments on all proposals previously submitted to it.  Broad industry negotiations have taken place with the goal of developing a consensus plan that addresses the concerns of carriers from all industry segments.  The ultimate outcome of this proceeding could change the way we receive compensation from, and remit compensation to, other carriers, our end user customers and the federal Universal Service Fund (the “USF”).  Until the FCC’s proceeding concludes and the changes, if any, to the existing rules are established, we cannot estimate the impact it will have on our results of operations.

In December 2005, a group of six mid-size carriers, including us, filed proposed rules with the FCC regarding “phantom traffic”.  “Phantom traffic” generally refers to telecommunications calls that cannot be billed properly to responsible carriers by other carriers in the call path because the traffic is mislabeled, unlabeled or improperly routed.  The proposal requests that the FCC implement and enforce updated rules that require carriers to accurately identify, label and route network traffic so that appropriate bills can be created.  In late 2006, the FCC opened a separate phantom traffic proceeding with the intent of formalizing potential phantom traffic rules for the industry.  Overall, the comments received to date on the phantom traffic issue have been favorable to us; however, until the FCC concludes its phantom traffic proceeding and adopts changes, if any, to existing rules, we cannot estimate the impact any changes will have on our results of operations.

As discussed further below, certain providers of competitive communications services are currently not required to compensate ILECs for the use of their networks.  Additionally, certain deregulated providers seek and receive high cost universal support funding based on the incumbent’s costs rather than their own.

Our operations and those of all communications carriers also may be impacted by legislation and regulation imposing new or greater obligations related to assisting law enforcement, bolstering homeland security, minimizing environmental impacts, or addressing other issues that impact our business, including the Communications Assistance for Law Enforcement Act, and laws governing local number portability and customer proprietary network information requirements.  These laws and regulations may cause us to incur additional costs.

Universal service support funds, revenue sharing arrangements and related matters . A significant number of our telephone subsidiaries recover a portion of their costs from the federal USF and from similar state “universal support” mechanisms, which receive their funding from fees charged to interexchange carriers and LECs.  Disbursements from these programs traditionally have focused principally on allowing LECs serving small communities and rural areas to provide communications services on terms and at prices reasonably comparable to those available in urban areas.  Other USF programs address other social goals, such as supporting schools and libraries through the USF’s E-rate program.

The table below sets forth the amounts received by our telephone subsidiaries in 2007 and 2006 from federal and state universal support programs.

 

Federal USF programs have undergone substantial changes since 1997, and are expected to experience more changes in the coming years as modernization of the overall program moves forward.  As mandated by the 1996 Act, in May 2001 the FCC modified its existing universal service support mechanism for rural telephone companies by adopting an interim mechanism for a five-year period based on embedded, or historical, costs that provide relatively predictable levels of support to many LECs, including substantially all of our LECs.   In May 2006, the FCC extended this interim mechanism until such time that new high-cost support rules are adopted for rural telephone companies.

Universal support funds available to ILECs are currently available to local competitors that (i) certify they will serve all customers in a study area, (ii) offer nine core services, and (iii) qualify as an “eligible telecommunications carrier.”  Wireless and other competitive service providers continue to seek to qualify to receive USF support.  This trend, coupled with changes in usage of telecommunications services, have placed stress on the funding mechanism of the USF, which is subject to annual caps on disbursements.  These developments have placed additional financial pressure on the amount of money that is necessary and available to provide support to all eligible service providers, including support payments we receive from the USF High Cost Loop support program.

A significant portion of our support payments have varied over time based on our average cost to serve customers compared to national cost averages.  Under the USF High Cost Loop support program, which is the USF’s principal support program, our payments from the USF will decrease if national average costs per loop increase at a rate greater than our average cost per loop.  Increases in the nationwide average cost per loop factor used to allocate funds among all USF recipients caused our revenues from the USF High Cost Loop support program to decrease in 2006 when compared to 2005.  While our 2007 USF High Cost Loop support program receipts approximated 2006 levels, we anticipate that our 2008 revenues from the USF High Cost Loop support program will be lower than 2007 by approximately $14-$17 million.

In late 2002, the FCC requested that the Federal-State Joint Board (“FSJB”) on Universal Service review various FCC rules governing high cost universal service support, including rules regarding eligibility to receive support payments in markets served by LECs and competitive carriers.   Since then, the FSJB recommended a comprehensive general review of the high-cost support mechanisms for rural and non-rural carriers and requested comments on the FCC’s current rules for the provision of high-cost support for rural companies, including comments on whether eligibility requirements should be amended in a manner that would adversely affect larger rural LECs such as us.  In addition, the FCC has taken various other steps in anticipation of restructuring universal service support mechanisms, including, most recently, opening for public comment in early 2008 several proposals that contemplate a substantial restructuring of current USF programs.

