| **UNITED  STATES**                                                                                           |
|--------------------------------------------------------------------------------------------------------------|
| **SECURITIES  AND EXCHANGE COMMISSION**                                                                      |
| **WASHINGTON, D. C. 20549**                                                                                  |
|                                                                                                         |   |   |
| **FORM 10-Q**                                                                                                |
|                                                                                                         |   |   |
| **ý****QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
| **For the quarterly period ended  June 30, 2004**                                                       |
| **OR**                                                                                                       |
| **o****TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**     |
|                                                                                                         |
| **Commission file number 1-4996**                                                                            |
|                                                                                                         |   |   |
| **ALLTEL CORPORATION**                                                                                       |
| (Exact name of  registrant as specified in its charter)                                                      |
|                                                                                                         |   |   |   |   |
|                                                                                                         | **Delaware** |   | **34-0868285** |   |
|                                                                                                         | (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |   |
|                                                                                                         |   |   |   |   |
|                                                                                                         | **One Allied Drive, Little Rock,  Arkansas** |   | **72202** |   |
|                                                                                                         | (Address of  principal executive offices) |   | (Zip Code) |   |
|                                                                                                         |   |   |   |   |
|                                                                                                         | Registrant’s  telephone number, including area code |   | **(501)  905-8000** |   |
|                                                                                                         |   |   |   |   |
|                                                                                                         |   |   |   |   |
|                                                                                                         | (Former name,  former address and former fiscal year, if changed since last report) |   |
|                                                                                                              |  |  |  |  |  |  |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

YES  ý      NO  o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined by Rule 12b-2 of theAct).

YES  ý      NO  o

 

Number of common sharesoutstanding as of July 31, 2004:  **308,248,743**

 

The Exhibit Index islocated on page 42.

 

 

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**ALLTEL CORPORATION**

**FORM 10-Q**

**TABLE OF CONTENTS**

 
|     | **PART I - FINANCIAL  INFORMATION**                                                         |   |
|----------|---------------------------------------------------------------------------------------------|--------|
|     |                                                                                        |   |
| Item 1.  | Financial  Statements                                                                       |   |
| Item  2. | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
| Item  3. | Quantitative  and Qualitative Disclosures About Market Risk                                 |   |
| Item 4.  | Controls  and Procedures                                                                    |   |
|     |                                                                                        |   |
|     | **PART II - OTHER INFORMATION**                                                             |   |
|     |                                                                                        |   |
| Item 1.  | Legal Proceedings                                                                           | *      |
| Item  2. | Changes  in Securities, Use of Proceeds and Issuer Purchases of Equity Securities           |   |
| Item 3.  | Defaults Upon Senior  Securities                                                            | *      |
| Item 4.  | Submission of Matters to Vote of Security  Holders                                          |   |
| Item 5.  | Other Information                                                                           | *      |
| Item 6.  | Exhibits and Reports  on Form 8-K                                                           |   |

 

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*                                     Noreportable information under this item.

 

Forward-LookingStatements

This Report on Form 10-Qincludes, and future filings by the Company on Form 10-K, Form 10-Q and Form8-K and future oral and written statements by ALLTEL and its management mayinclude, certain “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Forward-looking statements are subject to uncertainties that could causeactual future events and results to differ materially from those expressed inthe forward-looking statements.  Theseforward-looking statements are based on estimates, projections, beliefs, andassumptions and are not guarantees of future events and results.  Words such as “expects”, “anticipates”,“intends”, “plans”, “believes”, “seeks”, “estimates”, and “should”, andvariations of these words and similar expressions, are intended to identifythese forward-looking statements. ALLTEL disclaims any obligation to update or revise any forward-lookingstatement based on the occurrence of future events, the receipt of newinformation, or otherwise.

 

Actual future events andresults may differ materially from those expressed in these forward-lookingstatements as a result of a number of important factors.  Representative examples of these factorsinclude (without limitation) adverse changes in economic conditions in themarkets served by ALLTEL; the extent, timing, and overall effects ofcompetition in the communications business; material changes in thecommunications industry generally that could adversely affect vendorrelationships with equipment and network suppliers and customer relationshipswith wholesale customers; changes in communications technology; the risksassociated with the integration of acquired businesses; adverse changes in theterms and conditions of the Company’s wireless roaming agreements; thepotential for adverse changes in the ratings given to ALLTEL’s debt securitiesby nationally accredited ratings organizations; the availability and cost offinancing in the corporate debt markets; the uncertainties related to ALLTEL’sstrategic investments; the effects of work stoppages; the effects oflitigation; and the effects of federal and state legislation, rules, andregulations governing the communications industry.

 

In addition to thesefactors, actual future performance, outcomes and results may differ materiallybecause of more general factors including (without limitation) general industryand market conditions and growth rates, economic conditions, and governmentaland public policy changes.

 

1

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**ALLTEL CORPORATION**

**FORM 10-Q**

**PARTI - FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 
| **CONSOLIDATED BALANCE SHEETS  (UNAUDITED)**                                                                                                   |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **(Dollars in millions, except per  share amounts)Assets**                                                                                     |   | **June 30,  2004** |   | **December 31,  2003** |   |
| **Current  Assets:**                                                                                                                           |   |   |   |   |   |
| Cash  and short-term investments                                                                                                               |   | $ | 687.4 |   | $ | 657.8 |   |
| Accounts  receivable (less allowance for doubtful accounts of $49.9 and $46.3,  respectively)                                                  |   | 862.6 |   | 890.0 |   |
| Inventories                                                                                                                                    |   | 96.3 |   | 122.1 |   |
| Prepaid  expenses and other                                                                                                                    |   | 74.1 |   | 59.2 |   |
| Total  current assets                                                                                                                          |   | 1,720.4 |   | 1,729.1 |   |
| Investments                                                                                                                                    |   | 741.1 |   | 722.7 |   |
| Goodwill                                                                                                                                       |   | 4,854.2 |   | 4,854.2 |   |
| Other  intangibles                                                                                                                             |   | 1,306.8 |   | 1,337.0 |   |
| **Property,  Plant and Equipment:**                                                                                                            |   |   | ** ** |   | ** ** |
| Land                                                                                                                                           |   | 265.8 |   | 259.2 |   |
| Buildings  and improvements                                                                                                                    |   | 1,085.5 |   | 1,053.0 |   |
| Wireline                                                                                                                                       |   | 6,636.2 |   | 6,514.7 |   |
| Wireless                                                                                                                                       |   | 5,471.1 |   | 5,255.8 |   |
| Information  processing                                                                                                                        |   | 1,014.5 |   | 946.7 |   |
| Other                                                                                                                                          |   | 491.1 |   | 482.3 |   |
| Under  construction                                                                                                                            |   | 370.9 |   | 398.2 |   |
| Total  property, plant and equipment                                                                                                           |   | 15,335.1 |   | 14,909.9 |   |
| Less  accumulated depreciation                                                                                                                 |   | 7,851.9 |   | 7,289.1 |   |
| Net  property, plant and equipment                                                                                                             |   | 7,483.2 |   | 7,620.8 |   |
| Other  assets                                                                                                                                  |   | 356.3 |   | 397.3 |   |
| **Total  Assets**                                                                                                                              |   | $ | 16,462.0 |   | $ | 16,661.1 |   |
|                                                                                                                                           |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**                                                                                                 |   |   | ** ** |   | ** ** |
| **Current  Liabilities:**                                                                                                                      |   |   | ** ** |   | ** ** |
| Current  maturities of long-term debt                                                                                                          |   | $ | 27.2 |   | $ | 277.2 |   |
| Accounts  payable                                                                                                                              |   | 404.5 |   | 479.8 |   |
| Advance  payments and customer deposits                                                                                                        |   | 210.8 |   | 205.3 |   |
| Accrued  taxes                                                                                                                                 |   | 181.3 |   | 114.6 |   |
| Accrued  dividends                                                                                                                             |   | 114.2 |   | 116.2 |   |
| Accrued  interest                                                                                                                              |   | 102.4 |   | 107.1 |   |
| Other  current liabilities                                                                                                                     |   | 161.0 |   | 192.5 |   |
| Total  current liabilities                                                                                                                     |   | 1,201.4 |   | 1,492.7 |   |
| Long-term  debt                                                                                                                                |   | 5,549.2 |   | 5,581.2 |   |
| Deferred  income taxes                                                                                                                         |   | 1,566.6 |   | 1,417.7 |   |
| Other  liabilities                                                                                                                             |   | 1,113.8 |   | 1,147.3 |   |
| **Shareholders’  Equity:**                                                                                                                |   |   | ** ** |   | ** ** |
| Preferred  stock, Series C, $2.06, no par value, 13,049 and 13,928 shares issued and  outstanding, respectively                                |   | 0.3 |   | 0.4 |   |
| Common  stock, par value $1 per share, 1.0 billion shares authorized, 308,198,557 and  312,643,922 shares issued and outstanding, respectively |   | 308.2 |   | 312.6 |   |
| Additional  paid-in capital                                                                                                                    |   | 520.3 |   | 750.1 |   |
| Unrealized  holding gain on investments                                                                                                        |   | 93.8 |   | 73.6 |   |
| Foreign  currency translation adjustment                                                                                                       |   | 0.5 |   | 0.6 |   |
| Retained  earnings                                                                                                                             |   | 6,107.9 |   | 5,884.9 |   |
| Total  shareholders’ equity                                                                                                               |   | 7,031.0 |   | 7,022.2 |   |
| **Total  Liabilities and Shareholders’ Equity**                                                                                           |   | $ | 16,462.0 |   | $ | 16,661.1 |   |

 

See theaccompanying notes to the unaudited interim consolidated financial statements.

 

2

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| **CONSOLIDATED STATEMENTS OF INCOME  (UNAUDITED)**                                                              |   |
|-----------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                            |   | **Three  Months  Ended June 30,** |   | **Six Months  Ended June 30,** |   |
| **(Millions, except per share  amounts)**                                                                       |   | **2004** |   | **2003** |   | **2004** |   | **2003** |   |
| **Revenues  and sales:**                                                                                        |   |   |   |   |   |   |   |   |   |
| Service  revenues                                                                                               |   | $ | 1,825.9 |   | $ | 1,797.5 |   | $ | 3,591.5 |   | $ | 3,514.0 |   |
| Product  sales                                                                                                  |   | 216.2 |   | 212.7 |   | 411.8 |   | 402.0 |   |
| Total  revenues and sales                                                                                       |   | 2,042.1 |   | 2,010.2 |   | 4,003.3 |   | 3,916.0 |   |
| **Costs  and expenses:**                                                                                        |   |   |   |   |   |   |   |   |   |
| Cost  of services (excluding depreciation of $231.7, $225.3, $463.6 and $445.5,  respectively,  included below) |   | 584.2 |   | 565.6 |   | 1,145.0 |   | 1,103.0 |   |
| Cost  of products sold                                                                                          |   | 256.0 |   | 271.3 |   | 513.3 |   | 509.0 |   |
| Selling,  general, administrative and other                                                                     |   | 372.9 |   | 372.5 |   | 748.1 |   | 733.6 |   |
| Depreciation  and amortization                                                                                  |   | 321.2 |   | 310.7 |   | 642.5 |   | 614.2 |   |
| Restructuring  and other charges                                                                                |   | — |   | 19.0 |   | 51.8 |   | 19.0 |   |
| Total  costs and expenses                                                                                       |   | 1,534.3 |   | 1,539.1 |   | 3,100.7 |   | 2,978.8 |   |
| **Operating  income**                                                                                           |   | 507.8 |   | 471.1 |   | 902.6 |   | 937.2 |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |
| Equity  earnings in unconsolidated partnerships                                                                 |   | 15.9 |   | 16.7 |   | 29.2 |   | 34.2 |   |
| Minority  interest in consolidated partnerships                                                                 |   | (21.6 | ) | (21.4 | ) | (37.2 | ) | (39.2 | ) |
| Other  income, net                                                                                              |   | 2.9 |   | 3.7 |   | 7.5 |   | 4.1 |   |
| Interest  expense                                                                                               |   | (86.6 | ) | (93.2 | ) | (178.3 | ) | (196.6 | ) |
| Write-down  of investments and other                                                                            |   | — |   | (13.1 | ) | — |   | (13.1 | ) |
|                                                                                                            |   |   |   |   |   |   |   |   |   |
| Income  from continuing operations before income taxes                                                          |   | 418.4 |   | 363.8 |   | 723.8 |   | 726.6 |   |
| Income  taxes                                                                                                   |   | 155.8 |   | 139.6 |   | 271.4 |   | 274.8 |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |
| Income  from continuing operations                                                                              |   | 262.6 |   | 224.2 |   | 452.4 |   | 451.8 |   |
| Discontinued operations  (net of income taxes of $231.2 and $256.2, respectively)                               |   | — |   | 323.9 |   | — |   | 361.0 |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |
| Income  before cumulative effect of accounting change                                                           |   | 262.6 |   | 548.1 |   | 452.4 |   | 812.8 |   |
| Cumulative effect of accounting change   (net of income taxes of $10.3)                                         |   | — |   | — |   | — |   | 15.6 |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |
| Net  income                                                                                                     |   | 262.6 |   | 548.1 |   | 452.4 |   | 828.4 |   |
| Preferred  dividends                                                                                            |   | 0.1 |   | 0.1 |   | 0.1 |   | 0.1 |   |
| Net  income applicable to common shares                                                                         |   | $ | 262.5 |   | $ | 548.0 |   | $ | 452.3 |   | $ | 828.3 |   |
| **Earnings  per share:**                                                                                        |   |   |   |   |   |   |   |   |   |
| Basic:                                                                                                          |   |   |   |   |   |   |   |   |   |
| Income  from continuing operations                                                                              |   | $ | .85 |   | $ | .72 |   | $ | 1.46 |   | $ | 1.45 |   |
| Income  from discontinued operations                                                                            |   | — |   | 1.04 |   | — |   | 1.16 |   |
| Cumulative  effect of accounting change                                                                         |   | — |   | — |   | — |   | .05 |   |
| Net  income                                                                                                     |   | $ | .85 |   | $ | 1.76 |   | $ | 1.46 |   | $ | 2.66 |   |
| Diluted:                                                                                                        |   |   |   |   |   |   |   |   |   |
| Income  from continuing operations                                                                              |   | $ | .85 |   | $ | .72 |   | $ | 1.46 |   | $ | 1.45 |   |
| Income  from discontinued operations                                                                            |   | — |   | 1.03 |   | — |   | 1.15 |   |
| Cumulative  effect of accounting change                                                                         |   | — |   | — |   | — |   | .05 |   |
| Net  income                                                                                                     |   | $ | .85 |   | $ | 1.75 |   | $ | 1.46 |   | $ | 2.65 |   |
| Pro  forma amounts assuming change in accounting principle was applied  retroactively:                          |   |   |   |   |   |   |   |   |   |
| Net  income                                                                                                     |   | $ | 262.6 |   | $ | 548.1 |   | $ | 452.4 |   | $ | 812.8 |   |
| Basic  earnings per share                                                                                       |   | $ | .85 |   | $ | 1.76 |   | $ | 1.46 |   | $ | 2.61 |   |
| Diluted  earnings per share                                                                                     |   | $ | .85 |   | $ | 1.75 |   | $ | 1.46 |   | $ | 2.60 |   |

 

See theaccompanying notes to the unaudited interim consolidated financial statements.

 

3

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| **CONSOLIDATED STATEMENTS OF CASH  FLOWS (UNAUDITED)**                                          |   |
|-------------------------------------------------------------------------------------------------|--------|
|                                                                                            |   | **Six Months  Ended June 30,** |   |
| **(Millions)**                                                                                  |   | **2004** |   | **2003** |   |
|                                                                                            |   |   |   |   |   |
| **Cash Provided from Operations:**                                                              |   |   |   |   |   |
| Net  income                                                                                     |   | $ | 452.4 |   | $ | 828.4 |   |
| Adjustments  to reconcile net income to net cash provided from operations:                      |   |   |   |   |   |
| Income  from discontinued operations                                                            |   | — |   | (361.0 | ) |
| Cumulative  effect of accounting change                                                         |   | — |   | (15.6 | ) |
| Depreciation  and amortization                                                                  |   | 642.5 |   | 614.2 |   |
| Provision  for doubtful accounts                                                                |   | 88.7 |   | 97.1 |   |
| Non-cash  portion of restructuring and other charges                                            |   | 25.6 |   | 13.3 |   |
| Write-down  of investments                                                                      |   | — |   | 6.0 |   |
| Increase  in deferred income taxes                                                              |   | 145.9 |   | 114.5 |   |
| Other,  net                                                                                     |   | (0.2 | ) | (2.2 | ) |
| Changes  in operating assets and liabilities, net of effects of acquisitions and  dispositions: |   |   |   |   |   |
| Accounts  receivable                                                                            |   | (65.6 | ) | (47.0 | ) |
| Inventories                                                                                     |   | 25.8 |   | 3.3 |   |
| Accounts  payable                                                                               |   | (75.3 | ) | (37.9 | ) |
| Other  current liabilities                                                                      |   | 39.9 |   | (9.1 | ) |
| Other,  net                                                                                     |   | (31.6 | ) | 6.1 |   |
| Net  cash provided from operations                                                              |   | 1,248.1 |   | 1,210.1 |   |
|                                                                                            |   |   |   |   |   |
| **Cash Flows from Investing Activities:**                                                       |   |   |   |   |   |
| Additions  to property, plant and equipment                                                     |   | (480.5 | ) | (531.4 | ) |
| Additions  to capitalized software development costs                                            |   | (14.8 | ) | (28.4 | ) |
| Additions  to investments                                                                       |   | (2.5 | ) | (10.6 | ) |
| Purchases  of property, net of cash acquired                                                    |   | — |   | (132.1 | ) |
| Proceeds  from the return on investments                                                        |   | 36.9 |   | 17.6 |   |
| Other,  net                                                                                     |   | (4.2 | ) | 7.0 |   |
| Net  cash used in investing activities                                                          |   | (465.1 | ) | (677.9 | ) |
|                                                                                            |   |   |   |   |   |
| **Cash Flows from Financing Activities:**                                                       |   |   |   |   |   |
| Dividends  on preferred and common stock                                                        |   | (231.3 | ) | (218.1 | ) |
| Reductions  in long-term debt                                                                   |   | (252.9 | ) | (740.5 | ) |
| Repurchases  of common stock                                                                    |   | (243.0 | ) | — |   |
| Distributions  to minority investors                                                            |   | (32.7 | ) | (28.3 | ) |
| Redemptions  of preferred stock                                                                 |   | (0.1 | ) | — |   |
| Common  stock issued                                                                            |   | 6.7 |   | 23.0 |   |
| Net  cash used in financing activities                                                          |   | (753.3 | ) | (963.9 | ) |
|                                                                                            |   |   |   |   |   |
| Net  cash provided from discontinued operations                                                 |   | — |   | 792.7 |   |
|                                                                                            |   |   |   |   |   |
| Effect  of exchange rate changes on cash and short-term investments                             |   | (0.1 | ) | 0.8 |   |
|                                                                                            |   |   |   |   |   |
| Increase  in cash and short-term investments                                                    |   | 29.6 |   | 361.8 |   |
|                                                                                            |   |   |   |   |   |
| **Cash and Short-term Investments:**                                                            |   |   |   |   |   |
| Beginning  of the period                                                                        |   | 657.8 |   | 134.6 |   |
| End  of period                                                                                  |   | $ | 687.4 |   | $ | 496.4 |   |
|                                                                                            |   |   |   |   |   |
| **Non-Cash Investing and Financing Activity:**                                                  |   |   |   |   |   |
| Change  in fair value of investments in equity securities                                       |   | $ | 23.7 |   | $ | 38.5 |   |
| Change  in fair value of interest rate swap agreements                                          |   | $ | (33.4 | ) | $ | 30.9 |   |

 

See theaccompanying notes to the unaudited interim consolidated financial statements.