On May 1, 2007, the FSJB proposed that the FCC consider an interim cap on the amount of high cost support that competitive eligible telecommunications carriers (“CETCs”) may receive.  On November 20, 2007, the FSJB issued another recommended decision on universal service reform which suggested various reform measures including a migration of the present funding mechanisms to three new separate funds covering broadband providers, mobility providers, and providers of last resort.  The FSJB also recommended elimination of the identical support rule which now enables wireless CETCs to draw identical support based on the ILEC’s cost.   In addition, the FSJB is recommending certain other reforms, including (i) caps on the present high cost funding mechanism, (ii) certification of only one wireline, one wireless and one broadband carrier in each market and (iii) further consideration of competitive bidding as a distribution mechanism.  Until the FCC acts on these recommendations, we cannot estimate the impact that such proposals would have on our operations.  In addition, there are a number of judicial appeals challenging several aspects of the FCC’s universal service rules and various Congressional proposals seeking to substantially modify USF programs, none of which have been resolved at this time.  We will continue to be active in monitoring and participating in these developments.

In 2004, the FCC mandated changes in the administration of the universal service support programs that temporarily suspended the disbursement of funds under the USF’s E-rate program (for service to Schools and Libraries), and, more significantly, created questions that these administrative changes could similarly delay the disbursement of funds to LECs from the Universal Service High Cost Loop support program.  Congress has passed bills in recent years granting successive one-year exemptions from the federal law that impacted the E-rate program, including a bill extending the exemption through December 31, 2007. An additional exemption is currently pending before Congress.  Although we expect funding from this program to continue, we cannot assure you that the lack of a definitive resolution of this issue will not delay or impede the disbursement of funds in the future.

A substantial portion of our state support payments are payable by Louisiana under a program restructured in 2005 into a state universal service fund that expanded the base of contributors to include all telecommunication service providers operating in Louisiana.  Thus far, the payments we have received under this fund approximate those received by us under Louisiana’s predecessor program.  The fund is subject to an annual review by the Louisiana Public Service Commission (the “LPSC”).  As such, there can be no assurance that the fund will remain as adopted by the LPSC or that funding levels will remain at current levels.  In November 2007, the LPSC initiated a docket to determine the best way to convert the existing universal service fund to a stable funding mechanism.  The LPSC currently expects to complete its review by December 2008.

Some of our telephone subsidiaries operate in states where traditional cost recovery mechanisms, including rate structures, are under evaluation or have been modified. See “ State Regulation”.  There can be no assurance that these states will continue to provide for cost recovery at current levels.

All of our interstate network access revenues are based on access charges, cost separation studies or special settlement arrangements, many of which are administered by the FCC or NECA, and all of which are subject to change.  See “Services.”

Certain long distance carriers continue to request that certain of our LECs reduce intrastate access tariffed rates.  Long distance carriers have also aggressively pursued regulatory or legislative changes that would reduce access rates.   However, in light of pending intercarrier compensation reform that is expected to address intrastate access charges, most states are deferring action until they receive direction from the FCC.  However, some carriers are continuing to pursue lower intrastate access rates in some states.

Developments affecting competition .  Over the past decade, fundamental technological, regulatory and legislative changes have significantly impacted the communications industry, and we expect these changes will continue.  Primarily as a result of regulatory and technological changes, competition has been introduced and encouraged in each sector of the communications industry in recent years.  As a result, we increasingly face competition from other communication service providers, as further described below.

Wireless telephone services increasingly constitute a significant source of competition with LEC services, especially since wireless carriers have begun to compete effectively on the basis of price with more traditional telephone services.  As a result, some customers have chosen to completely forego use of traditional wireline phone service and instead rely solely on wireless service for voice services.  This trend is more pronounced among residential customers, which comprise 73% of our access line customers.  We anticipate this trend will continue, particularly if wireless service providers continue to expand their coverage areas, reduce their rates, improve the quality of their services, and offer enhanced new services.  Substantially all of our access line customers are currently capable of receiving wireless services from a competitive service provider.  Technological and regulatory developments in wireless services, personal communications services, digital microwave, satellite, coaxial cable, fiber optics, local multipoint distribution services and other wired and wireless technologies are expected to further permit the development of alternatives to traditional landline services.

The 1996 Act, which obligates LECs to permit competitors to interconnect their facilities to the LEC’s network and to take various other steps that are designed to promote competition, imposes several duties on a LEC if it receives a specific request from another entity which seeks to connect with or provide services using the LEC’s network.  In addition, each incumbent LEC is obligated to (i) negotiate interconnection agreements in good faith, (ii) provide nondiscriminatory “unbundled” access to all aspects of the LEC’s network, (iii) offer resale of its telecommunications services at wholesale rates and (iv) permit competitors, on terms and conditions (including rates) that are just, reasonable and nondiscriminatory, to collocate their physical plant on the LEC’s property, or provide virtual collocation if physical collocation is not practicable.  During 2003, the FCC released new rules outlining the obligations of incumbent LECs to lease to competitors elements of their circuit-switched networks on an unbundled basis at prices that substantially limited the profitability of these arrangements to incumbent LECs.  In response to successful judicial challenges to these rules, in 2005 the FCC released rules that required incumbent LECs to lease a network element only in those situations where competing carriers genuinely would be impaired without access to such network element, and where the unbundling would not interfere with the development of facilities-based competition. These rules are further designed to remove LECs’ unbundling obligations over time as competing carriers deploy their own networks and local exchange competition increases.

Under the 1996 Act’s rural telephone company exemption, approximately half of our telephone access lines are exempt from certain of the 1996 Act’s interconnection requirements unless and until the appropriate state regulatory commission overrides the exemption upon receipt from a competitor of a bona fide request meeting certain criteria.  States are permitted to adopt laws or regulations that provide for greater competition than is mandated under the 1996 Act.

As a result of these regulatory, consumer and technological developments, ILECs increasingly face competition from CLECs, particularly in densely populated areas.  CLECs provide competing services through reselling the ILECs’ local services, through use of the ILECs’ unbundled network elements or through their own facilities.  The number of companies which have requested authorization to provide local exchange service in our service areas has increased in recent years, especially in our markets acquired from Verizon in 2002 and 2000.  We anticipate that similar action may be taken by other competitors in the future, especially if all forms of federal support available to ILECs continue to remain available to these competitors.

As noted above, wireless and other competitive services providers have been increasingly aggressive in seeking and obtaining USF support funds.  This support is likely to encourage additional competitors to enter our high-cost service areas.

Technological developments have led to the development of new services that compete with traditional LEC services.  Technological improvements have enabled cable television companies to provide telephone service over their cable networks, and several national cable companies have aggressively pursued this opportunity.  As of December 31, 2007, we believe that approximately 40-45% of our access lines currently face competition from cable voice offerings.  Additionally, several large electric utilities have announced plans to offer communications services that compete with some LECs.

Improvements in the quality of VoIP service have led several cable, Internet, data and other communications companies, as well as start-up companies, to substantially increase their offerings of VoIP service to business and residential customers.  VoIP providers route calls partially or wholly over the Internet, without use of ILEC's circuit switches and, in certain cases, without use of ILEC's networks to carry their communications traffic.  VoIP providers frequently use existing broadband networks to deliver flat-rate, all distance calling plans that may offer features that cannot readily be provided by traditional LECs.  These plans may also be priced competitively or below those currently charged for traditional local and long distance telephone services for several reasons, including lower operating costs.   In December 2003, the FCC initiated rulemaking that is expected to address the effect of VoIP on intercarrier compensation, universal service and emergency services.  Although the FCC’s rulemaking regarding VoIP-enabled services remains pending, the FCC has adopted orders establishing broad guidelines for the regulation of such services, including (i) an April 2004 order that found an IP-telephony service using the public switched telephone network to be a regulated telecommunications service subject to interstate access charges, (ii) a November 2004 order that Internet-based services provided by Vonage Holdings Corporation should be subject to federal rather than state regulation and (iii) a June 2005 order requiring all VoIP service providers whose services are interconnected to the public switched telephone network to provide E-911 services to their customers.  There can be no assurance that future rulemaking will be on terms favorable to ILECs, or that VoIP providers will not successfully compete for our customers.

Similar to us, many cable, entertainment, technology or other communications companies that previously offered a limited range of services are now offering diversified bundles of services, either through their own networks, reselling arrangements or joint ventures.  As such, a growing number of companies are competing to serve the communications needs of the same customer base.   Several of these companies started offering full service bundles before us, which could give them an advantage in building customer loyalty.  Such activities will continue to place downward pressure on the demand for our access lines.

In addition to facing direct competition from those providers described above, ILECs increasingly face competition from alternate communication systems constructed by long distance carriers, large customers or alternative access vendors.  These systems, which have become more prevalent as a result of the 1996 Act, are capable of originating or terminating calls without use of the ILECs’ networks or switching services.  Other potential sources of competition include non-carrier systems that are capable of bypassing ILECs’ local networks, either partially or completely, through various means, including the provision of special access or independent switching services and the concentration of telecommunications traffic on a few of the ILECs’ access lines.  We anticipate that all these trends will continue and lead to decreased use of our networks.

Significant competitive factors in the local telephone industry include pricing, packaging of services and features, quality and convenience of service and meeting customer needs such as simplified billing and timely response to service calls.

As the telephone industry increasingly experiences competition, the size and resources of each respective competitor may increasingly influence its prospects. Many companies currently providing or planning to provide competitive communication services have substantially greater financial and marketing resources than we do or own larger or more diverse networks than ours.  In addition, many of them are not subject to the same regulatory constraints we are.