 

4

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| **CONSOLIDATED STATEMENT OF  SHAREHOLDERS’ EQUITY (UNAUDITED)** |   |
|----------------------------------------------------------------------|--------|
| **(Millions)**                                                       |   | **Preferred  Stock** |   | **Common  Stock** |   | **Additional  Paid-In  Capital** |   | **Unrealized  Holding  Gain On  Investments** |   | **Foreign  Currency  Translation  Adjustment** |   | **Retained  Earnings** |   | **Total** |   |
| Balance at December 31, 2003                                    |   | $ | 0.4 |   | $ | 312.6 |   | $ | 750.1 |   | $ | 73.6 |   | $ | 0.6 |   | $ | 5,884.9 |   | $ | 7,022.2 |   |
| Net income                                                           |   | — |   | — |   | — |   | — |   | — |   | 452.4 |   | 452.4 |   |
| Other comprehensive income, net of tax: (See Note  6)                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized holding gains on investments,                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net of reclassification adjustments                                  |   | — |   | — |   | — |   | 20.2 |   | — |   | — |   | 20.2 |   |
| Foreign currency translation adjustment                              |   | — |   | — |   | — |   | — |   | (0.1 | ) | — |   | (0.1 | ) |
| Comprehensive income                                                 |   | — |   | — |   | — |   | 20.2 |   | (0.1 | ) | 452.4 |   | 472.5 |   |
| Employee plans, net                                                  |   | — |   | 0.1 |   | 6.4 |   | — |   | — |   | — |   | 6.5 |   |
| Restricted stock, net of unearned compensation                       |   | — |   | 0.2 |   | 1.4 |   | — |   | — |   | — |   | 1.6 |   |
| Tax benefit for non-qualified stock options                          |   | — |   | — |   | 0.6 |   | — |   | — |   | — |   | 0.6 |   |
| Conversion of preferred stock                                        |   | (0.1 | ) | 0.1 |   | — |   | — |   | — |   | — |   | — |   |
| Repurchases of stock                                                 |   | — |   | (4.8 | ) | (238.2 | ) | — |   | — |   | — |   | (243.0 | ) |
| Dividends:                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                                                               |   | — |   | — |   | — |   | — |   | — |   | (229.3 | ) | (229.3 | ) |
| Preferred                                                            |   | — |   | — |   | — |   | — |   | — |   | (0.1 | ) | (0.1 | ) |
| Balance at June 30, 2004                                        |   | $ | 0.3 |   | $ | 308.2 |   | $ | 520.3 |   | $ | 93.8 |   | $ | 0.5 |   | $ | 6,107.9 |   | $ | 7,031.0 |   |

 

See theaccompanying notes to the unaudited interim consolidated financial statements.

 

5

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**NOTES TO UNAUDITED INTERIMCONSOLIDATED FINANCIAL STATEMENTS**

 

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**1.****                      General:**

Basis of Presentation – The consolidated financial statements atJune 30, 2004 and 2003 and for the three and six month periods then endedof ALLTEL Corporation (“ALLTEL” or the “Company”) are unaudited.  The consolidated financial statements havebeen prepared in accordance with generally accepted accounting principles forinterim financial reporting and Securities and Exchange Commission rules andregulations.  Certain information andfootnote disclosures have been condensed or omitted in accordance with thoserules and regulations.  The consolidatedfinancial statements reflect all adjustments (consisting only of normalrecurring adjustments) which are, in the opinion of management, necessary for afair presentation of the financial position and operating results for theinterim periods presented.

 

**2.****                      AccountingChanges:**

Except for certain wireline subsidiaries as further discussed below,the Company adopted Statement of Financial Accounting Standards (“SFAS”) No.143, “Accounting for Asset Retirement Obligations”, effective January 1,2003.  SFAS No. 143 addresses financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs.  This standard applies to legal obligationsassociated with the retirement of long-lived assets that result from theacquisition, construction, development, or normal use of the assets.  SFAS No. 143 requires that a liability foran asset retirement obligation be recognized when incurred and reasonablyestimable, recorded at fair value, and classified as a liability in the balancesheet.  When the liability is initiallyrecorded, the entity capitalizes the cost and increases the carrying value ofthe related long-lived asset.  Theliability is then accreted to its present value each period, and thecapitalized cost is depreciated over the estimated useful life of the relatedasset.  At the settlement date, theentity will settle the obligation for its recorded amount and recognize a gainor loss upon settlement.  The Companyhas evaluated the effects of SFAS No. 143 on its operations and has determinedthat, for telecommunications and other operating facilities in which theCompany owns the underlying land, ALLTEL has no contractual or legal obligationto remediate the property if the Company were to abandon, sell or otherwisedispose of the property.  Certain of theCompany’s cell site and switch site operating lease agreements contain clausesrequiring restoration of the leased site at the end of the lease term.  Similarly, certain of the Company’s leaseagreements for office and retail locations require restoration of the leasedsite upon expiration of the lease term. Accordingly, ALLTEL is subject to asset retirement obligationsassociated with these leased facilities under the provisions of SFAS No.143.  The application of SFAS No. 143 tothe Company’s cell site and switch site leases and leased office and retaillocations did not have a material impact on ALLTEL’s consolidated results ofoperations, financial position, or cash flows as of and for the three and sixmonths ended June 30, 2004 or 2003.

 

In accordance with federal and state regulations, depreciation expensefor ALLTEL’s wireline operations has historically included an additionalprovision for cost of removal.  Theadditional cost of removal provision does not meet the recognition andmeasurement principles of an asset retirement obligation under SFAS No.143.  In December 2002, the FederalCommunications Commission (“FCC”) notified wireline carriers that they shouldnot adopt the provisions of SFAS No. 143 unless specifically required by the FCCin the future.  As a result of the FCCruling, ALLTEL continues to record a regulatory liability for cost of removalfor its wireline subsidiaries that follow the accounting prescribed by SFAS No.71 “Accounting for the Effects of Certain Types of Regulation”.  The regulatory liability for cost of removalincluded in accumulated depreciation amounted to $164.2 million and $151.6million at June 30, 2004 and 2003, respectively.  For the acquired Kentucky and Nebraska wireline operations notsubject to SFAS No. 71, effective January 1, 2003, the Company ceasedrecognition of the cost of removal provision in depreciation expense andeliminated the cumulative cost of removal included in accumulateddepreciation.  The cumulative effect ofretroactively applying these changes to periods prior to January 1, 2003resulted in a non-cash credit of $15.6 million, net of income tax benefit of$10.3 million, and was included in net income for the six months endedJune 30, 2003.

 

**3.****                      Goodwilland Other Intangible Assets:**

Goodwill represents the excess of cost over the fair value of netidentifiable tangible and intangible assets acquired through various businesscombinations.  The Company has acquiredidentifiable intangible assets through its acquisitions of interests in variouswireless and wireline properties.  Thecost of acquired entities at the date of the acquisition is allocated toidentifiable assets, and the excess of the total purchase price over theamounts assigned to identifiable assets is recorded as goodwill.  As of January 1, 2004, ALLTEL completedthe annual impairment reviews of its goodwill and other indefinite-livedintangible assets and determined that no write-down in the carrying value ofthese assets was required.  During thesix months ended June 30, 2004, there were no changes in the carryingamounts of goodwill or other indefinite-lived intangible assets.

 

6

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**NOTES TO UNAUDITED INTERIMCONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

** **

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**3.****                      Goodwilland Other Intangible Assets, Continued:**

Goodwill by business segment was as follows:

 
| **(Millions)**                   |   | **June 30,  2004** |    | **December 31,  2003** |   |
|----------------------------------|--------|-------------------------|---------|-----------------------------|--------|
| Wireless                         |   | $                       | 3,604.3 |                        | $      | 3,604.3 |   |
| Wireline                         |   | 1,247.6                 |    | 1,247.6                     |   |
| Communications  Support Services |   | 2.3                     |    | 2.3                         |   |
|                             |   | $                       | 4,854.2 |                        | $      | 4,854.2 |   |

 

The carrying values of indefinite-lived intangible assets other thangoodwill were as follows:

 
| **(Millions)**                             |   | **June 30,  2004** |    | **December 31,  2003** |   |
|--------------------------------------------|--------|-------------------------|---------|-----------------------------|--------|
| Cellular  licenses                         |   | $                       | 761.6   |                        | $      | 761.6 |   |
| Personal  Communications Services licenses |   | 78.5                    |    | 78.5                        |   |
| Franchise  rights – wireline          |   | 265.0                   |    | 265.0                       |   |
|                                       |   | $                       | 1,105.1 |                        | $      | 1,105.1 |   |

 

Intangible assets subject to amortization were as follows:

 
|                    |   | **June 30,  2004**     |   |
|-------------------------|--------|-----------------------------|--------|
| **(Millions)**          |   | **Gross  Cost**             |   | **Accumulated  Amortization** |   | **Net  Carrying  Value** |   |
| Customer  lists         |   | $                           | 382.4  |   | $ | (189.0 | ) | $ | 193.4 |   |
| Franchise  rights       |   | 22.5                        |   | (14.2 | ) | 8.3 |   |
| Non-compete  agreements |   | 2.9                         |   | (2.9 | ) | — |   |
|                    |   | $                           | 407.8  |   | $ | (206.1 | ) | $ | 201.7 |   |
|                    |   |                        |   |   |   |   |   |
|                    |   | **December 31,  2003** |   |
| **(Millions)**          |   | **Gross  Cost**             |   | **Accumulated  Amortization** |   | **Net  Carrying  Value** |   |
| Customer  lists         |   | $                           | 382.4  |   | $ | (159.6 | ) | $ | 222.8 |   |
| Franchise  rights       |   | 22.5                        |   | (13.4 | ) | 9.1 |   |
| Non-compete  agreements |   | 2.9                         |   | (2.9 | ) | — |   |
|                    |   | $                           | 407.8  |   | $ | (175.9 | ) | $ | 231.9 |   |

 

Amortization expense for intangible assets subject to amortization was$15.1 million and $30.2 million for the three and six month periods endedJune 30, 2004, compared to $15.1 million and $30.0 million for the sameperiods of 2003.  Amortization expensefor intangible assets subject to amortization is estimated to be $60.3 millionin 2004, $59.6 million in 2005, $41.0 million in 2006, $24.3 million in 2007and $18.1 million in 2008.

 

**4.****                      Restructuringand Other Charges:**

A summary of the restructuring and other chargesrecorded during the six months ended June 30, 2004 was as follows:

 
| **(Millions)**                                      |   | **Wireless** |   | **Wireline** |   | **Communications  Support  Services** |   | **Corporate  Operations** |   | **Total** |   |
|-----------------------------------------------------|--------|--------------|--------|--------------|--------|---------------------------------------|--------|---------------------------|--------|-----------|--------|
| Severance  and employee benefit costs               |   | $            | 8.8    |         | $      | 11.2                                  |   | $                         | 0.5    |      | $      | 2.1 |   | $ | 22.6 |   |
| Relocation  costs                                   |   | 3.2          |   | 1.4          |   | 0.1                                   |   | 0.1                       |   | 4.8       |   |
| Lease  and contract termination costs               |   | 0.5          |   | (1.9         | )      | —                                |   | (0.1                      | )      | (1.5      | )      |
| Write-down  in carrying value of certain facilities |   | 0.7          |   | —       |   | —                                |   | 24.1                      |   | 24.8      |   |
| Other  exit costs                                   |   | 0.4          |   | 0.7          |   | —                                |   | —                    |   | 1.1       |   |
| Total  restructuring and other charges              |   | $            | 13.6   |         | $      | 11.4                                  |   | $                         | 0.6    |      | $      | 26.2 |   | $ | 51.8 |   |

 

7

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**NOTES TO UNAUDITED INTERIM CONSOLIDATEDFINANCIAL STATEMENTS–(Continued)**

** **

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**4.****                      Restructuringand Other Charges, Continued:**

In January 2004, the Company announced its plans to reorganize itsoperations and support teams.  Also,during February 2004, the Company announced its plans to exit itsCompetitive Local Exchange Carrier (“CLEC”) operations in the Jacksonville,Florida market due to the continued unprofitability of these operations.  In connection with these activities, theCompany recorded a restructuring charge of $29.3 million consisting of $22.9million in severance and employee benefit costs related to a planned workforcereduction, $4.8 million of employee relocation expenses, $0.5 million in leasetermination costs and $1.1 million of other exit costs.  The severance and employee benefit costsincluded a $1.2 million payment to a former employee of the Company’s soldfinancial services division that became payable in the first quarter of 2004pursuant to the terms of a change in control agreement between the employee andALLTEL.  As of June 30, 2004, theCompany had paid $21.6 million in severance and employee-related expenses, andall of the employee reductions associated with the reorganization had beencompleted.  Certain of the plannedemployee relocations and employee reductions associated with the closure of theCLEC operations will be completed by the end of the third quarter of 2004.  ALLTEL also recorded a $2.3 millionreduction in the liabilities associated with various restructuring activitiesinitiated prior to 2003, consisting of $2.0 million in lease and contracttermination costs and $0.3 million in severance and employee benefitcosts.  The reductions primarilyreflected differences between estimated and actual costs paid in completing theprevious planned workforce reductions and lease and contract terminations.  During the first quarter of 2004, theCompany also recorded a write-down in the carrying value of certain corporateand regional facilities to fair value in conjunction with the 2004organizational changes and the 2003 sale of the Company’s financial servicesdivision to Fidelity National Financial Inc. (“Fidelity National”), as furtherdiscussed in Note 11 to the unaudited interim consolidated financialstatements.

 

A summary of the restructuring and other chargesrecorded during the six months ended June 30, 2003 was as follows:

 
| **(Millions)**                            |   | **Wireless** |   | **Wireline** |   | **Communications  Support  Services** |   | **Corporate  Operations** |   | **Total** |   |
|-------------------------------------------|--------|--------------|--------|--------------|--------|---------------------------------------|--------|---------------------------|--------|-----------|--------|
| Severance  and employee benefit costs     |   | $            | 1.3    |         | $      | 7.0                                   |   | $                         | — |      | $      | (2.0 | ) | $ | 6.3 |   |
| Lease  and contract termination costs     |   | —       |   | —       |   | (0.5                                  | )      | —                    |   | (0.5      | )      |
| Write-down  of software development costs |   | 7.6          |   | 1.8          |   | 3.8                                   |   | —                    |   | 13.2      |   |
| Total  restructuring and other charges    |   | $            | 8.9    |         | $      | 8.8                                   |   | $                         | 3.3    |      | $      | (2.0 | ) | $ | 19.0 |   |

 

During the second quarter of 2003, the Company recorded a restructuringcharge of $8.5 million consisting of severance and employee benefit costsrelated to a planned workforce reduction, primarily resulting from the closingof certain call center locations.  As ofJune 30, 2004, the Company had paid $8.5 million in severance andemployee-related expenses, and all of the employee reductions had beencompleted.  The Company also recorded a$2.7 million reduction in the liabilities associated with various restructuringactivities initiated prior to 2003, consisting of $2.2 million in severance andemployee benefit costs and $0.5 million in lease termination costs.  The reduction primarily reflecteddifferences between estimated and actual costs paid in completing the previousplanned workforce reductions and lease terminations.  During the second quarter of 2003, ALLTEL also wrote off certaincapitalized software development costs that had no alternative future use orfunctionality.