Competition can harm us by causing us to lose customers, or by causing us to lower prices or increase our capital or operating expenses to retain customers.  Competing communications services, such as wireless, VoIP, electronic mail and optional calling services, can also reduce usage of our network and thereby decrease our network access revenues.  Competition can also cause customers to reduce either usage of our services or switch to less profitable services, and could impede our ability to diversify into new lines of business dominated by incumbent providers.

We anticipate that the traditional operations of LECs will continue to be impacted by changes in regulation, technology, and consumer preferences affecting the ability of LECs to attract and retain customers and the capability of wireless companies, CLECs, cable television companies, VoIP providers, electric utilities and others to provide competitive LEC services. Competition relating to traditional LEC services has thus far affected large urban areas to a greater extent than the less dense areas in which we operate. We will actively monitor these developments, observe the effect of emerging competitive trends in larger markets and continue to evaluate new business opportunities that may arise out of future technological, legislative and regulatory developments.

We expect our operating revenues in 2008 to decline as we continue to experience downward pressure primarily due to continued access line losses, reduced network access revenues and lower prior year revenue settlement amounts.   We expect such declines to be partially offset primarily due to increased demand for our high-speed Internet service offering and the impact of recognizing a full year of revenues associated with our Madison River properties acquired in April 2007.

Regulation and Competition Relating to Other Operations

Long Distance Operations .  We offer intra-LATA, intrastate and interstate long distance services.  State public service commissions generally regulate intra-LATA toll calls within the same LATA and inter-LATA toll calls between different LATAs located in the same state.  Federal regulators have jurisdiction over interstate toll calls.  Recent state regulatory changes have increased competition to provide intra-LATA toll services in our local exchange markets.  Competition for intrastate and interstate long distance services has been intense for several years, and focuses primarily on price and pricing plans, and secondarily on customer service, reliability and communications quality.  Traditionally, our principal competitors for providing long distance services were large long distance companies such as AT&T, regional phone companies and dial-around resellers.  Increasingly, however, we have experienced competition from newer sources, including wireless companies offering attractively-priced calling plans.  Technological substitutions, including VoIP and electronic mail, have further reduced demand for traditional long distance services.  To counter such competition, we now offer unlimited long distance calling plans.

Data Operations .  In connection with our data business, we face competition from Internet service providers, satellite companies, long distance carriers and cable companies which use wired or wireless technologies to offer dial-up Internet access services or high-speed broadband services.  As of December 31, 2007, we believe approximately 60% of our local exchange markets are overlapped by cable systems offering data services competitive with ours.  Many of these competitors offer content that we cannot match.   Moreover, many of these providers have traditionally been subject to less rigorous regulatory scrutiny than our subsidiaries, although recent FCC rule changes classifying our high-speed offering as an “information service” has helped reduce regulatory disparities.  These recent rule changes further provided companies the option to deregulate (for price cap companies) or detariff (for rate of return companies) high-speed Internet services.  During 2006, all of our operating companies elected to either deregulate or detariff their high-speed Internet services, which decreased regulatory oversight and increased our retail pricing flexibility.

Fiber Transport Operations .  When our fiber transport networks are used to provide intrastate telecommunications services, we must comply with state requirements for telecommunications utilities, including state tariffing requirements.  To the extent our facilities are used to provide interstate communications, we are subject to federal regulation as a non-dominant common carrier.  Due largely to excess capacity, the fiber transport industry is highly competitive.  Our primary competitors are from other communications companies, many of whom operate networks and have resources much larger than ours.   Over the last few years, several large communications companies have merged and have implemented strategies to transfer a significant portion of their voice and data traffic from our fiber network to their networks.  We expect this trend to continue as companies seek opportunities to reduce their transport-related costs.  In addition, new IP-based services may enable new entrants to transport data at prices lower than we currently offer.

CLEC Operations .  Competitive local exchange carriers are subject to certain reporting and other regulatory requirements by the FCC and state public service commissions, although the degree of regulation is much less substantial than that imposed on ILECs operating in the same markets.  Local governments also frequently require competitive local exchange carriers to obtain licenses or franchises regulating the use of rights-of-way necessary to install and operate their networks.  In each of our CLEC markets, we face competition from the ILEC, which traditionally has long-standing relationships with its customers.  Over time, we may also face competition from one or more other CLECs, or from other communications providers who can provide comparable services.

Other Operations .  Similar to our CLEC business, we may be required to obtain licenses or franchises to enter new markets for our switched digital television and wireless broadband services, which could delay our rollout of these offerings.  The television and wireless communications markets we have recently entered are highly competitive, which could limit our ability to compete effectively.

OTHER DEVELOPMENTS OR MATTERS

In August 2007, our board of directors approved a $750 million stock repurchase program which expires in September 2009, unless extended by the board.  Through December 31, 2007, we had repurchased approximately 3.6 million shares for $158.5 million under this program.  We previously repurchased approximately $401.0 million, $186.7 million, $437.5 million and $1.028 billion of our shares under separate repurchase programs approved in February 2004, February 2005, May 2005 and February 2006, respectively.  For additional information, see Liquidity and Capital Resources included in Item 7 of this annual report.