 

The following is a summary of activity related to the liabilities associatedwith the Company’s restructuring and other charges for the six months endedJune 30, 2004:

 
| **(Millions)**                   |   |   |   |
|----------------------------------|--------|--------|--------|
| Balance  as of December 31, 2003 |   | $      | 3.8    |   |
| Restructuring  and other charges |   | 54.1   |   |
| Reversal  of accrued liabilities |   | (2.3   | )      |
| Non-cash  write-down of assets   |   | (25.6  | )      |
| Cash  outlays                    |   | (26.3  | )      |
| Balance as of June 30, 2004      |   | $      | 3.7    |   |

 

At June 30, 2004, the remaining unpaid liability related to theCompany’s integration and restructuring activities consisted of severance andemployee-related expenses of $1.5 million, relocation expenses of $1.8 millionand lease and contract termination costs of $0.4 million and is included inother current liabilities in the accompanying consolidated balance sheets.

 

8

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**NOTES TO UNAUDITED INTERIMCONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

** **

----

 

**5.****                      Write-downof Investments and Other:**

In the second quarter of 2003, ALLTEL recorded pretax write-downstotaling $6.0 million to reflect other-than-temporary declines in the fairvalue of certain investments in unconsolidated limited partnerships.  In addition, during the second quarter of2003, the Company retired, prior to stated maturity dates, $249.1 million oflong-term debt, representing all of the long-term debt outstanding under theRural Utilities Services, Rural Telephone Bank and Federal Financing Bankprograms. In connection with the early retirement of the debt, the Companyincurred pretax termination fees of $7.1 million.

 

**6.****                      ComprehensiveIncome:**

Comprehensive income was as follows for the three and six month periodsended June 30:

 
|                                                                           |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|--------------------------------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| **(Millions)**                                                                 |   | **2004**                |   | **2003**              |   | **2004** |   | **2003** |   |
| Net  income                                                                    |   | $                       | 262.6  |                  | $      | 548.1 |   | $ | 452.4 |   | $ | 828.4 |   |
| Other  comprehensive income (loss):                                            |   |                    |   |                  |   |   |   |   |   |
| Unrealized  holding gains (losses) on investments arising in the period        |   | (25.4                   | )      | 38.6                  |   | 23.7 |   | 38.6 |   |
| Income  tax expense (benefit)                                                  |   | (8.9                    | )      | 15.0                  |   | 3.5 |   | 15.0 |   |
|                                                                           |   | (16.5                   | )      | 23.6                  |   | 20.2 |   | 23.6 |   |
|                                                                           |   |                    |   |                  |   |   |   |   |   |
| Foreign  currency translation adjustment for the period                        |   | (0.3                    | )      | 0.9                   |   | (0.1 | ) | 0.8 |   |
| Reclassification  adjustments for losses included in net income for the period |   | —                  |   | 6.7                   |   | — |   | 6.7 |   |
|                                                                           |   | (0.3                    | )      | 7.6                   |   | (0.1 | ) | 7.5 |   |
|                                                                           |   |                    |   |                  |   |   |   |   |   |
| Other  comprehensive income (loss) before tax                                  |   | (25.7                   | )      | 46.2                  |   | 23.6 |   | 46.1 |   |
| Income  tax expense (benefit)                                                  |   | (8.9                    | )      | 15.0                  |   | 3.5 |   | 15.0 |   |
| Other  comprehensive income (loss)                                             |   | (16.8                   | )      | 31.2                  |   | 20.1 |   | 31.1 |   |
| Comprehensive  income                                                          |   | $                       | 245.8  |                  | $      | 579.3 |   | $ | 472.5 |   | $ | 859.5 |   |

 

**7.****                      Earningsper Share:**

Basic earnings per share of common stock was computed by dividing netincome applicable to common shares by the weighted average number of commonshares outstanding during the period. Diluted earnings per share reflects the potential dilution that couldoccur assuming conversion or exercise of all unexercised stock options andoutstanding preferred stock.  Areconciliation of the net income and number of shares used in computing basicand diluted earnings per share was as follows for the three and six monthperiods ended June 30:

 
|                                                       |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|------------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| **(Millions, except per share  amounts)**                  |   | **2004**                |   | **2003**              |   | **2004** |   | **2003** |   |
| **Basic  earnings per share:**                             |   |                    |   |                  |   |   |   |   |   |
| Income  from continuing operations                         |   | $                       | 262.6  |                  | $      | 224.2 |   | $ | 452.4 |   | $ | 451.8 |   |
| Income  from discontinued operations                       |   | —                  |   | 323.9                 |   | — |   | 361.0 |   |
| Cumulative  effect of accounting change                    |   | —                  |   | —                |   | — |   | 15.6 |   |
| Less  preferred dividends                                  |   | (0.1                    | )      | (0.1                  | )      | (0.1 | ) | (0.1 | ) |
| Net  income applicable to common shares                    |   | $                       | 262.5  |                  | $      | 548.0 |   | $ | 452.3 |   | $ | 828.3 |   |
|                                                       |   |                    |   |                  |   |   |   |   |   |
| Weighted  average common shares outstanding for the period |   | 308.2                   |   | 311.4                 |   | 309.8 |   | 311.3 |   |
|                                                       |   |                    |   |                  |   |   |   |   |   |
| Basic  earnings per share:                                 |   |                    |   |                  |   |   |   |   |   |
| From  continuing operations                                |   | $                       | .85    |                  | $      | .72 |   | $ | 1.46 |   | $ | 1.45 |   |
| From  discontinued operations                              |   | —                  |   | 1.04                  |   | — |   | 1.16 |   |
| Cumulative  effect of accounting change                    |   | —                  |   | —                |   | — |   | .05 |   |
| Net  income                                                |   | $                       | .85    |                  | $      | 1.76 |   | $ | 1.46 |   | $ | 2.66 |   |

 

9

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**NOTES TO UNAUDITED INTERIMCONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

** **

----

 

**7.****                      Earningsper Share, Continued:**

 
|                                                                           |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|--------------------------------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| **(Millions, except per share  amounts)**                                      |   | **2004**                |   | **2003**              |   | **2004** |   | **2003** |   |
| **Diluted  earnings per share:**                                               |   |                    |   |                  |   |   |   |   |   |
| Net  income applicable to common shares                                        |   | $                       | 262.5  |                  | $      | 548.0 |   | $ | 452.3 |   | $ | 828.3 |   |
| Adjustment  for convertible preferred stock dividends                          |   | 0.1                     |   | 0.1                   |   | 0.1 |   | 0.1 |   |
| Net  income applicable to common shares assuming conversion of preferred stock |   | $                       | 262.6  |                  | $      | 548.1 |   | $ | 452.4 |   | $ | 828.4 |   |
|                                                                           |   |                    |   |                  |   |   |   |   |   |
| Weighted  average common shares outstanding for the period                     |   | 308.2                   |   | 311.4                 |   | 309.8 |   | 311.3 |   |
| Increase  in shares resulting from the assumed:                                |   |                    |   |                  |   |   |   |   |   |
| Exercise  of stock options                                                     |   | 0.6                     |   | 0.7                   |   | 0.6 |   | 0.8 |   |
| Conversion  of preferred stock                                                 |   | 0.3                     |   | 0.3                   |   | 0.3 |   | 0.3 |   |
| Weighted  average common shares assuming conversion                            |   | 309.1                   |   | 312.4                 |   | 310.7 |   | 312.4 |   |
|                                                                           |   |                    |   |                  |   |   |   |   |   |
| Diluted  earnings per share:                                                   |   |                    |   |                  |   |   |   |   |   |
| From  continuing operations                                                    |   | $                       | .85    |                  | $      | .72 |   | $ | 1.46 |   | $ | 1.45 |   |
| From  discontinued operations                                                  |   | —                  |   | 1.03                  |   | — |   | 1.15 |   |
| Cumulative  effect of accounting change                                        |   | —                  |   | —                |   | — |   | .05 |   |
| Net  income                                                                    |   | $                       | .85    |                  | $      | 1.75 |   | $ | 1.46 |   | $ | 2.65 |   |

 

**8.****                      BusinessSegment Information:**

ALLTEL manages its business operations based on differences in productsand services.  The Company evaluatesperformance of the segments based on segment income, which is computed asrevenues and sales less operating expenses, excluding the effects of the itemsdiscussed in Notes 2, 4 and 5, respectively. These items are not allocated to the segments and are included incorporate operations.  Segment operatingresults were as follows for the three and six month periods ended June 30:

 
|                                             |   | **Three  Months Ended** |    | **Six Months  Ended** |   |
|--------------------------------------------------|--------|-------------------------|---------|-----------------------|--------|
| **(Millions)**                                   |   | **2004**                |    | **2003**              |   | **2004** |   | **2003** |   |
| **Revenues  and Sales from External Customers:** |   |                    |    |                  |   |   |   |   |   |
| Wireless                                         |   | $                       | 1,253.1 |                  | $      | 1,195.4 |   | $ | 2,437.6 |   | $ | 2,303.2 |   |
| Wireline                                         |   | 564.7                   |    | 569.1                 |   | 1,126.1 |   | 1,141.4 |   |
| Communications  support services                 |   | 144.4                   |    | 156.4                 |   | 291.0 |   | 301.5 |   |
| Total  business segments                         |   | $                       | 1,962.2 |                  | $      | 1,920.9 |   | $ | 3,854.7 |   | $ | 3,746.1 |   |
|                                             |   |                    |    |                  |   |   |   |   |   |
| **Intersegment  Revenues and Sales:**            |   |                    |    |                  |   |   |   |   |   |
| Wireless                                         |   | $                       | —  |                  | $      | — |   | $ | — |   | $ | — |   |
| Wireline                                         |   | 44.9                    |    | 37.1                  |   | 83.0 |   | 73.7 |   |
| Communications  support services                 |   | 84.8                    |    | 86.4                  |   | 157.2 |   | 166.4 |   |
| Total  business segments                         |   | $                       | 129.7   |                  | $      | 123.5 |   | $ | 240.2 |   | $ | 240.1 |   |
|                                             |   |                    |    |                  |   |   |   |   |   |
| **Total  Revenues and Sales:**                   |   |                    |    |                  |   |   |   |   |   |
| Wireless                                         |   | $                       | 1,253.1 |                  | $      | 1,195.4 |   | $ | 2,437.6 |   | $ | 2,303.2 |   |
| Wireline                                         |   | 609.6                   |    | 606.2                 |   | 1,209.1 |   | 1,215.1 |   |
| Communications  support services                 |   | 229.2                   |    | 242.8                 |   | 448.2 |   | 467.9 |   |
| Total  business segments                         |   | 2,091.9                 |    | 2,044.4               |   | 4,094.9 |   | 3,986.2 |   |
| Less  intercompany eliminations                  |   | (49.8                   | )       | (34.2                 | )      | (91.6 | ) | (70.2 | ) |
| Total  revenues and sales                        |   | $                       | 2,042.1 |                  | $      | 2,010.2 |   | $ | 4,003.3 |   | $ | 3,916.0 |   |

 

10

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**NOTES TO UNAUDITED INTERIMCONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

** **

----

 

**8.****                      BusinessSegment Information, Continued:**

 
|                                                     |   | **Three Months  Ended** |   | **Six Months  Ended**   |     |
|----------------------------------------------------------|--------|-------------------------|--------|-------------------------|----------|
| **(Millions)**                                           |   | **2004**                |   | **2003**                |     | **2004** |   | **2003** |   |
| **Segment  Income:**                                     |   |                    |   |                    |     |   |   |   |   |
| Wireless                                                 |   | $                       | 261.6  |                    | $        | 262.0 |   | $ | 472.5 |   | $ | 498.0 |   |
| Wireline                                                 |   | 234.4                   |   | 216.8                   |     | 462.6 |   | 439.6 |   |
| Communications  support services                         |   | 20.8                    |   | 20.8                    |     | 37.3 |   | 38.5 |   |
| Total  segment income                                    |   | 516.8                   |   | 499.6                   |     | 972.4 |   | 976.1 |   |
| Corporate  expenses                                      |   | (9.0                    | )      | (9.5                    | )        | (18.0 | ) | (19.9 | ) |
| Restructuring  and other charges                         |   | —                  |   | (19.0                   | )        | (51.8 | ) | (19.0 | ) |
| Equity  earnings in unconsolidated partnerships          |   | 15.9                    |   | 16.7                    |     | 29.2 |   | 34.2 |   |
| Minority  interest in consolidated partnerships          |   | (21.6                   | )      | (21.4                   | )        | (37.2 | ) | (39.2 | ) |
| Other  income, net                                       |   | 2.9                     |   | 3.7                     |     | 7.5 |   | 4.1 |   |
| Interest  expense                                        |   | (86.6                   | )      | (93.2                   | )        | (178.3 | ) | (196.6 | ) |
| Write-down  of investments and other                     |   | —                  |   | (13.1                   | )        | — |   | (13.1 | ) |
| Income  from continuing operations before income taxes   |   | $                       | 418.4  |                    | $        | 363.8 |   | $ | 723.8 |   | $ | 726.6 |   |
|                                                     |   |                    |   |                    |     |   |   |   |   |
| Segment  assets were as follows:                         |   |                    |   |                    |     |   |   |   |   |
|                                                     |   |                    |   |                    |     |   |   |   |   |
| **(Millions)**                                           |   |                    |   | **June 30,  2004** |     | **December 31,  2003** |   |   |   |
| Wireless                                                 |   |                    |   | $                       | 9,646.9  |   | $ | 9,673.9 |   |   |   |
| Wireline                                                 |   |                    |   | 5,090.0                 |     | 5,212.9 |   |   |   |
| Communications  support services                         |   |                    |   | 463.9                   |     | 518.6 |   |   |   |
| Total  business segments                                 |   |                    |   | 15,200.8                |     | 15,405.4 |   |   |   |
| Corporate  headquarters assets not allocated to segments |   |                    |   | 1,290.8                 |     | 1,319.3 |   |   |   |
| Less  elimination of intersegment receivables            |   |                    |   | (29.6                   | )        | (63.6 | ) |   |   |
| Total  consolidated assets                               |   |                    |   | $                       | 16,462.0 |   | $ | 16,661.1 |   |   |   |

 

Supplemental informationpertaining to the communications support services segment was as follows forthe three and six month periods ended June 30:

 
|                                             |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|--------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| **(Millions)**                                   |   | **2004**                |   | **2003**              |   | **2004** |   | **2003** |   |
| **Revenues  and Sales from External Customers:** |   |                    |   |                  |   |   |   |   |   |
| Product  distribution                            |   | $                       | 72.1   |                  | $      | 67.1 |   | $ | 141.5 |   | $ | 127.5 |   |
| Long-distance  and network management services   |   | 46.5                    |   | 50.2                  |   | 95.0 |   | 99.1 |   |
| Directory  publishing                            |   | 14.1                    |   | 13.5                  |   | 28.1 |   | 22.7 |   |
| Telecommunications  information services         |   | 11.7                    |   | 25.6                  |   | 26.4 |   | 52.2 |   |
| Total                                            |   | $                       | 144.4  |                  | $      | 156.4 |   | $ | 291.0 |   | $ | 301.5 |   |
|                                             |   |                    |   |                  |   |   |   |   |   |
| **Intersegment  Revenues and Sales:**            |   |                    |   |                  |   |   |   |   |   |
| Product  distribution                            |   | $                       | 23.8   |                  | $      | 33.7 |   | $ | 53.5 |   | $ | 66.4 |   |
| Long-distance  and network management services   |   | 26.4                    |   | 30.9                  |   | 56.9 |   | 63.0 |   |
| Directory  publishing                            |   | 34.6                    |   | 21.8                  |   | 46.8 |   | 37.0 |   |
| Telecommunications  information services         |   | —                  |   | —                |   | — |   | — |   |
| Total                                            |   | $                       | 84.8   |                  | $      | 86.4 |   | $ | 157.2 |   | $ | 166.4 |   |
|                                             |   |                    |   |                  |   |   |   |   |   |
| **Total  Revenues and Sales:**                   |   |                    |   |                  |   |   |   |   |   |
| Product  distribution                            |   | $                       | 95.9   |                  | $      | 100.8 |   | $ | 195.0 |   | $ | 193.9 |   |
| Long-distance  and network management services   |   | 72.9                    |   | 81.1                  |   | 151.9 |   | 162.1 |   |
| Directory  publishing                            |   | 48.7                    |   | 35.3                  |   | 74.9 |   | 59.7 |   |
| Telecommunications  information services         |   | 11.7                    |   | 25.6                  |   | 26.4 |   | 52.2 |   |
| Total  revenues and sales                        |   | $                       | 229.2  |                  | $      | 242.8 |   | $ | 448.2 |   | $ | 467.9 |   |

 

11

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**NOTES TO UNAUDITED INTERIMCONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

** **

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**9.****                      Stock-BasedCompensation:**

Under the Company’s stock-based compensation plans, ALLTEL may grantfixed and performance-based incentive and non-qualified stock options,restricted stock, and otherequity securities to officers and other management employees.  The Company accounts for these plans underthe recognition and measurement principles of Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” and relatedInterpretations.  For fixed stockoptions granted under these plans, the exercise price of the option equals themarket value of ALLTEL’s common stock on the date of grant.  Accordingly, ALLTEL does not recordcompensation expense for any of the fixed stock options granted, and nocompensation expense related to stock options was recognized in the three andsix month periods ended June 30, 2004 or 2003.  In January 2004, the Company granted 173,000 shares ofrestricted stock to certain senior management employees.  The restricted shares will vest in equalincrements over a three-year period from the date of grant.  Compensation expense related to theserestricted shares amounted to $0.7 million and $1.4 million for the three andsix month periods ended June 30, 2004. Unrecognized compensation expense for the restricted shares amounted to$7.1 million and was included in additional paid-in capital in the accompanyingconsolidated balance sheet as of June 30, 2004.  The following table illustrates the effects on net income andearnings per share had the Company applied the fair value recognitionprovisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, to itsstock-based employee compensation plans for the three and six months endedJune 30:

 
| **(Millions, except per share  amounts)**                                                                                        |        | **Three  Months Ended** |     | **Six Months  Ended** |     |
|----------------------------------------------------------------------------------------------------------------------------------|-------------|-------------------------|----------|-----------------------|----------|
|                                                                                                                             | **2004**    |                    | **2003** |                  | **2004** |   | **2003** |   |
| Net  income as reported                                                                                                          |        | $                       | 262.6    |                  | $        | 548.1 |   | $ | 452.4 |   | $ | 828.4 |   |
| Add  stock-based compensation expense included in net income, net of related tax  effects                                        |        | 0.5                     |     | —                |     | 0.9 |   | — |   |
| Deduct  stock-based employee compensation expense determined under fair value method  for all awards, net of related tax effects |        | (6.3                    | )        | (6.9                  | )        | (12.9 | ) | (11.3 | ) |
| Pro  forma net income                                                                                                            |        | $                       | 256.8    |                  | $        | 541.2 |   | $ | 440.4 |   | $ | 817.1 |   |
| Basic  earnings per share:                                                                                                       | As reported |                    | $        | .85                   |     | $ | 1.76 |   | $ | 1.46 |   | $ | 2.66 |   |
|                                                                                                                             | Pro forma   |                    | $        | .83                   |     | $ | 1.74 |   | $ | 1.42 |   | $ | 2.62 |   |
| Diluted  earnings per share:                                                                                                     | As reported |                    | $        | .85                   |     | $ | 1.75 |   | $ | 1.46 |   | $ | 2.65 |   |
|                                                                                                                             | Pro forma   |                    | $        | .83                   |     | $ | 1.73 |   | $ | 1.42 |   | $ | 2.62 |   |

 

The pro forma amounts presented above may not be representative of thefuture effects on reported net income and earnings per share, since the proforma compensation expense is allocated over the periods in which optionsbecome exercisable, and new option awards may be granted each year.

 

**10.****               EmployeeBenefit Plans and Postretirement Benefits Other Than Pensions:**

The Company maintains a qualified defined benefit pension plan, whichcovers substantially all employees other than employees of ALLTEL’s directorypublishing subsidiary.  The Company alsomaintains a supplemental executive retirement plan that provides unfunded,non-qualified supplemental retirement benefits to a select group of managementemployees.  In addition, the Company hasentered into individual retirement agreements with certain retired executivesproviding for unfunded supplemental pension benefits.  The Company funds the accrued costs of the unfunded plans asbenefits are paid.  The components ofpension expense, including provision for executive retirement agreements, wereas follows for the three and six month periods ended June 30:

 
|                                           |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| **(Millions)**                                 |   | **2004**                |   | **2003**              |   | **2004** |   | **2003** |   |
| Benefits  earned during the year               |   | $                       | 7.7    |                  | $      | 6.7 |   | $ | 15.4 |   | $ | 13.3 |   |
| Interest  cost on benefit obligation           |   | 12.9                    |   | 13.0                  |   | 25.9 |   | 26.1 |   |
| Amortization  of transition (asset) obligation |   | —                  |   | (0.3                  | )      | — |   | (0.6 | ) |
| Amortization  of prior service cost            |   | 0.1                     |   | —                |   | 0.2 |   | (0.1 | ) |
| Recognized  net actuarial loss                 |   | 4.9                     |   | 5.2                   |   | 9.8 |   | 10.4 |   |
| Expected  return on plan assets                |   | (17.6                   | )      | (14.3                 | )      | (35.2 | ) | (28.6 | ) |
| Net  periodic benefit expense                  |   | $                       | 8.0    |                  | $      | 10.3 |   | $ | 16.1 |   | $ | 20.5 |   |

 

ALLTEL disclosed in itsfinancial statements for the year ended December 31, 2003 that it expectedto contribute $5.0 million for retirement benefits in 2004 consisting solely ofamounts necessary to fund the expected benefit payments related to the unfundedsupplemental retirement plans. Primarily due to the timing of the required contributions to fund thesupplemental retirement plans, actual contributions were $3.3 million for thesix months ended June 30, 2004.

 

12

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**NOTES TO UNAUDITED INTERIMCONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

** **

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**10.****               EmployeeBenefit Plans and Postretirement Benefits Other Than Pensions, Continued:**

ALLTEL does not expectthat any contribution to the qualified defined pension plan calculated inaccordance with the minimum funding requirements of the Employee RetirementIncome Security Act of 1974 will be required in 2004.  Future discretionary contributions to the plan will depend onvarious factors, including future investment performance, changes in futurediscount rates and changes in the demographics of the population participatingin ALLTEL’s qualified pension plan.

 

The Company provides postretirement healthcare and life insurancebenefits for eligible employees. Employees share in the cost of these benefits.  The Company funds the accrued costs of these plans as benefitsare paid.  The components ofpostretirement expense were as follows for the three and six month periodsended June 30:

 
|                                   |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|----------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| **(Millions)**                         |   | **2004**                |   | **2003**              |   | **2004** |   | **2003** |   |
| Benefits  earned during the year       |   | $                       | 0.2    |                  | $      | 0.1 |   | $ | 0.4 |   | $ | 0.3 |   |
| Interest  cost on benefit obligation   |   | 4.0                     |   | 3.7                   |   | 7.9 |   | 7.4 |   |
| Amortization  of transition obligation |   | 0.2                     |   | 0.2                   |   | 0.4 |   | 0.4 |   |
| Amortization  of prior service cost    |   | 0.4                     |   | 0.4                   |   | 0.8 |   | 0.8 |   |
| Recognized  net actuarial loss         |   | 2.2                     |   | 1.8                   |   | 4.4 |   | 3.6 |   |
| Expected  return on plan assets        |   | —                  |   | —                |   | — |   | — |   |
| Net  periodic benefit expense          |   | $                       | 7.0    |                  | $      | 6.2 |   | $ | 13.9 |   | $ | 12.5 |   |

 

Under the MedicarePrescription Drug, Improvement and Modernization Act of 2003, (the “Act”)beginning in 2006, the Act will provide a prescription drug benefit underMedicare Part D, as well as a federal subsidy to plan sponsors of retireehealthcare plans that provide a prescription drug benefit to their participantsthat is at least actuarially equivalent to the benefit that will be availableunder Medicare.  The amount of thefederal subsidy will be based on 28 percent of an individual beneficiary'sannual eligible prescription drug costs ranging between $250 and $5,000.  On May 19, 2004, the Financial AccountingStandards Board issued Staff Position No. 106-2, “Accounting and DisclosureRequirements Related to the Medicare Prescription Drug, Improvement andModernization Act of 2003” (“FSP No. 106-2”). FSP No. 106-2 clarified that the federal subsidy provided under the Actshould be accounted for as an actuarial gain in calculating the accumulatedpostretirement benefit obligation and annual postretirement expense.  FSP No. 106-2 became effective as ofJuly 1, 2004.  The Department of Health and Human Services has yet toissue final regulations on the determination of actuarial equivalence and thefederal subsidy.  Until such regulations are finalized, ALLTEL cannot fullyquantify the effects, if any, that the Act will have on its future benefit costsor accumulated postretirement benefit obligation.  Accordingly, the effectsof the Act have not been reflected in the accompanying unaudited consolidatedfinancial statements.

 

**11.****               DiscontinuedOperations:**

Pursuant to an agreement dated January 28, 2003, on April 1, 2003, ALLTEL soldthe financial services division of its information services subsidiary, ALLTELInformation Services, Inc., to Fidelity National for $1.05 billion received as$775.0 million in cash and $275.0 million in Fidelity National common stock. Approximately 5,500 employees of the Company transitioned to Fidelity Nationalas part of the transaction.  As a result of this transaction, ALLTELrecorded an after tax gain of $323.9 million.  The after-tax proceeds fromthe sale were used primarily to reduce borrowings outstanding under theCompany's commercial paper program and to retire all long-term debt outstandingunder the Rural Utilities Services, Rural Telephone Bank and Federal FinancingBank programs.  The Fidelity National common stock acquired in thistransaction currently represents an approximate seven percent interest inFidelity National.

 

As a result of this transaction, the financial services division hasbeen reflected as discontinued operations in the Company's interim consolidatedstatements of income and cash flows for the period ended June 30,2003.  The depreciation of long-livedassets related to the financial services division ceased as of January 28,2003, the date of the agreement to sell such operations.

 

In January 2003, ALLTEL also completed the termination of itsbusiness venture with Bradford & Bingley Group.  The business venture, ALLTEL Mortgage Solutions, Ltd., amajority-owned consolidated subsidiary of ALLTEL, was created in 2000 toprovide mortgage administration and information technology products in theUnited Kingdom.  Unfortunately, thebusiness climate in the United Kingdom limited the venture’s ability toleverage the business across a broad base of customers.  As a result, the operations of ALLTELMortgage Solutions, Ltd. have also been reflected as discontinued operations inthe Company’s interim consolidated statements of operations and cash flows forthe period ended June 30, 2003.

 

13

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**NOTES TO UNAUDITED INTERIMCONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

** **

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**11.****               DiscontinuedOperations, Continued:**

The following table includes certain summary income statementinformation related to the financial services operations reflected asdiscontinued operations for the three and six months ended June 30, 2003:

 
| **(Millions)**                              |   | **Three  Months  Ended** |   | **Six  Months  Ended** |   |
|---------------------------------------------|--------|--------------------------|--------|------------------------|--------|
| Revenues  and sales                         |   | $                        | — |                   | $      | 210.3 |   |
| Operating  expenses                         |   | —                   |   | 148.1                  |   |
| Operating  income                           |   | —                   |   | 62.2                   |   |
| Other  expense, net                         |   | —                   |   | (0.1                   | )      |
| Gain  on sale of discontinued operations    |   | 555.1                    |   | 555.1                  |   |
| Pretax  income from discontinued operations |   | 555.1                    |   | 617.2                  |   |
| Income  tax expense                         |   | 231.2                    |   | 256.2                  |   |
| Income  from discontinued operations        |   | $                        | 323.9  |                   | $      | 361.0 |   |

 

The following table includes certain summary cash flow statementinformation related to the financial services operations reflected asdiscontinued operations for the six months ended June 30, 2003:

 
| **(Millions)**                                |   |   |   |
|-----------------------------------------------|--------|--------|--------|
| Net  cash provided by operating activities    |   | $      | 29.4   |   |
| Net  cash provided by investing activities    |   | 763.4  | (a)    |
| Net  cash used in financing activities        |   | (0.1   | )      |
| Net  cash provided by discontinued operations |   | $      | 792.7  |   |

 

(a)          Included cash proceeds of $784.9 millionreceived from the sale of the financial services division to FidelityNational.  The cash proceeds includedworking capital adjustments of $9.9 million.

 

**12.****               Commitmentsand Contingencies:**

The Company currently has outstanding various indemnifications relatedeither to the sale of the financial services division to Fidelity National (seeNote 11) or the sale of certain assets and related liabilities, includingselected customer contracts and capitalized software development costs,associated with the telecommunications information services operations toConvergys Information Management Group, Inc. (“Convergys”) during the fourthquarter of 2003.

 

In conjunction with the sale of the financial services division, ALLTELagreed to indemnify Fidelity National for any damages resulting from ALLTEL’sbreach of warranty or non-fulfillment of certain covenants under the salesagreement, that exceed 1.5 percent of the purchase price, or $15.75 million, upto a maximum of 15 percent of the purchase price, or $157.5 million.  Because of the low probability of beingrequired to pay any amount under this indemnification, ALLTEL determined thefair value of this obligation to be immaterial to the consolidated results ofoperations, cash flows and financial condition of the Company.  Accordingly, the Company has not recorded aliability related to it.  ALLTEL alsoagreed to indemnify Fidelity National from any future tax liability imposed onthe financial services division related to periods prior to the date ofsale.  ALLTEL’s obligation to FidelityNational under this indemnification is not subject to a maximum amount.  The Company has recorded a liability for taxcontingencies of approximately $34.0 million related to the operations of thefinancial services division for periods prior to the date of sale thatmanagement has assessed as probable and estimable, which should adequatelycover any obligation under this indemnification.

 

In connection with the sale of assets to Convergys, ALLTEL agreed toindemnify Convergys for any damages resulting from ALLTEL’s breach of warrantyunder the sales agreement that exceed $500,000, up to a maximum of $10.0million.  In addition, the Companyagreed to indemnify Convergys from any damages resulting from non-fulfillmentof certain covenants or liabilities arising from the ownership, operation oruse of the assets included in the sale. This indemnification is not subject to a maximum obligation.  Because of the low probability of beingrequired to pay any amount under these indemnifications, ALLTEL determined thefair value of these obligations to be immaterial to the consolidated results ofoperations, cash flows and financial condition of the Company.  Accordingly, the Company has not recorded aliability related to these indemnifications.

 

14

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**ALLTEL CORPORATION**

**FORM 10-Q**

**PART I - FINANCIAL INFORMATION**

 

**Item 2. Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

**GENERAL**

The following is adiscussion and analysis of the historical results of operations and financialcondition of ALLTEL Corporation (“ALLTEL” or the “Company”).  This discussion should be read inconjunction with the unaudited consolidated financial statements, including thenotes thereto, for the interim periods ended June 30, 2004 and 2003, andthe Company’s Annual Report on Form 10-K for the year ended December 31,2003.

 

###### **EXECUTIVE SUMMARY**

ALLTEL is acustomer-focused communications company providing wireless, local telephone,long-distance, Internet and high-speed data services to nearly 13 millionresidential and business customers in 26 states.  Among the highlights in the second quarter of 2004:

 

•                  Wirelesscustomer growth was strong supported by continued improvements in customerretention.  Wireless postpay customerchurn decreased to 1.57 percent, the lowest churn rate in more than 5years.  This improvement in postpaychurn contributed to more than 155,000 net new wireless customers during thesecond quarter, all of which were on postpay plans. Wireless service revenuesincreased 5 percent from the same period a year ago, including 6 percent growthin retail revenues.  Retail minutes ofuse per wireless customer per month increased 33 percent from the same period ayear ago to 490 minutes per customer per month.

 

•                  Althoughwireless retail revenues increased in the second quarter of 2004 compared tothe same period a year ago, wholesale wireless revenues declined 9 percentyear-over-year, primarily due to lower analog and TDMA minutes of use by othercarriers’ customers roaming on ALLTEL’s wireless network, partially offset bycontinued growth in CDMA minutes of use.  This decline in wholesalerevenues combined with increased network costs attributable to the significantgrowth in customer usage and additional costs associated with migratingcustomers to newer rate plans and handsets adversely affected wireless segmentincome in both the three and six month periods ended June 30, 2004.

 

•                  Inits wireline business, ALLTEL added more than 20,000 high-speed data customers,increasing ALLTEL’s DSL customer base to 195,000.  During the quarter, the Company lostapproximately 24,000 wireline access lines, a slight decline from the 26,000access lines lost during the second quarter of 2003.  Average revenue per wireline customer increased 3 percent from ayear ago to $65.99 due primarily to growth from selling additional services andfeatures to existing wireline customers. ALLTEL continued to generate solid operating margins in its wirelinebusiness and controlled operating expenses.

  

•                  Maintainedits strong financial position while reducing long-term debt by $250.0 millionduring the quarter.  At June 30,2004, the Company had available more than $1.1 billion in cash and marketablesecurities.

 

Throughout the remainderof 2004, the Company will continue to face significant challenges resultingfrom continued competition in the telecommunications industry and changes inthe regulatory environment, including the effects of potential changes to therules governing universal service and inter-carrier compensation.  In addressing these challenges, ALLTEL willcontinue to focus its efforts on improving customer service, enhancing thequality of its networks and expanding its product and service offerings.