We have certain obligations based on federal, state and local laws relating to the protection of the environment.  Costs of compliance through 2007 have not been material and we currently have no reason to believe that such costs will become material.

For additional information concerning our business and properties, see Items  2 and 7 elsewhere herein, and the Consolidated Financial Statements and notes 2, 4, 5, and 16 thereto set forth in Item 8 elsewhere herein.

Risks Related to Our Regulatory Environment

 

Our revenues could be materially reduced or our expenses materially increased by changes in regulations.

 

The majority of our revenues are substantially dependent upon regulations which, if changed, could result in material revenue reductions.  Laws and regulations applicable to us and our competitors may be, and have been, challenged in the courts, and could be changed by federal or state legislators.  Any of the following could significantly impact us:

 

Risk of loss or reduction of network access charge revenues.   A significant portion of our network access revenues are paid to us by intrastate and interstate long distance carriers for originating and terminating calls in the regions we serve.  The amount of access charge revenues that we receive is based largely on rates set by federal and state regulatory bodies, and such rates could change.  The FCC is currently weighing several proposals to comprehensively reform the intercarrier compensation regime in order to create a uniform system of intercarrier payments.  Any reform eventually adopted by the FCC will likely involve significant changes in the access charge system and could potentially result in a significant decrease or elimination of access charges altogether.  In addition, our financial results could be harmed if carriers that use our access services become financially distressed or bypass our networks, either due to changes in regulation or other factors.  Furthermore, access charges currently paid to us could be diverted to competitors who enter our markets or expand their operations, either due to changes in regulation or otherwise.

Risk of loss or reduction of support fund payments.   We receive a substantial portion of our revenues from the federal Universal Service Fund and, to a lesser extent, intrastate support funds.  These governmental programs are reviewed and amended from time to time, and we cannot assure you that they will not be changed or impacted in a manner adverse to us.  In August 2004, a federal-state joint board requested comments on the FCC’s current rules for high-cost support payments to rural telephone companies, including comments on whether eligibility requirements should be amended in a manner that would adversely affect larger rural LECs such as us.  In May 2007, this board proposed that the FCC consider an interim cap on the amount of the high-cost support that competitive eligible telecommunications carriers may receive.  Several parties have objected to the size of the USF or questioned the continued need to maintain the program in its current form.  Pending judicial appeals and Congressional proposals create additional uncertainty regarding our future receipt of support payments.  We cannot estimate the impact that these developments will have on us.

We expect our 2008 high cost support fund revenues to be approximately $14 to $17 million lower than 2007 due to (i) an expected increase in the nationwide average cost per loop factor and (ii) an expected decline in the overall size of the high cost support fund.  In addition, the number of eligible telecommunications carriers receiving support payments from this program continues to increase, which, coupled with other factors, has placed additional financial pressure on the amount of money that is necessary and available to provide support payments to all eligible recipients, including us.

 

Risk of loss of statutory exemption from burdensome interconnection rules imposed on incumbent local exchange carriers .  Affiliates of ours operating approximately half of our telephone access lines are exempt from the 1996 Act’s more burdensome requirements governing the rights of competitors to interconnect to incumbent local exchange carrier networks and to utilize discrete network elements of the incumbent’s network at favorable rates.  If state regulators decide that it is in the public’s interest to impose these more burdensome interconnection requirements on us, these affiliates would be required to provide unbundled network elements to competitors.  As a result, more competitors could enter our traditional telephone markets than we currently expect, resulting in lower revenues and higher additional administrative and regulatory expenses.

 

Risk of losses from rate reductions .  Notwithstanding the movement toward alternative state regulation, LECs operating approximately 28% of our total access lines continue to be subject to “rate of return” regulation for intrastate purposes.  These LECs remain subject to the powers of state regulatory commissions to conduct earnings reviews and adjust service rates, which could lead to revenue reductions.  LECs governed by alternative regulatory plans could also under certain circumstances be ordered to reduce rates or could experience rate reductions following the lapse of plans currently in effect.

 

The FCC regulates tariffs for interstate access and subscriber line charges, both of which are components of our revenues.  As noted above, the FCC currently is considering proposals to reduce interstate access charges for carriers like us.  We could be adversely affected if the FCC lowers or eliminates interstate access charges without adopting an adequate revenue replacement mechanism.

Risks posed by costs of regulatory compliance .  Regulations continue to create significant compliance costs for us.  Challenges to our tariffs by regulators or third parties or delays in obtaining certifications and regulatory approvals could cause us to incur substantial legal and administrative expenses, and, if successful, such challenges could adversely affect the rates that we are able to charge our customers.  Our business also may be impacted by legislation and regulation imposing new or greater obligations related to assisting law enforcement, bolstering homeland security, minimizing environmental impacts, or addressing other issues that impact our business (including local number portability and customer proprietary network information requirements).  For example, existing provisions of the Communications Assistance for Law Enforcement Act require communications carriers to ensure that their equipment, facilities, and services are able to facilitate authorized electronic surveillance.  We expect our compliance costs to increase if future legislation or regulations continue to increase our obligations to assist other governmental agencies.