 

15

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| **CONSOLIDATED RESULTS OF OPERATIONS**                       |   |                                   |    |                                 |   |
|--------------------------------------------------------------|--------|----------------------------------------|---------|--------------------------------------|--------|
|                                                         |   | **Three  Months Ended  June 30,** |    | **Six Months  Ended  June 30,** |   |
| **(Millions, except per share  amounts)**                    |   | **2004**                               |    | **2003**                             |   | **2004** |   | **2003** |   |
| Revenues  and sales:                                         |   |                                   |    |                                 |   |   |   |   |   |
| Service  revenues                                            |   | $                                      | 1,825.9 |                                 | $      | 1,797.5 |   | $ | 3,591.5 |   | $ | 3,514.0 |   |
| Product  sales                                               |   | 216.2                                  |    | 212.7                                |   | 411.8 |   | 402.0 |   |
| Total  revenues and sales                                    |   | 2,042.1                                |    | 2,010.2                              |   | 4,003.3 |   | 3,916.0 |   |
| Costs  and expenses:                                         |   |                                   |    |                                 |   |   |   |   |   |
| Cost  of services                                            |   | 584.2                                  |    | 565.6                                |   | 1,145.0 |   | 1,103.0 |   |
| Cost  of products sold                                       |   | 256.0                                  |    | 271.3                                |   | 513.3 |   | 509.0 |   |
| Selling,  general, administrative and other                  |   | 372.9                                  |    | 372.5                                |   | 748.1 |   | 733.6 |   |
| Depreciation  and amortization                               |   | 321.2                                  |    | 310.7                                |   | 642.5 |   | 614.2 |   |
| Restructuring  and other charges                             |   | —                                 |    | 19.0                                 |   | 51.8 |   | 19.0 |   |
| Total  costs and expenses                                    |   | 1,534.3                                |    | 1,539.1                              |   | 3,100.7 |   | 2,978.8 |   |
| Operating  income                                            |   | 507.8                                  |    | 471.1                                |   | 902.6 |   | 937.2 |   |
| Non-operating  expense, net                                  |   | (2.8                                   | )       | (1.0                                 | )      | (0.5 | ) | (0.9 | ) |
| Interest  expense                                            |   | (86.6                                  | )       | (93.2                                | )      | (178.3 | ) | (196.6 | ) |
| Write-down  of investments and other                         |   | —                                 |    | (13.1                                | )      | — |   | (13.1 | ) |
| Income  from continuing operations before income taxes       |   | 418.4                                  |    | 363.8                                |   | 723.8 |   | 726.6 |   |
| Income  taxes                                                |   | 155.8                                  |    | 139.6                                |   | 271.4 |   | 274.8 |   |
| Income  from continuing operations                           |   | 262.6                                  |    | 224.2                                |   | 452.4 |   | 451.8 |   |
| Income  from discontinued operations, net of income taxes    |   | —                                 |    | 323.9                                |   | — |   | 361.0 |   |
| Cumulative  effect of accounting change, net of income taxes |   | —                                 |    | —                               |   | — |   | 15.6 |   |
| Net  income                                                  |   | $                                      | 262.6   |                                 | $      | 548.1 |   | $ | 452.4 |   | $ | 828.4 |   |
| Basic  earnings per share:                                   |   |                                   |    |                                 |   |   |   |   |   |
| Income  from continuing operations                           |   | $                                      | .85     |                                 | $      | .72 |   | $ | 1.46 |   | $ | 1.45 |   |
| Income  from discontinued operations                         |   | —                                 |    | 1.04                                 |   | — |   | 1.16 |   |
| Cumulative  effect of accounting change                      |   | —                                 |    | —                               |   | — |   | .05 |   |
| Net  income                                                  |   | $                                      | .85     |                                 | $      | 1.76 |   | $ | 1.46 |   | $ | 2.66 |   |
| Diluted  earnings per share:                                 |   |                                   |    |                                 |   |   |   |   |   |
| Income  from continuing operations                           |   | $                                      | .85     |                                 | $      | .72 |   | $ | 1.46 |   | $ | 1.45 |   |
| Income  from discontinued operations                         |   | —                                 |    | 1.03                                 |   | — |   | 1.15 |   |
| Cumulative  effect of accounting change                      |   | —                                 |    | —                               |   | — |   | .05 |   |
| Net  income                                                  |   | $                                      | .85     |                                 | $      | 1.75 |   | $ | 1.46 |   | $ | 2.65 |   |

 

Service revenuesincreased 2 percent, or $28.4 million and $77.5 million, for the three and sixmonth periods ended June 30, 2004, respectively, compared to the sameperiods of 2003.  The increases inservice revenues primarily reflected growth in ALLTEL’s wireless customer baseand the corresponding increases in wireless access revenues, which increased$82.6 million and $156.5 million in the three and six month periods endedJune 30, 2004, respectively. Service revenues for both 2004 periods also reflected growth in revenuesderived from wireless and wireline data services and from the sale of enhancedcommunication services, including caller identification, call waiting, callforwarding, voice mail, and wireless equipment protection plans.  Revenues from data and enhanced servicesincreased $18.5 million and $37.8 million in the three and six month periods of2004, respectively, primarily reflecting continued demand for theseservices.  Wireless services revenuesalso included increases in regulatory and other fees of $11.2 million and $21.6million in the three and six month periods of 2004, respectively.  Regulatory fees in 2004 included UniversalService Fund (“USF”) support received by ALLTEL pursuant to its certificationin five states as an Eligible Telecommunications Carrier (“ETC”), and accountedfor $10.6 million and $15.2 million of the overall increases in regulatory feesin the three and six month periods of 2004, respectively.  The increase in regulatory fees in the sixmonth period of 2004 also reflected additional amounts billed to customers tooffset costs related to certain regulatory mandates, including universalservice funding, primarily resulting from changes in FCC regulations applicableto universal service fees that were effective on April 1, 2003. Compared to the same periods of 2003, revenues from the Company’s Internetoperations increased $3.4 million and $6.8 million in the three and six monthperiods of 2004, respectively, primarily driven by growth in DSL customers.

 

The above increases inservice revenues were partially offset by lower wireless airtime, retailroaming and wholesale revenues, reductions in revenues derived fromtelecommunications information, long-distance and network management servicesand decreases in wireline access and toll service revenues.  Compared to the same periods of 2003, airtimeand retail roaming revenues decreased $41.5 million and $61.8 million in thethree and six month periods of 2004, respectively. The decreases in wirelessairtime and retail roaming revenues primarily reflected the effects ofcustomers migrating to rate plans with a larger number of packaged minutes. Such rate plans, for a flat monthly service fee, provide customers with a 

16

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specified number of airtime minutes and include unlimited weekend, nighttime andmobile-to-mobile minutes at no extra charge.  Wholesale wireless revenues declined $8.9 million and $13.6 million inthe three and six months ended June 30, 2004, respectively, primarily dueto lower analog and TDMA minutes of use by other carriers’ customers roaming onALLTEL’s wireless network. Telecommunications information services revenues decreased $13.9 millionand $25.8 million in the three and six month periods of 2004, respectively,compared to the same periods of 2003. The decreases in these revenues resultedfrom the December 2003 sale of certain assets and related liabilities,including selected customer contracts and capitalized software developmentcosts, to Convergys Information Management Group, Inc. (“Convergys”).  Revenues from long-distance and networkmanagement services decreased $8.2 million and $10.2 million in the three andsix month periods of 2004, respectively, primarily due to declining usage byresidential customers and a reduction in intercompany and residential customerbilling rates.  Wireline local accessservice and intrastate network access and toll revenues decreased $11.0 millionand $23.1 million in the three and six month periods of 2004, respectively,primarily as a result of the loss of wireline access lines due, in part, tobroadband and wireless substitution.

 

Product sales increased 2percent, or $3.5 million and $9.8 million, in the three and six month periodsended June 30, 2004, respectively, compared to the same periods of2003.  The increases in product sales inboth 2004 periods were primarily driven by higher retail prices realized on thesale of wireless handsets and accessories and increased sales of wirelesshandsets to retailers and other distributors. The increase in product sales in the six month period of 2004 alsoreflected 6 percent growth in gross wireless customer additions compared to thecorresponding period of 2003. Offsetting the growth in product sales in the six month period of 2004was a reduction in sales of landline-based communications equipment, reflectinglower customer demand and the loss of wireline access lines.

 

Cost of servicesincreased $18.6 million, or 3 percent, and $42.0 million, or 4 percent, in thethree and six month periods ended June 30, 2004, respectively, compared tothe same periods of 2003.  Cost ofservices for the three and six month periods of 2004 reflected increases inwireless network-related costs of $33.2 million and $59.4 million,respectively, compared to the same periods of 2003, primarily due to increasednetwork traffic resulting from customer growth, increased minutes of use andexpansion of network facilities.  Costof services for the three and six month periods of 2004 also reflectedincreases in wireless customer service expenses of $8.4 million and $17.5million, respectively, primarily reflecting additional costs associated withALLTEL’s initiatives designed to improve customer satisfaction and reducepostpay churn.  Cost of services forthe six month period of 2004 also included increased wireless regulatory feesof $13.2 million principally related to fees associated with the USF,reflecting changes in FCC regulations effective April 1, 2003.  The increases in cost of services in the sixmonth period of 2004 attributable to higher wireless network-related costs,increased regulatory fees and customer services expenses were partially offsetby a decrease in wireless bad debt expense. Compared to the same period of 2003, wireless bad debt expense decreased$10.8 million in the first six months of 2004 primarily due to ALLTEL’scontinuing efforts to reduce losses sustained from bad debts by managing itscustomer credit policies, improving collection practices, utilizing newtechnologies and proactively managing the efforts of the Company’s collectionagencies.  Cost of services for thethree and six month periods of 2004 also reflected decreases in network-relatedcosts for the wireline operations of $5.7 million and $13.1 million,respectively, primarily due to the loss of wireline access lines and theeffects of the incremental strike-related and maintenance costs incurred in2003.  Cost of services for the threeand six month periods of 2004 were also favorably affected by reduced operatingcosts of $10.1 million and $20.8 million, respectively, resulting from the saleof certain telecommunications information services operations to Convergys, aspreviously discussed.

 

Cost of products solddecreased $15.3 million, or 6 percent, and increased $4.3 million, or 1percent, in the three and six month periods ended June 30, 2004,respectively, compared to the same periods of 2003.  The decrease in the three month period of 2004 primarily resultedfrom a decline in the volume of equipment upgrades provided to existingwireless customers compared to the same period of 2003 and the effects ofvendor rebates earned by ALLTEL for attaining specified purchase volumes withthe Company’s wireless handset vendors. Conversely, the increase in cost of products sold in the six monthperiod of 2004 was consistent with the overall growth in product sales notedabove and reflected 6 percent growth in wireless gross customer activations,sales of higher-priced digital phones and increased sales of wireless handsetsto resellers and other distributors.

 

Selling, general,administrative and other expenses increased $0.4 million, or less than 1percent, and $14.5 million, or 2 percent, in the three and six month periodsended June 30, 2004, respectively, compared to the same periods of 2003.  The increase in the six month period of 2004primarily resulted from an increase in wireless commissions expense of $27.4million, consistent with the growth in gross customer additions, partiallyoffset by cost savings realized in the wireline operations, reflecting the Company’scontinued  control of operating expenses.  Depreciation and amortization expense increased $10.5 million, or3 percent, and $28.3 million, or 5 percent, in the three and six month periodsended June 30, 2004, respectively, compared to the same periods of 2003,primarily due to growth in wireless plant in service.

 

17

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Operating incomeincreased $36.7 million, or 8 percent, and decreased $34.6 million, or 4percent, in the three and six month periods ended June 30, 2004,respectively, compared to the same periods of 2003.  The increase in the three month period of 2004 primarilyreflected growth in wireline segment income due to selling additional servicesand features to existing wireline customers, growth in the Company's Internet operations and the effects of theincremental strike-related costs incurred in the second quarter of 2003.  Operating income comparisons for the secondquarter of 2004 were also favorably affected by the effects of restructuringand other charges recorded in the second quarter of 2003, as further discussedbelow.  Conversely, the decrease inoperating income in the six month period of 2004 primarily reflected theeffects of the restructuring and other charges incurred during the firstquarter of 2004, as further discussed below, and a reduction in wirelesssegment income due to decreased wireless wholesale revenues and increasedcustomer acquisition and retention costs. The changes in wireless and wireline segment income in 2004 are furtherdiscussed below under “Results of Operations by Business Segment”.

 

Restructuring and OtherCharges

Set forth below is asummary of the restructuring and other charges recorded for the three and sixmonth periods ended June 30:

 
|                                                    |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|---------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| **(Millions)**                                          |   | **2004**                |   | **2003**              |   | **2004** |   | **2003** |   |
| Severance  and employee benefit costs                   |   | $                       | — |                  | $      | 6.3 |   | $ | 22.6 |   | $ | 6.3 |   |
| Relocation  costs                                       |   | —                  |   | —                |   | 4.8 |   | — |   |
| Lease  and contract termination costs                   |   | —                  |   | (0.5                  | )      | (1.5 | ) | (0.5 | ) |
| Write-down  of software development costs               |   | —                  |   | 13.2                  |   | — |   | 13.2 |   |
| Write-down  in the carrying value of certain facilities |   | —                  |   | —                |   | 24.8 |   | — |   |
| Other  exit costs                                       |   | —                  |   | —                |   | 1.1 |   | — |   |
| Total  restructuring and other charges                  |   | $                       | — |                  | $      | 19.0 |   | $ | 51.8 |   | $ | 19.0 |   |

 

In January 2004, theCompany announced its plans to reorganize its operations and supportteams.  Also, during February 2004,the Company announced its plans to exit its Competitive Local Exchange Carrier (“CLEC”)operations in the Jacksonville, Florida market due to the continuedunprofitability of these operations.  Inconnection with these activities, ALLTEL recorded a restructuring charge of$29.3 million consisting of $22.9 million in severance and employee benefitcosts related to a planned workforce reduction, $4.8 million of employeerelocation expenses, $0.5 million in lease termination costs and $1.1 millionof other exit costs.  The severance andemployee benefit costs included a $1.2 million payment to a former employee ofthe Company’s sold financial services division that became payable in the firstquarter of 2004 pursuant to the terms of a change in control agreement betweenthe employee and ALLTEL.  As ofJune 30, 2004, the Company had paid $21.6 million in severance andemployee-related expenses, and all of the employee reductions associated withthe reorganization had been completed. Certain of the planned employee relocations and employee reductionsassociated with the closure of the CLEC operations will be completed by the endof the third quarter of 2004.  ALLTELalso recorded a $2.3 million reduction in the liabilities associated withvarious restructuring activities initiated prior to 2003, consisting of $2.0million in lease and contract termination costs and $0.3 million in severanceand employee benefit costs.  Thereductions primarily reflected differences between estimated and actual costspaid in completing the previous planned workforce reductions and lease andcontract terminations.  During the firstquarter of 2004, the Company also recorded a write-down in the carrying valueof certain corporate and regional facilities to fair value in conjunction withthe proposed leasing or sale of those facilities.  The asset write-downs resulted from lower occupancy in thefacilities due to the 2004 reorganizational changes and the 2003 sale of theCompany’s financial services division to Fidelity National Financial Inc.(“Fidelity National”), as further discussed below under “DiscontinuedOperations”.

 

During the second quarterof 2003, the Company recorded a restructuring charge of $8.5 million consistingof severance and employee benefit costs related to a planned workforcereduction, primarily resulting from the closing of certain call centerlocations.  As of June 30, 2004,the Company had paid $8.5 million in severance and employee-related expenses,and all of the employee reductions had been completed.  The Company also recorded a $2.7 millionreduction in the liabilities associated with various restructuring activitiesinitiated prior to 2003, consisting of $2.2 million in severance and employeebenefit costs and $0.5 million in lease termination costs.  The reduction primarily reflecteddifferences between estimated and actual costs paid in completing the previousplanned workforce reductions and lease terminations.  During the second quarter of 2003, ALLTEL also wrote off certaincapitalized software development costs totaling $13.2 million that had noalternative future use or functionality.

 

At June 30, 2004,the remaining unpaid liability related to the Company’s integration andrestructuring activities consisted of severance and employee-related expensesof $1.5 million, relocation expenses of $1.8 million and lease and contracttermination costs of $0.4 million.  Cashoutlays for the remaining unpaid liability are to be paid over the next 12 to24 months out of operating cash flows. (See Note 4 to the unaudited interim consolidated financial statementsfor additional information regarding the restructuring and other charges.)

 

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| Non-Operating Expense,  Net                     |   |                                   |   |                                |   |
|-------------------------------------------------|--------|----------------------------------------|--------|-------------------------------------|--------|
|                                            |   | **Three  Months  Ended June 30,** |   | **Six Months  Ended June 30,** |   |
| **(Millions)**                                  |   | **2004**                               |   | **2003**                            |   | **2004** |   | **2003** |   |
| Equity  earnings in unconsolidated partnerships |   | $                                      | 15.9   |                                | $      | 16.7 |   | $ | 29.2 |   | $ | 34.2 |   |
| Minority  interest in consolidated partnerships |   | (21.6                                  | )      | (21.4                               | )      | (37.2 | ) | (39.2 | ) |
| Other  income, net                              |   | 2.9                                    |   | 3.7                                 |   | 7.5 |   | 4.1 |   |
| Non-operating  expense, net                     |   | $                                      | (2.8   | )                                   | $      | (1.0 | ) | $ | (0.5 | ) | $ | (0.9 | ) |

 

As indicated in the tableabove, non-operating expense, net increased $1.8 million, or 180 percent, anddecreased $0.4 million, or 44 percent, in the three and six months endedJune 30, 2004, respectively, compared to the same periods of 2003.  The decreases in equity earnings of $0.8million and $5.0 million in the three and six month periods of 2004,respectively, primarily reflected the effects of ALLTEL’s April 1, 2003acquisition of a majority ownership interest in a Wisconsin RSA in which theCompany previously owned a minority interest. Conversely, the decrease in minority interest expense of $2.0 million inthe six month period of 2004 primarily reflected the effects of ALLTEL’s thirdquarter 2003 acquisitions of additional ownership interests in wirelessproperties in Mississippi, New Mexico and Virginia in which the Company owned amajority interest.  Other income, netfor the six month period of 2004 included additional dividend income of $1.6million earned on the Company’s equity investments, primarily Fidelity Nationalcommon stock.  Other income, net for2004 also included $1.2 million of additional interest income earned on theCompany’s cash and short-term investments due to significant growth in theCompany’s available cash on hand following the sale of the financial servicesdivision to Fidelity National, as further discussed below under “DiscontinuedOperations”.

 

Interest Expense

Interest expensedecreased $6.6 million, or 7 percent, and $18.3 million, or 9 percent, in thethree and six month periods ended June 30, 2004, respectively, compared tothe same periods of 2003.  The decreasesin both 2004 periods reflected the repayment of a $250.0 million, 7.25 percentsenior unsecured note that the Company repaid on April 1, 2004, usingavailable cash on hand.  Interest expense for both 2004 periods also reflected the Company’s repaymentof more than $750.0 million of long-term debt during 2003.  During the first quarter of 2003, theCompany repaid a $450.0 million, 7.125 percent unsecured note due March 1,2003, using commercial paper borrowings. In the second quarter of 2003, ALLTEL repaid all outstanding commercialpaper borrowings and prepaid $249.1 million of long-term debt outstanding underthe Rural Utilities Services, Rural Telephone Bank and Federal Financing Bankprograms.  The debt repayments in thesecond quarter of 2003 were funded primarily from the cash proceeds receivedfrom the sale of the financial services division.