Regulatory changes in the communications industry could adversely affect our business by facilitating greater competition against us.

 

The 1996 Act provides for significant changes and increased competition in the communications industry, including the local communications and long distance industries.  This Act and the FCC’s implementing regulations remain subject to judicial review and additional rulemakings, thus making it difficult to predict what effect the legislation will ultimately have on us and our competitors.  Several regulatory and judicial proceedings have recently concluded, are underway or may soon be commenced, which address issues affecting our operations and those of our competitors.  Moreover, certain communities nationwide have expressed an interest in establishing a municipal telephone utility that would compete for customers.  We cannot predict the outcome of these developments, nor can we assure that these changes will not have a material adverse effect on us or our industry.

 

We are subject to significant regulations that limit our flexibility.

 

As a diversified full service incumbent local exchange carrier, or ILEC, we have traditionally been subject to significant regulation that does not apply to many of our competitors.  For instance, unlike many of our competitors, we are subject to federal mandates to share facilities, file and justify tariffs, maintain certain accounts and file reports, and state requirements that obligate us to maintain service standards and limit our ability to change tariffs in a timely manner.  This regulation imposes substantial compliance costs on us and restricts our ability to change rates, to compete and to respond rapidly to changing industry conditions.  Although newer alternative forms of regulation permit us greater freedoms in several states in which we operate, they nonetheless typically impose caps on the rates that we can charge our customers.  As our business becomes increasingly competitive, regulatory disparities between us and our competitors could impede our ability to compete.  Litigation and different objectives among federal and state regulators could create uncertainty and impede our ability to respond to new regulations.  Moreover, changes in tax laws, regulations or policies could increase our tax rate, particularly if state regulators continue to search for additional revenue sources to address budget shortfalls.  We are unable to predict the future actions of the various regulatory bodies that govern us, but such actions could materially affect our business.

 

We are subject to franchising requirements that could impede our expansion opportunities.

We may be required to obtain from municipal authorities operating franchises to install or expand facilities.  Some of these franchises may require us to pay franchise fees.  These franchising requirements generally apply to our fiber transport and CLEC operations, and to our emerging switched digital television and wireless broadband businesses.  These requirements could delay us in expanding our operations or increase the costs of providing these services.

We will be exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and related regulations implemented by the SEC, the New York Stock Exchange and the Public Company Accounting Oversight Board, are increasing legal and financial compliance costs and making some activities more time consuming.  The annual evaluation of our internal controls required by Section 404 of the Sarbanes-Oxley Act may result in identifying material weaknesses in our internal controls.   Any future failure to successfully or timely complete these annual assessments could subject us to sanctions or investigation by regulatory authorities.  Any such action could adversely affect our financial results or investors’ confidence in us, and could cause our stock price to fall.  If we fail to maintain effective controls and procedures, we may be unable to provide financial information in a timely and reliable manner, which could in certain instances limit our ability to borrow or raise capital.

For a more thorough discussion of the regulatory issues that may affect our business, see “Operations” above.

 

Other Risks

We have a substantial amount of indebtedness and may need to incur more in the future.

We have a substantial amount of indebtedness , which could have material adverse consequences for us, including (i) hindering our ability to adjust to changing market, industry or economic conditions; (ii) limiting our ability to access the capital markets to refinance maturing debt or to fund acquisitions or emerging businesses; (iii) limiting the amount of free cash flow available for future operations, acquisitions, dividends, stock repurchases or other uses; (iv) making us more vulnerable to economic or industry downturns, including interest rate increases; and (v) placing us at a competitive disadvantage to those of our competitors that have less indebtedness.

In connection with executing our business strategies, we are continuously evaluating the possibility of acquiring additional communications assets, and we may elect to finance acquisitions by incurring additional indebtedness.  Moreover, to respond to the competitive challenges discussed above, we may be required to raise substantial additional capital to finance new product or service offerings.  Our ability to arrange additional financing will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control.  We cannot assure you that we will be able to obtain additional financing on terms acceptable to us or at all.  If we are able to obtain additional financing, our credit ratings could be adversely affected.  As a result, our borrowing costs would likely increase, our access to capital may be adversely affected and our ability to satisfy our obligations under our current indebtedness could be adversely affected.

As a holding company, we rely on payments from our operating companies to meet our obligations.