 

Write-down of Investmentsand Other

In the second quarter of2003, ALLTEL recorded pretax write-downs totaling $6.0 million to reflectother-than-temporary declines in the fair value of certain investments inunconsolidated limited partnerships.  Asnoted above, during the second quarter of 2003, the Company retired, prior tostated maturity dates, $249.1 million of long-term debt.  In connection with the early retirement ofthis debt, the Company incurred pretax termination fees of $7.1 million.

 

Income Taxes

Income tax expenseincreased $16.2 million, or 12 percent, and decreased $3.4 million, or 1percent, for the three and six month periods ended June 30, 2004,respectively, compared to the same periods of 2003.  The increase in income tax expense in the three month period of2004 was consistent with the overall growth in the Company’s earnings fromcontinuing operations primarily attributable to growth in wireline segmentincome and the effects of restructuring and other charges recorded in thesecond quarter of 2003.  Conversely, thedecrease in income tax expense in the six month period of 2004 was consistentwith the overall decrease in the Company’s earnings from continuing operationsthat resulted primarily from the effects of the restructuring and other chargesrecorded in the first quarter of 2004, decreased wireless wholesale revenuesand increased wireless customer acquisition and retention costs previouslydiscussed.

 

The Company’s effectiveincome tax rates decreased slightly to 37.2 percent and 37.5 percent for thethree and six months ended June 30, 2004, respectively.  In determiningits quarterly provision for income taxes, ALLTEL uses an estimated annualeffective tax rate, which is based on the Company’s expected annual income,statutory rates and tax planning opportunities and reflects ALLTEL’s bestestimate of the ultimate outcome of tax examinations and assessments.  Significant or unusual items, such as thetaxes related to the sale of a business, would be separately recognized in thequarter in which they occur.

 

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Subsequent toJune 30, 2004, the Internal Revenue Service (“IRS”) completed itsfieldwork related to the audits of the Company’s consolidated federal incometax returns for the fiscal years 1997 through 2001.  As a result of the IRS completing this phase of their audits,ALLTEL is currently reassessing certain tax contingencies related to the periods underexamination and will adjust its estimated annual effective tax rate in the thirdquarter of 2004 to reflect the effects of this reassessment.  Although ALLTELhas not fully quantified the effects, it is likely that the reassessment willresult in a reduction in the Company's effectivetax rate for the third quarterof 2004 and such reduction could be material.

 

Net Income and Earningsper Share from Continuing Operations

Net income fromcontinuing operations increased $38.4 million, or 17 percent, and $0.6 million,or less than 1 percent, for the three and six month periods ended June 30,2004, respectively, compared to the same periods of 2003.  Basic and diluted earnings per share fromcontinuing operations both increased 18 percent and less than 1 percent, forthe three and six month periods ended June 30, 2004, respectively, comparedto the same periods of 2003.  Theincreases in net income and earnings per share in the three month period of2004 primarily reflected growth in wireline segment income and the effects ofrestructuring and other charges recorded in the second quarter of 2003 aspreviously discussed.  Net income andearnings per share from continuing operations for the six month period of 2004reflected growth in wireline segment income, partially offset by the effects ofthe restructuring and other charges recorded in the first quarter of 2004, anda reduction in wireless segment income due to lower wholesale revenues andincreased customer acquisition and retention costs.  For a further discussion of the wireless and wireline segmentoperating results, see “Results of Operations by Business Segment” below.

 

Discontinued Operations

On April 1, 2003,ALLTEL completed the sale of the financial services division of its informationservices subsidiary, ALLTEL Information Services, Inc., to Fidelity National,for $1.05 billion, received as $775.0 million in cash and $275.0 million inFidelity National common stock.  As partof this transaction, Fidelity National acquired ALLTEL’s mortgage servicing,retail and wholesale banking and commercial lending operations, as well as thecommunity/regional bank division. Approximately 5,500 employees of the Company transitioned to FidelityNational as part of the transaction.  Asa result of this transaction, the financial services division has beenreflected as discontinued operations in the Company’s consolidated financialstatements for the three and six months ended June 30, 2003.  The telecom division of ALLTEL InformationServices, Inc. was retained by the Company and was not part of the saletransaction with Fidelity National.  Theoperations of the retained telecom division are included in the communicationssupport services segment.

 

In January 2003,ALLTEL completed the termination of its business venture with Bradford &Bingley Group.  The business venture,ALLTEL Mortgage Solutions, Ltd., a majority-owned consolidated subsidiary ofALLTEL, was created in 2000 to provide mortgage administration and informationtechnology products in the United Kingdom. Unfortunately, the business climate in the United Kingdom limited theventure’s ability to leverage the business across a broad base ofcustomers.  As a result, the operationsof ALLTEL Mortgage Solutions, Ltd. were also reflected as discontinuedoperations in the Company’s consolidated financial statements for the three andsix months ended June 30, 2003. The following table includes certain summary income statementinformation related to the financial services operations reflected asdiscontinued operations for the three and six months ended June 30, 2003:

 
| **(Millions)**                              |   | **Three  Months  Ended** |   | **Six  Months  Ended** |   |
|---------------------------------------------|--------|--------------------------|--------|------------------------|--------|
| Revenues  and sales                         |   | $                        | — |                   | $      | 210.3 |   |
| Operating  expenses                         |   | —                   |   | 148.1                  |   |
| Operating  income                           |   | —                   |   | 62.2                   |   |
| Other  expense, net                         |   | —                   |   | (0.1                   | )      |
| Gain  on sale of discontinued operations    |   | 555.1                    |   | 555.1                  |   |
| Pretax  income from discontinued operations |   | 555.1                    |   | 617.2                  |   |
| Income  tax expense                         |   | 231.2                    |   | 256.2                  |   |
| Income  from discontinued operations        |   | $                        | 323.9  |                   | $      | 361.0 |   |

 

The depreciation oflong-lived assets related to the financial services division ceased as ofJanuary 28, 2003, the date of the agreement to sell such operations.  The cessation of depreciation had the effectof reducing operating expenses by approximately $13.0 million in 2003.  (See Note 11 to the unaudited interimconsolidated financial statements for additional information regarding thediscontinued operations.)

 

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Cumulative Effectof Accounting Change

Except for certainwireline subsidiaries as further discussed below, the Company adopted Statementof Financial Accounting Standards (“SFAS”) No. 143, “Accounting for AssetRetirement Obligations”, effective January 1, 2003.  SFAS No. 143 addresses financial accountingand reporting for obligations associated with the retirement of tangiblelong-lived assets and the associated asset retirement costs.  This standard applies to legal obligationsassociated with the retirement of long-lived assets that result from theacquisition, construction, development, or normal use of the assets.  SFAS No. 143 requires that a liability foran asset retirement obligation be recognized when incurred and reasonablyestimable, recorded at fair value and classified as a liability in the balancesheet.  When the liability is initiallyrecorded, the entity capitalizes the cost and increases the carrying value ofthe related long-lived asset.  Theliability is then accreted to its present value each period, and thecapitalized cost is depreciated over the estimated useful life of the relatedasset.  At the settlement date, theentity will settle the obligation for its recorded amount and recognize a gainor loss upon settlement.  The Companyhas evaluated the effects of SFAS No. 143 on its operations and has determinedthat, for telecommunications and other operating facilities in which theCompany owns the underlying land, ALLTEL has no contractual or legal obligationto remediate the property if the Company were to abandon, sell or otherwisedispose of the property.  Certain of theCompany’s cell site and switch site operating lease agreements contain clausesrequiring restoration of the leased site at the end of the lease term.  Similarly, certain of the Company’s leaseagreements for office and retail locations require restoration of the leasedsite upon expiration of the lease term. Accordingly, ALLTEL is subject to asset retirement obligationsassociated with these leased facilities under the provisions of SFAS No.143.  The application of SFAS No. 143 tothe Company’s cell site and switch site leases and leased office and retaillocations did not have a material impact on ALLTEL’s consolidated results ofoperations, financial position or cash flows as of or for the six months endedJune 30, 2004 or 2003.

 

In accordance withfederal and state regulations, depreciation expense for the Company’s wirelineoperations has historically included an additional provision for cost ofremoval.  The additional cost of removalprovision does not meet the recognition and measurement principles of an assetretirement obligation under SFAS No. 143. On December 20, 2002, the Federal Communications Commission (“FCC”)notified wireline carriers that they should not adopt the provisions of SFASNo. 143 unless specifically required by the FCC in the future.  As a result of the FCC ruling, ALLTELcontinues to record a regulatory liability for cost of removal for its wirelinesubsidiaries that follow the accounting prescribed by SFAS No. 71, “Accountingfor the Effects of Certain Types of Regulation”.  The regulatory liability for cost of removal included inaccumulated depreciation amounted to $164.2 million and $151.6 million atJune 30, 2004 and 2003, respectively. For the acquired Kentucky and Nebraska wireline operations not subjectto SFAS No. 71, effective January 1, 2003, the Company ceased recognitionof the cost of removal provision in depreciation expense and eliminated thecumulative cost of removal included in accumulated depreciation.  The cumulative effect of retroactivelyapplying these changes to periods prior to January 1, 2003, resulted in anon-cash credit of $15.6 million, net of income tax benefit of $10.3 million,and was included in net income for the six months ended June 30,2004.  The cessation of the cost ofremoval provision in depreciation expense for the acquired Kentucky andNebraska wireline operations did not have a material impact on the Company’sconsolidated results of operations for the three and six months endedJune 30, 2004 and 2003.

 

Average Common SharesOutstanding

The average number ofcommon shares outstanding decreased in both the three and six month periodsended June 30, 2004, compared to the same periods of 2003.  The decreases in both 2004 periods primarilyreflected the effects of the Company’s repurchase of approximately 4.8 million ofits common shares during the first quarter of 2004, as further discussed belowunder “Cash Flows-Financing Activities”. The decreases in outstanding common shares in both 2004 periodsattributable to the share repurchase were partially offset by additional sharesissued upon the exercise of options granted under ALLTEL’s employee stock-basedcompensation plans.

 

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**RESULTS OF OPERATIONS BY BUSINESS SEGMENT**

Communications-WirelessOperations
|                                              |   | **Three  Months Ended  June 30,** |    | **Six Months  Ended  June 30,** |   |
|---------------------------------------------------|--------|----------------------------------------|---------|--------------------------------------|--------|
| **(Millions, customers in  thousands)**           |   | **2004**                               |    | **2003**                             |   | **2004** |   | **2003** |   |
| Revenues  and sales:                              |   |                                   |    |                                 |   |   |   |   |   |
| Service  revenues                                 |   | $                                      | 1,183.6 |                                 | $      | 1,127.6 |   | $ | 2,299.1 |   | $ | 2,174.6 |   |
| Product  sales                                    |   | 69.5                                   |    | 67.8                                 |   | 138.5 |   | 128.6 |   |
| Total  revenues and sales                         |   | 1,253.1                                |    | 1,195.4                              |   | 2,437.6 |   | 2,303.2 |   |
| Costs  and expenses:                              |   |                                   |    |                                 |   |   |   |   |   |
| Cost  of services                                 |   | 382.1                                  |    | 339.7                                |   | 737.8 |   | 656.1 |   |
| Cost  of products sold                            |   | 135.0                                  |    | 141.2                                |   | 279.6 |   | 263.7 |   |
| Selling,  general, administrative and other       |   | 293.0                                  |    | 287.1                                |   | 588.8 |   | 558.9 |   |
| Depreciation  and amortization                    |   | 181.4                                  |    | 165.4                                |   | 358.9 |   | 326.5 |   |
| Total  costs and expenses                         |   | 991.5                                  |    | 933.4                                |   | 1,965.1 |   | 1,805.2 |   |
| Segment  income                                   |   | $                                      | 261.6   |                                 | $      | 262.0 |   | $ | 472.5 |   | $ | 498.0 |   |
| Customers                                         |   | 8,336.5                                |    | 7,872.3                              |   | — |   | — |   |
| Average  customers                                |   | 8,256.0                                |    | 7,828.8                              |   | 8,171.8 |   | 7,742.0 |   |
| Gross  customer additions (a)                     |   | 650.1                                  |    | 686.1                                |   | 1,387.5 |   | 1,454.1 |   |
| Net  customer additions (a)                       |   | 155.3                                  |    | 111.4                                |   | 313.0 |   | 270.6 |   |
| Market  penetration                               |   | 13.6                                   | %       | 13.1                                 | %      | — |   | — |   |
| Postpay  customer churn                           |   | 1.57                                   | %       | 2.03                                 | %      | 1.75 | % | 2.10 | % |
| Total  churn                                      |   | 2.00                                   | %       | 2.45                                 | %      | 2.20 | % | 2.55 | % |
| Retail  minutes of use per customer per month (b) |   | 490                                    |    | 369                                  |   | 461 |   | 352 |   |
| Retail  revenue per customer per month (c)        |   | $                                      | 44.08   |                                 | $      | 43.73 |   | $ | 43.33 |   | $ | 42.77 |   |
| Average  revenue per customer per month (d)       |   | $                                      | 47.79   |                                 | $      | 48.01 |   | $ | 46.89 |   | $ | 46.82 |   |
| Cost  to acquire a new customer (e)               |   | $                                      | 313     |                                 | $      | 322 |   | $ | 305 |   | $ | 303 |   |

 

Notes:

(a)          Includes the effects ofacquisitions.  Excludes resellercustomers for all periods presented.

 

(b)         Represents the averagemonthly minutes that ALLTEL’s customers use on both the Company’s network andwhile roaming on other carriers’ networks.

 

(c)          Retail revenue percustomer is calculated by dividing wireless retail revenues by averagecustomers for the period.  Areconciliation of the revenues used in computing retail revenue per customerper month was as follows for the three and six month periods endedJune 30:

 
|                     |   | **Three  Months Ended** |    | **Six Months  Ended** |   |
|--------------------------|--------|-------------------------|---------|-----------------------|--------|
| **(Millions)**           |   | **2004**                |    | **2003**              |   | **2004** |   | **2003** |   |
| Service  revenues        |   | $                       | 1,183.6 |                  | $      | 1,127.6 |   | $ | 2,299.1 |   | $ | 2,174.6 |   |
| Less  wholesale revenues |   | (91.7                   | )       | (100.6                | )      | (174.4 | ) | (188.0 | ) |
| Total  retail revenues   |   | $                       | 1,091.9 |                  | $      | 1,027.0 |   | $ | 2,124.7 |   | $ | 1,986.6 |   |

 

(d)         Average revenue percustomer per month is calculated by dividing wireless service revenues byaverage customers for the period.

 

(e)          Cost to acquire a newcustomer is calculated by dividing the sum of product sales, cost of productssold and sales and marketing expenses (included within “Selling, general,administrative and other”), as reported above, by the number of internal grosscustomer additions in the period. Customer acquisition costs exclude amounts related to the Company’scustomer retention efforts.  Areconciliation of the revenues, expenses and customer additions used incomputing cost to acquire a new customer was as follows for the three and sixmonth periods ended June 30:

 
|                                              |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|---------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| **(Millions, customers in  thousands)**           |   | **2004**                |   | **2003**              |   | **2004** |   | **2003** |   |
| Product  sales                                    |   | $                       | (51.8  | )                     | $      | (42.9 | ) | $ | (104.1 | ) | $ | (82.8 | ) |
| Cost  of products sold                            |   | 77.4                    |   | 74.1                  |   | 164.2 |   | 139.8 |   |
| Sales  and marketing expense                      |   | 177.9                   |   | 180.2                 |   | 363.8 |   | 341.4 |   |
| Total  costs incurred to acquire new customers    |   | $                       | 203.5  |                  | $      | 211.4 |   | $ | 423.9 |   | $ | 398.4 |   |
| Gross  customer additions, excluding acquisitions |   | 650.1                   |   | 655.7                 |   | 1,387.5 |   | 1,312.8 |   |
| Cost  to acquire a new customer                   |   | $                       | 313    |                  | $      | 322 |   | $ | 305 |   | $ | 303 |   |

 

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The total number ofwireless customers served by ALLTEL increased by more than 450,000 customers,or 6 percent, during the twelve month period ended June 30, 2004.  Wireless customer gross additions were650,000 and 1,387,000 during the three and six month periods of 2004,respectively.  Sales of ALLTEL’s higher-yieldTotal and National Freedom rate plans accounted for approximately 41 percent and42 percent of the gross additions during the three and six month periods of2004, respectively.  At June 30,2004, customers on the Company’s Total and National Freedom rate plansrepresented approximately 35 percent of ALLTEL’s wireless customer base.  The combination of increased gross additionsand the reduction in postpay churn resulted in net wireless customer additionsof 155,000 and 313,000 during the three and six months ended June 30,2004, respectively.  The level of netcustomer additions for the first six months of 2004 exceeded ALLTEL’s netcustomer additions for all of 2003. Overall, the Company’s wireless market penetration rate (number ofcustomers as a percent of the total population in ALLTEL’s service areas)increased to 13.6 percent as of June 30, 2004.

 

The level of customergrowth throughout the remainder of 2004 will be dependent upon the Company’sability to attract new customers in an increasingly competitive marketplace,which is currently supporting up to seven competitors in each market.  The Company will continue to focus itsefforts on sustaining value-added customer growth by improving service qualityand customer satisfaction, managing its distribution channels and customersegments, offering attractively priced rate plans and new or enhanced servicesand other features, selling additional phone lines and services to existingcustomers and pursuing strategic acquisitions. Consistent with this focus, during the first quarter of 2004, theCompany completed the launch of “Touch2Talk”, ALLTEL’s “walkie-talkie” wirelessoffering that provides customers with service coverage over ALLTEL’s entiredigital wireless network.

 

The Company continues tofocus its efforts on lowering postpay customer churn (average monthly rate ofcustomer disconnects).  To improvecustomer retention, during the second quarter of 2003, the Company launchedseveral operational initiatives designed to improve overall service quality toits customers both at its retail stores and in its call centers.  ALLTEL also continues to upgrade itstelecommunications network in order to offer expanded network coverage andquality and to provide enhanced service offerings to its customers.  In addition, the Company has increased the numberof its customers under contract through the offering of competitively pricedrate plans, proactively analyzing customer usage patterns and migratingcustomers to newer digital handsets. The Company believes that its improvements in customer service levels,digital network expansion and proactive retention efforts contributed to thedecrease in postpay customer churn in the both the three and six month periodsof 2004 compared to the same periods of 2003. Primarily due to the declines in postpay churn, total churn alsodecreased in both the three and six month periods of 2004 compared to the sameperiods of 2003.

 

Wireless revenues andsales increased $57.7 million, or 5 percent, and $134.4 million, or 6 percent,for the three and six month periods ended June 30, 2004, respectively,compared to the same periods of 2003. Service revenues also increased 5 percent and 6 percent, or $56.0million and $124.5 million, in the three and six month periods of 2004,respectively, compared to the same periods of 2003.  The increases in service revenues primarily reflected growth inALLTEL’s wireless customer base and the corresponding increases in wirelessaccess revenues, which increased $82.6 million and $156.5 million in the threeand six month periods ended June 30, 2004, respectively.  Service revenues for both 2004 periods alsoreflected growth in revenues derived from wireless data services and from thesale of enhanced communication services, including caller identification, callwaiting, call forwarding, voice mail, and wireless equipment protectionplans.  Revenues from data and enhancedservices increased $13.1 million and $26.1 million in the three and six monthperiods of 2004, respectively, primarily reflecting continued demand for theseservices.  Wireless service revenuesalso included increases in regulatory and other fee revenues of $11.2 million and $21.6million in the three and six month periods of 2004, respectively.  Regulatory fees in 2004 included USF supportreceived by ALLTEL pursuant to its certification in five states as an ETC, andaccounted for $10.6 million and $15.2 million of the overall increases inregulatory fees in the three and six month periods of 2004, respectively.  The increase in regulatory fees in the sixmonth period of 2004 also reflected additional amounts billed to customers tooffset costs related to certain regulatory mandates, including universalservice funding, primarily resulting from changes in FCC regulations applicableto universal service fees that were effective on April 1, 2003.

 

Service revenue growth inthe three and six month periods of 2004 attributable to customer growth,increased access revenues, additional revenues earned from data and enhancedservices and increased regulatory and other fees were partially offset by lowerairtime and retail roaming revenues and a decrease in wholesale revenues.  Compared to the same periods of 2003,airtime and retail roaming revenues decreased $41.5 million and $61.8 millionin the three and six month periods of 2004, respectively.  The decreases in airtime and retail roamingrevenues primarily reflected the effects of customers migrating to rate planswith a larger number of packaged minutes.  Such rate plans, for a flat monthly service fee, providecustomers with a specified number of airtime minutes and include unlimitedweekend, nighttime and mobile-to-mobile minutes at no extra charge. Wholesale wireless revenues declined $8.9 million and $13.6 million inthe three and six months ended June 30, 2004, respectively, primarily dueto lower analog and TDMA minutes of use by other carriers’ customers roaming onALLTEL’s wireless network.  The declinein TDMA minutes is likely to continue; 

 

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however, thisimpact may be somewhat offset by CDMA minute growth as other CDMA carriersdirect wholesale traffic to ALLTEL’s network. Primarily driven by the increase in average monthly retail minutes ofuse and the effects of increased sales of the higher-yield Total and NationalFreedom rate plans, retail revenue per customer per month increased one percentin both the three and six month periods of 2004 compared to the same periods of2003.  Average revenue per customer permonth decreased slightly in the three month period of 2004 compared to the sameperiod a year ago, primarily due to the decrease in wholesale revenues.  The slight increase in average revenue percustomer per month in the six month period of 2004 was attributable to theincreases in minutes of use and sales of Total and National Freedom rate plans,partially offset by the decrease in wholesale revenues.  Growth in service revenues and averagerevenue per customer per month for the remainder of 2004 will depend uponALLTEL’s ability to maintain market share in an increasingly competitivemarketplace by adding new customers, retaining existing customers, increasingcustomer usage, and selling data and additional enhanced services.

 

Product sales increased$1.7 million, or 3 percent, and $9.9 million, or 8 percent, in the three andsix month periods ended June 30, 2004, respectively, compared to the sameperiods of 2003.  The increases inproduct sales in both 2004 periods were primarily driven by higher retailprices for wireless handsets that include advanced features, such as picturemessaging and that are capable of downloading games, entertainment content,weather and office applications.  Theincreases in product sales in both 2004 periods also reflected the continuedretention efforts by the Company focused on migrating existing wireless customersto new wireless technologies.  Theincrease in product sales in the six month period of 2004 also reflected 6percent growth in gross customer additions, compared to the correspondingperiod of 2003.

 

Cost of servicesincreased 12 percent, or $42.4 million and $81.7 million, in the three and sixmonth periods ended June 30, 2004, respectively, compared to the sameperiods of 2003.  Cost of services forthe three and six month periods of 2004 reflected increases in network-relatedcosts of $33.2 million and $59.4 million, respectively, compared to the sameperiods of 2003, primarily due to increased network traffic resulting fromcustomer growth, increased minutes of use and expansion of networkfacilities.  Cost of services for thethree and six month periods of 2004 also reflected increases in customerservice expenses of $8.4 million and $17.5 million, respectively, when comparedto the same periods of 2003.  Theincreases in customer service expenses in both 2004 periods primarily reflectedadditional costs associated with ALLTEL’s initiatives designed to improvecustomer satisfaction and reduce postpay churn.  Cost of services for the six month period of 2004 also includedincreased regulatory fees of $13.2 million compared to the same period a yearago principally related to fees associated with USF, reflecting changes in FCCregulations effective April 1, 2003. The increases in cost of services in the six month period of 2004attributable to higher network-related costs, increased regulatory fees andcustomer services expenses were partially offset by a decrease in bad debtexpense.  Compared to the same period of2003, bad debt expense decreased $10.8 million in the first six months of 2004primarily due to ALLTEL’s continuing efforts to reduce losses sustained frombad debts by managing its customer credit policies, improving collectionpractices, utilizing new technologies and proactively managing the efforts ofthe Company’s collection agencies.

 

Cost of products solddecreased $6.2 million, or 4 percent, and increased $15.9 million, or 6percent, for the three and six month periods ended June 30, 2004,respectively, compared to the same periods of 2003.  The decrease in the three month period of 2004 primarily resultedfrom a decline in the volume of equipment upgrades provided to existingcustomers compared to the same period of 2003 and the effects of vendor rebatesearned by ALLTEL for attaining specified purchase volumes with the Company’shandset vendors.  The increase in costof products sold in the six month period of 2004 was consistent with thecorresponding increase in product sales discussed above and primarily reflectedthe effects of significant growth in gross customer activations, the selling ofhigher-priced handsets and the Company’s continuing efforts to migratecustomers to newer wireless technologies as part of ALLTEL’s customer retentionefforts.

 

Selling, general,administrative and other expenses increased $5.9 million, or 2 percent, and$29.9 million, or 5 percent, for the three and six month periods endedJune 30, 2004, respectively, compared to the same periods of 2003.  The increases in selling, general,administrative and other expenses in the three and six month periods of 2004primarily reflected increased commission costs of $4.9 million and $27.4million, respectively, compared to the same periods of 2003.  Commissions expense increased in both 2004periods due to increased sales of ALLTEL’s Total and National Freedom rateplans and a higher mix of postpay gross customer additions, as compared to thecorresponding periods of 2003. Commission rates paid to the Company’s internal sales force and outsideagents are higher on the sales of ALLTEL’s more profitable postpayrate plans than comparable rates paid on other lower-margin rate plans offeredby the Company.  Commission expense forthe six month period of 2004 also reflected the 6 percent growth in grosscustomer additions compared to the corresponding period of 2003.

 

Depreciation andamortization expense increased 10 percent, or $16.0 million and $32.4 million,for the three and six month period ended June 30, 2004, respectively,compared to the same periods of 2003. Depreciation and amortization expense increased in both 2004 periodsprimarily due to growth in wireless plant in service.

 

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Although wireless revenues and sales increased in both the three and six monthperiods of 2004, wireless segment income decreased $0.4 million, or less than 1percent, and $25.5 million, or 5 percent, for the three and six month periodsended June 30, 2004, respectively, compared to the same periods of 2003. The decrease in the three month period of 2004 primarily reflected increasednetwork costs attributable to the significant growth in customer usage notedabove and additional costs associated with the Company's retention efforts. In addition to these factors, the decrease in the six month period alsoreflected increased customer acquisition costs attributable to the acceleratedgrowth in gross customer additions. 

 

Cost to acquire a newcustomer is used to measure the average cost of adding a new customer and representssales, marketing and advertising costs and the net equipment cost, if any, foreach new customer added.  The decreasein cost to acquire a new customer in the three month period of 2004 primarilyreflected improved margins on the sale of wireless handsets to new customersand the effects of vendorrebates earned by ALLTEL as previously discussed.  Conversely, the increase in cost to acquire a new customer forthe six month period of 2004 primarily reflected the increase in commissionsexpense discussed above, partially offset by the improved margins on the saleof wireless handsets and the favorable effects of spreading the total customeracquisition costs over a larger number of gross customer additions as comparedto the same period of 2003.  For boththe six months ended June 30, 2004 and 2003, approximately 66 percent ofthe wireless gross customer additions came through ALLTEL’s internal distributionchannels.  ALLTEL’s internal salesdistribution channels include Company retail stores and kiosks located inshopping malls, other retail outlets and mass merchandisers. Incremental salescosts at a Company retail store or kiosk are significantly lower thancommissions paid to dealers.  AlthoughALLTEL intends to manage the costs of acquiring new customers throughout theremainder of 2004 by continuing to enhance its internal distribution channels,the Company will also continue to utilize its large dealer network.

 

Set forth below is asummary of the restructuring and other charges related to the wirelessoperations that were not included in the determination of segment income forthe three and six months ended June 30:

 
|                                                    |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|---------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| **(Millions)**                                          |   | **2004**                |   | **2003**              |   | **2004** |   | **2003** |   |
| Severance  and employee benefit costs                   |   | $                       | — |                  | $      | 1.3 |   | $ | 8.8 |   | $ | 1.3 |   |
| Relocation  costs                                       |   | —                  |   | —                |   | 3.2 |   | — |   |
| Lease  and contract termination costs                   |   | —                  |   | —                |   | 0.5 |   | — |   |
| Write-down  of software development costs               |   | —                  |   | 7.6                   |   | — |   | 7.6 |   |
| Write-down  in the carrying value of certain facilities |   | —                  |   | —                |   | 0.7 |   | — |   |
| Other  exit costs                                       |   | —                  |   | —                |   | 0.4 |   | — |   |
| Total  restructuring and other charges                  |   | $                       | — |                  | $      | 8.9 |   | $ | 13.6 |   | $ | 8.9 |   |

 

RegulatoryMatters-Wireless Operations

ALLTEL is subject toregulation by the FCC as a provider of wireless communications services.  The Telecommunications Act of 1996 (the “96Act”) provides wireless carriers numerous opportunities to provide analternative to the long-distance and local exchange services provided by localexchange telephone companies and interexchange carriers.  Wireless carriers are also entitled tocompensation from other telecommunications carriers for calls transmitted fromthe other carriers’ networks and terminated on the wireless carriers’ networks.  Presently, the Company’s wireless operationsdo not bill access charges to interexchange carriers, although an FCC decisionissued on referral from the U.S. District Court for the Western District ofMissouri noted that wireless operators are not precluded from billing andcollecting access charges that the interexchange carrier has a contractual orother legal obligation to pay.  InApril 2001, the FCC released a notice of proposed rulemaking addressinginter-carrier compensation issues. Under this rulemaking, the FCC has proposed a “bill and keep”compensation method that would overhaul the existing rules governing reciprocalcompensation and access charge regulation. The FCC is expected to issue a further notice of proposed rulemaking onthis matter in the second half of 2004. In addition, individual wireless carriers have filed a number ofpetitions with the FCC seeking determinations as to the type and amount ofcompensation due to and from local exchange carriers and/or interexchangecarriers for the termination of traffic. Further, various wireline companies have initiated a number of stateproceedings to address inter-carrier compensation for traffic that originatesor terminates on wireless carriers’ networks. The outcome of the FCC and state proceedings could change the way ALLTELreceives compensation from, and remits compensation to, other carriers as wellas its wireless customers.  At thistime, ALLTEL cannot estimate whether any such changes will occur or, if theydo, what the effect of the changes on its wireless revenues and expenses wouldbe.

 

Under rules establishedby the FCC, Cellular Radiotelephone Service (“CRS”) and Personal CommunicationsServices (“PCS”) (collectively Commercial Mobile Radio Services or “CMRS”)providers were required, as of November 24, 2002, to participate in anationwide number conservation program known as thousand block number pooling inaccordance with roll-out schedules established by the FCC.  These providers were requiredto modify their networks to comply with FCC and industry performance criteriafor number pooling, including support for roaming customers.  Numberpooling is a FCC-mandated program intended to alleviate the shortage ofavailable telephone numbers by requiring carriers to return unused

 

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numbers in their inventory to a centrally administered pool and to takeassignment of new numbers in blocks of 1,000 instead of the 10,000 numberblocks previously assigned.  In adecision released June 18, 2003, the FCC affirmed that all carriers mustparticipate in the nationwide pooling roll-out.  The FCC exempted small and rural CMRS and local exchange carriersfrom the pooling requirement until such time as they implement local numberportability in response to a specific request from another carrier.

 

FCC rules also requiredCMRS providers in the top 100 markets to implement by November 24, 2003(and by May 24, 2004 for all other markets) wireless local number portability(“WLNP”), which permits customers to retain their existing telephone numberwhen moving from one telecommunications carrier to another.  The FCC, on June 18, 2003, released therules governing the number of Metropolitan Statistical Areas (“MSAs”) in whichWLNP must be deployed, as well as the process for triggering a carrier’sobligation to provide WLNP in markets both within those MSAs andotherwise.  The FCC retained therequirement that carriers implement WLNP based upon the specific request ofanother carrier and gave the state public service commissions authority torequire CMRS carriers to implement WLNP in any market within the top 100 MSAsin which they provide service and for which a request was not received from acompeting carrier.

 

On October 7, 2003,the FCC released a decision providing guidance to carriers on certain WLNPimplementation issues that had been raised in two petitions for declaratoryrulings filed by the Cellular Telecommunications Industry Association (“CTIA”)and to resolve related issues raised through the appeal of a July 3, 2003letter from the Chief of the Wireless Telecommunications Bureau of theFCC.  In general, the FCC decision notedthat porting numbers between carriers should be performed without obstruction,including any delay related to efforts to collect outstanding balances; portingintervals should be governed by a “reasonableness standard” using theindustry’s suggested 2.5 hour porting interval as the reference point; writteninterconnection agreements between carriers involved in porting are notrequired; and carriers must continue to support nationwide roaming.

 

On November 10,2003, the FCC released a decision addressing the CTIA petitions and providingguidance on wireline to wireless porting, which is referred to as “intermodalporting”.  The FCC stated that number portingfrom a wireline carrier to a wireless carrier is required where the coveragearea of the wireless carrier (i.e. the area in which the wireless carrierprovides service) overlaps the geographic location in which the wireline numberwas provisioned.  Further, while the FCCrequired the wireless carrier to maintain the rate center designation of thenumber, it also noted that wireless carriers were not required to have eitherdirect connections or interconnection agreements with wireline carriers norwere wireless carriers required to have numbering resources in the rate centerin which the wireline number is located in order to subject the wireline numberto intermodal porting.  The FCC'sguidance requires that wireline numbers be ported to wireless carriers acrosstraditional wireline rate centers; however, the FCC left issues governing thepayment of call routing costs to another pending proceeding.  The United States TelecommunicationsAssociation (“USTA”), along with certain rural telephone companies, appealedthe FCC's November 10, 2003 decision to the U.S. Court of Appeals for theDistrict of Columbia Circuit (the “Court”). The appeal remains pending with oral arguments scheduled forNovember 2004.  The intermodalporting requirement took effect on November 24, 2003 for wireline carriersin the top 100 MSAs, and on May 24, 2004 for wireline carriers operating inmarkets below the top 100 MSAs.  Todate, the volume of intermodal porting requests processed by the Company forwireless customers has not been significant.