As a holding company, substantially all of our income and operating cash flow is dependent upon the earnings of our subsidiaries and the distribution of those earnings to, or upon loans or other payments of funds by those subsidiaries to, us.  As a result, we rely upon our subsidiaries to generate the funds necessary to meet our obligations, including the payment of amounts owed under our long-term debt.  Our subsidiaries are separate and distinct legal entities and have no obligation to pay any amounts owed by us or, subject to limited exceptions for tax-sharing purposes, to make any funds available to us to repay our obligations, whether by dividends, loans or other payments.  Certain of our subsidiaries may be restricted under loan agreements or regulatory orders from transferring funds to us, including certain loan provisions that restrict the amount of dividends that may be paid to us.  Moreover, our rights to receive assets of any subsidiary upon its liquidation or reorganization will be effectively subordinated to the claims of creditors of that subsidiary, including trade creditors.  The footnotes to our consolidated financial statements included elsewhere herein describe these matters in additional detail.

Our agreements and organizational documents and applicable law could limit another party’s ability to acquire us.

Under our articles of incorporation, each share of common stock that has been beneficially owned by the same person or entity continually since May 30, 1987 generally entitles the holder to ten votes on all matters duly submitted to a vote of shareholders. As of January 31, 2008, we estimate that the holders of our ten-vote shares held approximately 26% of our total voting power. Our articles also provide for a classified board of directors, which limits the ability of an insurgent to rapidly replace the board.  In addition, a number of other provisions in our agreements and organizational documents and various provisions of applicable law may delay, defer or prevent a future takeover of CenturyTel unless the takeover is approved by our board of directors.  This could deprive our shareholders of any related takeover premium.

We face other risks.

 

The list of risks above is not exhaustive, and you should be aware that we face various other risks.  For a description of additional risks, please see “Operations” above, “Forward-Looking Statements” below, and the other items of this annual report, particularly Items 3, 7 and 8.

 

Forward-Looking Statements

This report on Form 10-K and other documents filed by us under the federal securities laws include, and future oral or written statements or press releases by us and our management may include, certain forward-looking statements, including without limitation statements with respect to our anticipated future operating and financial performance, financial position and liquidity, growth opportunities and growth rates, acquisition and divestiture opportunities, business prospects, regulatory and competitive outlook, investment and expenditure plans, investment results, financing opportunities and sources (including the impact of financings on our financial position, financial performance or credit ratings), pricing plans, strategic alternatives, business strategies, and other similar statements of expectations or objectives or accompanying statements of assumptions that are highlighted by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “projects,” “seeks,” “estimates,” “hopes,” “should,” “could,” and “may,” and variations thereof and similar expressions.  Such forward-looking statements are based upon our judgment and assumptions as of the date such statements are made concerning future developments and events, many of which are outside of our control.  These forward-looking statements, and the assumptions upon which such statements are based, are inherently speculative and are subject to uncertainties that could cause our actual results to differ materially from such statements.  These uncertainties include but are not limited to those set forth below:

·	the extent, timing, success and overall effects of competition from wireless carriers, VoIP providers, CLECs, cable television companies, electric utilities and others, including without limitation the risks that these competitors may offer less expensive or more innovative products and services

·	the risks inherent in rapid technological change, including without limitation the risk that new technologies will displace our products and services

·

the effects of ongoing changes in the regulation of the communications industry, including without limitation (i) increased competition resulting from the FCC’s regulations relating to interconnection and other matters, (ii) the final outcome of various federal, state and local regulatory initiatives and proceedings that could impact our competitive position, revenues, compliance costs, capital expenditures or prospects, and (iii) reductions in revenues received from the federal Universal Service Fund or other current or future federal and state support programs designed to compensate LECs operating in high-cost markets

·	our ability to effectively adjust to changes in the communications industry

·

our ability to effectively manage our growth, including without limitation our ability to (i) effectively manage our expansion opportunities, including successfully integrating newly-acquired businesses into our operations, (ii) attract and retain technological, managerial and other key personnel, (iii) achieve projected growth, revenue and cost savings targets, and (iv) otherwise monitor our operations, costs, regulatory compliance, and service quality and maintain other necessary internal controls

·	possible changes in the demand for, or pricing of, our products and services, including without limitation reduced demand for traditional telephone services caused by greater use of wireless or Internet communications or other factors and reduced demand for our access services

·

our ability to successfully introduce new product or service offerings on a timely and cost-effective basis, including without limitation our ability to (i) successfully roll out our new video, voice and broadband services, (ii) expand successfully our long distance, Internet access and fiber transport service offerings to new or acquired markets and (iii) offer bundled service packages on terms attractive to our customers

·	our continued access to credit markets on favorable terms, including our continued access to financing in amounts, and on terms and conditions, necessary to support our operations and refinance existing indebtedness when it becomes due

·	our ability to collect receivables from financially troubled communications companies

·	our ability to successfully negotiate collective bargaining agreements on reasonable terms without work stoppages

·	regulatory limits on our ability to change the prices for telephone services in response to industry changes

·	impediments to our ability to expand through attractively priced acquisitions, whether caused by regulatory limits, financing constraints, a decrease in the pool of attractive target companies, or competition for acquisitions from other interested buyers

·	the possible need to make abrupt and potentially disruptive changes in our business strategies due to changes in competition, regulation, technology, product acceptance or other factors

·	the lack of assurance that we can compete effectively against better-capitalized competitors

·	the impact of network disruptions on our business

·	the effects of adverse weather on our customers or properties

·	other risks referenced in this report and from time to time in our other filings with the Securities and Exchange Commission

·	the effects of more general factors, including without limitation:

\   changes in general industry and market conditions and growth rates

\   changes in labor conditions, including workforce levels and labor costs

\   changes in interest rates or other general national, regional or local economic conditions

\   changes in legislation, regulation or public policy, including changes in federal rural financing programs or changes that increase our tax rate

            \       increases in capital, operating, medical or administrative costs, or the impact of new business opportunities requiring significant up-front investments

\   changes in our relationships with vendors, or the failure of these vendors to provide competitive products on a timely basis

\   failures in our internal controls that could result in inaccurate public disclosures or fraud

\   changes in our debt ratings

\   unfavorable outcomes of regulatory or legal proceedings, including rate proceedings and tax audits

\   losses or unfavorable returns on our investments in other communications companies

\   delays in the construction of our networks

\   changes in accounting policies, assumptions, estimates or practices adopted voluntarily or as required by generally accepted accounting principles, including the possible

         future unavailability of Statement of Financial Accounting Standards No. 71 to our wireline subsidiaries.

For additional information, see the description of our business included above, as well as Item 7 of this report.  Due to these uncertainties, there can be no assurance that our anticipated results will occur, that our judgments or assumptions will prove correct, or that unforeseen developments will not occur.  Accordingly, you are cautioned not to place undue reliance upon any of our forward-looking statements, which speak only as of the date made.  Additional risks that we currently deem immaterial or that are not presently known to us could also cause our actual results to differ materially from those expected in our forward-looking statements.  We undertake no obligation to update or revise any of our forward-looking statements for any reason, whether as a result of new information, future events or developments, changed circumstances, or otherwise.

Investors should also be aware that while we do, at various times, communicate with securities analysts, it is against our policy to disclose to them selectively any material non-public information or other confidential information.  Accordingly, investors should not assume that we agree with any statement or report issued by an analyst irrespective of the content of the statement or report.  To the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.

 

Item 1B.

Unresolved Staff Comments

Not applicable.

Item 2.

Properties.

Our properties consist principally of telephone lines, central office equipment, and land and buildings related to telephone operations. As of December 31, 2007 and 2006, our gross property, plant and equipment of approximately $8.7 billion and $7.9 billion, respectively, consisted of the following:

 

“Cable and wire” facilities consist primarily of buried cable and aerial cable, poles, wire, conduit and drops used in providing local and long distance services.  “Central office” consists primarily of switching equipment, circuit equipment and related facilities.  “General support” consists primarily of land, buildings, tools, furnishings, fixtures, motor vehicles and work equipment.  “Fiber transport” consists of network assets and equipment to provide fiber transport services.  “Construction in progress” includes property of the foregoing categories that has not been placed in service because it is still under construction.

The properties of certain of our telephone subsidiaries are subject to mortgages securing the debt of such companies.  We own substantially all of the central office buildings, local administrative buildings, warehouses, and storage facilities used in our telephone operations.

For further information on the location and type of our properties, see the descriptions of our operations in Item 1.

 

 

 

 

 

 

Common stock dividends during 2007 and 2006 were paid each quarter.  As of February 15, 2008, there were approximately 3,800 stockholders of record of our common stock.  As of February 28, 2008, the closing stock price of our common stock was $37.45.

In February 2006, our Board of Directors authorized a $1.0 billion share repurchase program under which, in February 2006, we repurchased $500 million (or approximately 14.36 million shares) of our common stock under accelerated share repurchase agreements with certain investment banks at an initial average price of $34.83.  The investment banks completed their repurchases in mid-July 2006 and in connection therewith we paid an aggregate of approximately $28.4 million cash to the investment banks to compensate them for the difference between their weighted average purchase price during the repurchase period and the initial average price.  We repurchased the remaining $500 million of common stock of this program in open-market transactions through June 2007.

In August 2007, our board of directors authorized a $750 million share repurchase program which expires on September 30, 2009, unless extended by the board.  The following table reflects our repurchases of common stock during the fourth quarter of 2007.

 

In addition to the above repurchases, we also withheld 123 shares of stock at an average price of $45.10 per share to pay taxes due upon the vesting of restricted stock for certain of our employees in October 2007.

For information regarding shares of our common stock authorized for issuance under our equity compensation plans, see Item 12.

The following table presents certain selected consolidated operating data as of the following dates:

See Items 1 and 2 in Part I and Items 7 and 8 elsewhere herein for additional information.