 

In addition, wirelessservice carriers must also provide enhanced 911 emergency service (“E-911”) ina two-phased approach.  In phase one,carriers must, within six months of receiving a request from a phase one enabledPublic Safety Answering Point (“PSAP”), deliver both the caller’s number andthe location of the cell site to the PSAP serving the geographic territory fromwhich the E-911 call originated.  Aphase one enabled PSAP is generally one that is capable of receiving andutilizing the number and cell site location data transmitted by thecarrier.  ALLTEL has generally compliedwith the phase one requirements and provides service to phase one capablePSAPs.  Due to the status of the PSAPs,as well as other technology and deployment issues, the six month window inwhich service is to be provided under the FCC rules has, in certain instancesand in accordance with the rules, been extended by mutual agreement betweenALLTEL and the particular PSAPs involved. In phase two, CMRS carriers opting for a handset-based solution, as theCompany has, must determine, for originated calls, the location of the callerwithin fifty meters for 67 percent of the originated calls and 150 meters for95 percent of the originated calls.  Thephase two requirements were set to begin by October 1, 2001, but, due totechnology unavailability and other factors, the Company requested a limitedwaiver of these requirements, as did virtually every other carrier.  On July 26, 2002, the FCC released anorder granting a temporary stay of the E-911 emergency implementation rules asthey applied to the Company.  The FCCorder provides for a phased-in deployment of Automatic Location Identification(“ALI”) capable network or handset-based technology that began on March 1,2003.  ALI capability permits moreaccurate identification of the caller’s location by PSAPs.  Under the FCC order, the Company,  (1) beganselling and activating ALI-capable handsets prior to March 1, 2003; (2) ensuredthat as of May 31, 2003 at least 25 percent of all new handsets activated wereALI-capable; (3) ensured that as of November 30, 2003 at least 50 percent of allnew handsets activated were ALI-capable; (4) ensured that 100 percent of itsdigital handsets activated were ALI-capable as of May 31, 2004; and (5) willensure that penetration of ALI-capable handsets among its customers reaches 95percent no later

 

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than December 31, 2005.  ALLTEL began selling ALI-capable handsets inJune 2002 and to date has complied with the handset deployment thresholds underthe FCC's order.  Based on the current pace of migration to ALI-capablehandsets, ALLTEL may have difficulty complying with the December 31, 2005requirement to be 95 percent penetrated without incurring a significant increasein its operating costs.

 

The Company filedpetitions with the FCC and various state commissions during 2003 seekingcertification as an ETC.  Certificationas an ETC will qualify the Company to receive support from the federalUSF.  The Company has non-ruralapplications pending at the FCC for its properties in Alabama, Virginia,Georgia, North Carolina and Florida. During the second quarter of 2004, the Company withdrew its ruralapplications in these five states due to the uncertainty related to the timeframe in which these applications would be approved.  ALLTEL has obtained approval of its petitions from statecommissions for its properties in Michigan, Mississippi, Arkansas, Wisconsin,West Virginia and Louisiana and is presently certified as an ETC in each ofthose states.  As previously discussed,the Company began receiving USF support associated with these approvedpetitions, except Louisiana, in the first quarter of 2004, and expects to beginreceiving support for Louisiana in the fourth quarter of 2004.  The Company has also filed petitionsrequesting ETC certification at the state commissions in Arizona and Kansas andis awaiting commission action on those petitions.  The Company has withdrawn the application for ETC certificationthat it previously filed with the state commission in New Mexico.  ALLTEL received approximately $15.0 millionof ETC subsidies in the first half of 2004 and expects to receive at least$30.0 million of subsidies for the full year of 2004 related to the approvedETC petitions.

 

On January 22, 2004,the FCC approved the petition of Virginia Cellular, LLC (“Virginia Cellular”)for certification as an ETC in Virginia, and on April 12, 2004, the FCCgranted the petition of Highland Cellular, Inc. (“Highland Cellular”) forcertification as an ETC in Virginia.  Inits orders granting these approvals, the FCC required that Virginia Cellularand Highland Cellular meet certain additional conditions in exchange for itsdesignation as an ETC.  The FCC statedthat it intended to impose similar requirements in future proceedings to grantETC designations.  ALLTEL supplementedits ETC applications pending before the FCC on March 1, 2004 to meet thenew conditions set forth in the Virginia Cellular decision.  On April 12, 2004, the FCC released apublic notice inviting parties with pending ETC petitions to supplement thosepetitions in light of the Virginia Cellular and Highland Cellular decisions andestablished deadlines for public comments on the pending petitions.  On April 12, 2004, the FCC alsoreleased a public notice seeking comment on ETC petitions that already had beensupplemented in light of the Virginia Cellular and Highland Cellulardecisions.  As a result of these FCCactions, ALLTEL’s petitions before the FCC are subject to additional publiccomment.  Further, the FCC, inconjunction with the Federal/State Joint Board on Universal Service, isconsidering changes to the USF program, including the services qualified forUSF support and the qualifications of ETCs. At this time, ALLTEL cannot estimate what effect the Virginia Cellularand Highland Cellular orders and potential FCC changes to the USF program mayhave on ALLTEL’s ability to receive support from the USF related to itswireless business.

 

In July 2003, theFCC unanimously adopted an order modifying the wireless phone exemption to theHearing Aid Compatibility Act (the “HAC Act”) and adopted requirementsgoverning the compatibility of hearing aids and wireless phones.  The decision requires that interference tohearing aids from digital wireless phones be reduced, and that carriers makeavailable wireless phone models engineered to reduce radio frequencyinterference to hearing aids.  The FCC'sdecision modifying the HAC Act wireless exemption is currently underreconsideration.  In October 2003,the FCC issued its long awaited order in the proceeding governing the sale orleasing of spectrum in the secondary market. The decision revises standards for transfer of control and provides newoptions for the lease of spectrum to providers of new wirelesstechnologies.  At this time, ALLTEL hasnot fully evaluated the effects, if any, that these orders may have on ALLTEL’sexisting wireless operations.

 

The CommunicationsAssistance for Law Enforcement Act (“CALEA”) requires wireless and wirelinecarriers to ensure that their networks have the capability and capacity toaccommodate law enforcement agencies’ lawful intercept requests.  The FCC has imposed various obligations andcompliance deadlines, with which ALLTEL has either complied or, in accordancewith CALEA, filed a request for an extension of time.  On March 10, 2004, the U.S. Department of Justice, jointlywith other federal agencies, petitioned the FCC to adopt new rules under CALEApertaining to wireless and wireline carriers’ packet mode communicationsservices, including Internet protocol (“IP”) based services.  The FCC has requested public comment on thepetition, and has indicated that it will subsequently initiate a rulemakingproceeding to consider the issues raised therein.  A notice of proposed rulemaking is scheduled for the thirdquarter of 2004.  Rules or precedentsadopted as a result of these proceedings could impose new costs and obligationson ALLTEL and other carriers, including seeking Federal Bureau of Investigationand FCC concurrence before deploying new technology or features in its network.

 

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Communications-WirelineOperations
|                                           |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
| **(Millions, access lines in  thousands)**     |   | **2004**                               |   | **2003**                             |   | **2004** |   | **2003** |   |
| Revenues  and sales:                           |   |                                   |   |                                 |   |   |   |   |   |
| Local  service                                 |   | $                                      | 280.7  |                                 | $      | 284.3 |   | $ | 560.7 |   | $ | 570.2 |   |
| Network  access and long-distance              |   | 262.8                                  |   | 261.5                                |   | 523.5 |   | 523.7 |   |
| Miscellaneous                                  |   | 66.1                                   |   | 60.4                                 |   | 124.9 |   | 121.2 |   |
| Total  revenues and sales                      |   | 609.6                                  |   | 606.2                                |   | 1,209.1 |   | 1,215.1 |   |
| Costs  and expenses:                           |   |                                   |   |                                 |   |   |   |   |   |
| Cost  of services                              |   | 178.6                                  |   | 185.5                                |   | 351.5 |   | 367.6 |   |
| Cost  of products sold                         |   | 7.1                                    |   | 6.3                                  |   | 12.3 |   | 14.2 |   |
| Selling,  general, administrative and other    |   | 60.9                                   |   | 64.2                                 |   | 121.8 |   | 130.4 |   |
| Depreciation  and amortization                 |   | 128.6                                  |   | 133.4                                |   | 260.9 |   | 263.3 |   |
| Total  costs and expenses                      |   | 375.2                                  |   | 389.4                                |   | 746.5 |   | 775.5 |   |
| Segment  income                                |   | $                                      | 234.4  |                                 | $      | 216.8 |   | $ | 462.6 |   | $ | 439.6 |   |
| Access  lines in services (excludes DSL lines) |   | 3,066.1                                |   | 3,133.7                              |   | — |   | — |   |
| Average  access lines in service               |   | 3,079.6                                |   | 3,149.4                              |   | 3,085.4 |   | 3,155.3 |   |
| Average  revenue per customer per month (a)    |   | $                                      | 65.99  |                                 | $      | 64.16 |   | $ | 65.31 |   | $ | 64.18 |   |

 

Notes:

(a)          Average revenue percustomer per month is calculated by dividing total wireline revenues by averageaccess lines in service for the period.

 

Wireline operationsconsist of the Company’s Incumbent Local Exchange Carrier (“ILEC”), CLEC andInternet operations.  Wireline revenuesand sales increased $3.4 million, or 1 percent, and decreased $6.0 million, orless than 1 percent, in the three and six months ended June 30, 2004, respectively,compared to the same periods of 2003. Customer access lines decreased 2 percent during the twelve months endedJune 30, 2004, reflecting declines in both primary and secondary accesslines.  The Company lost approximately24,000 and 30,000 access lines during the three and six month periods endedJune 30, 2004, respectively, a slight decline from the 26,000 and 33,000access lines lost during the same periods a year ago.  The declines in access lines primarily resulted from the effectsof wireless and broadband substitution for the Company’s wirelineservices.  The Company expects accessline growth for the remainder of 2004 to continue to be impacted by the effectsof wireless and broadband substitution.

 

To slow the decline ofrevenue during the remainder of 2004, the Company will continue to emphasizesales of enhanced services and bundling of its various product offeringsincluding Internet, long-distance and high-speed data transport services(digital subscriber line or “DSL”). Deployment of DSL service is an important strategic initiative forALLTEL.  During the twelve month periodended June 30, 2004, the number of DSL subscribers nearly doubled toapproximately 195,000 customers, or 10 percent of the Company’s addressableaccess lines.  The growth in theCompany’s DSL customers more than offset the decline in customer access linesthat occurred during the twelve months ended June 30, 2004 notedabove.  As further discussed below,revenues generated from the sales of data and enhanced services increased inboth the three and six month periods of 2004, which helped to offset theadverse effects on wireline revenues resulting from the loss of access lines.

 

Local service revenuesdecreased $3.6 million, or 1 percent, and $9.5 million, or 2 percent, in thethree and six months ended June 30, 2004, respectively, compared to thesame periods of 2003.  Local servicerevenues reflected reductions in basic service access line revenues of $5.2million and $12.8 million in the three and six month periods of 2004,respectively, compared to the same periods of 2003, consistent with the overalldecline in primary and secondary access lines discussed above.  The declines in local service revenuesattributable to access line loss were partially offset by growth in revenuesderived from the sales of enhanced products and services and equipmentprotection plans.  Revenues fromenhanced services increased $1.8 million and $4.2 million in the three and sixmonth periods of 2004, respectively, compared to the same periods of 2003,reflecting continued demand for these products and services.

 

Network access andlong-distance revenues increased $1.3 million, or less than 1 percent, anddecreased slightly in the three and six months ended June 30, 2004,respectively, compared to the same periods of 2003.  Primarily due to the overall decline in access lines discussedabove, intrastate network access usage and toll revenues decreased $5.8 millionand $10.3 million in the three and six month periods of 2004, respectively,compared to the same periods of 2003. The declines in network access and long-distance revenues attributableto access line loss were partially offset by growth in revenues from dataservices, which increased $3.6 million and $7.5 million in the three and sixmonth periods of 2004, respectively, reflecting increased demand for high-speeddata transport services.

 

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Miscellaneous revenuesprimarily consist of charges for billing and collections services provided tolong-distance companies, customer premise equipment sales, directoryadvertising and revenues derived from Internet services. Miscellaneous revenuesincreased $5.7 million, or 9 percent, and $3.7 million, or 3 percent, in thethree and six month periods ended June 30, 2004, respectively, compared tothe same periods of 2003.  Primarilydriven by growth in DSL customers, revenues from the Company’s Internetoperations increased $3.4 million and $6.8 million in the three and six monthperiods of 2004, respectively. Miscellaneous revenues in both 2004 periods also included additionaldirectory advertising revenues of approximately $7.0 million associated withthe initial publication of directories in the acquired Kentucky markets.  These additional revenues were partiallyoffset by lower directory advertising revenues in ALLTEL’s other wirelinemarkets of $3.9 million and $5.6 million in the three and six month periods of2004, respectively, primarily due to a change in the number and mix ofdirectories published.  The increases inmiscellaneous revenues in the six month period of 2004 attributable to thegrowth in the Internet operations and directory advertising revenues werepartially offset by a $3.8 million decline in customer premise equipment salesand rentals reflecting lower customer demand for purchasing or leasinglandline-based communications equipment.

 

Primarily due to the DSLcustomer growth and increased sales of enhanced products and services, averagerevenue per customer per month increased three percent and two percent in thethree and six month periods of 2004, respectively, compared to the same periodsin 2003.  Future growth in averagerevenue per customer per month will depend on the Company’s success insustaining growth in sales of DSL and enhanced services to new and existingcustomers.

 

Cost of servicesdecreased 4 percent, or $6.9 million and $16.1 million, in the three and sixmonths ended June 30, 2004, respectively, compared to the same periods of2003.  Interconnection expensesdecreased $3.0 million and $6.6 million in the three and six month periods of2004, respectively, consistent with the declines in toll revenues and accesslines discussed above.  Compared to thesame periods of 2003, customer service expenses decreased $1.2 million and $3.0million in the three and six month periods of 2004, respectively, primarilyreflecting cost savings from the Company’s continued efforts to controloperating expenses.  Salaries andemployee benefit costs for both the three and six months ended June 30,2003 included incremental expenses of $2.4 million associated with a strikethat began in early June and ended on October 1, 2003, when theCompany signed a new collective bargaining agreement impacting approximately400 ALLTEL employees in Kentucky represented by the Communications Workers ofAmerica.  Cost of services for the sixmonth period of 2003 also included $6.0 million of additional maintenance costsincurred to repair damage caused by severe winter storms in Kentucky.

 

Cost of products soldincreased slightly in the three months ended June 30, 2004 and decreased$1.9 million, or 13 percent, in the six month period ended June 30,2004, respectively, compared to the same periods of 2003.  The decrease in the six month period of 2004was consistent with the decline in sales and leasing of customer premiseequipment discussed above.

 

Selling, general,administrative and other expenses decreased $3.3 million, or 5 percent, and$8.6 million, or 7 percent, in the three and six months ended June 30,2004, respectively, compared to the same periods of 2003.  The decreases in selling, general,administrative and other expenses in both 2004 periods primarily resulted fromreductions in data processing charges and salaries and employee benefit costs,primarily due to cost savings resulting from the Company’s continuedcontrol of operating expenses.  Compared tothe same periods of 2003, data processing charges decreased $0.9 million and$3.6 million and employee benefit costs and salaries decreased $3.8 million and$6.8 million in the three and six month periods of 2004, respectively.  The decreases in both 2004 periodsattributable to reductions in data processing charges and salaries and employeebenefit costs were partially offset by increases in advertising costs.  Advertising costs increased $1.1 million and$1.9 million in the three and six month periods of 2004, respectively, comparedto the same periods of 2003, primarily due to increased promotional activitiesincluding direct mailings to customers.

 

Depreciation andamortization expense decreased $4.8 million, or 4 percent, and $2.4 million, or1 percent, in the three and six months ended June 30, 2004, respectively,compared to the same periods of 2003. The decreases in depreciation and amortization expense in both 2004periods primarily resulted from a reduction in depreciation rates for theCompany’s Nebraska operations, reflecting the results of a triennial study ofdepreciable lives completed by ALLTEL in the second quarter of 2004 as requiredby the Nebraska Public Service Commission.

 

Wireline segment incomeincreased $17.6 million, or 8 percent, and $23.0 million, or 5 percent, in thethree and six months ended June 30, 2004, respectively, compared to thesame periods of 2003.  The increases inboth 2004 periods primarily reflected the selling of additional services andfeatures to existing wireline customers, growth in the Company’s Internet operations, theeffects of the incremental strike-related and maintenance costs incurred in2003 and the Company’s cost savings and expense control efforts discussedabove.

 

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Set forth below is asummary of the restructuring and other charges related to the wirelineoperations that were not included in the determination of segment income forthe three and six months ended June 30:

 
|                                      |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|-------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| **(Millions)**                            |   | **2004**                |   | **2003**              |   | **2004** |   | **2003** |   |
| Severance  and employee benefit costs     |   | $                       | — |                  | $      | 7.0 |   | $ | 11.2 |   | $ | 7.0 |   |
| Relocation  costs                         |   | —                  |   | —                |   | 1.4 |   | — |   |
| Lease  and contract termination costs     |   | —                  |   | —                |   | (1.9 | ) | — |   |
| Write-down  of software development costs |   | —                  |   | 1.8                   |   | — |   | 1.8 |   |
| Other  exit costs                         |   | —                  |   | —                |   | 0.7 |   | — |   |
| Total  restructuring and other charges    |   | $                       | — |                  | $      | 8.8 |   | $ | 11.4 |   | $ | 8.8 |   |

 

Regulatory Matters -Wireline Operations

Except for the Kentuckyproperties acquired in 2002 and the Nebraska operations acquired in 1999,ALLTEL's ILEC operations follow the accounting for regulated enterprisesprescribed by SFAS No. 71, “Accounting for the Effects of Certain Types ofRegulation”.  Criteria that would giverise to the discontinuance of SFAS No. 71 include (1) increasing competitionrestricting the ILEC subsidiaries’ ability to establish prices to recoverspecific costs and (2) significant changes in the manner in which rates are setby regulators from cost-based regulation to another form of regulation.  On a quarterly basis, the Company reviewsthe criteria to determine whether the continuing application of SFAS No. 71 isappropriate.  Some of the Company's ILECoperations have begun to experience competition in their local serviceareas.  Sources of competition toALLTEL's local exchange business include, but are not limited to, resellers oflocal exchange services, interexchange carriers, satellite transmissionservices, wireless communications providers, cable television companies, andcompetitive access service providers including those utilizing UnbundledNetwork Elements-Platform (“UNE-P”). Through June 30, 2004, this competition has not had a materialadverse effect on the results of operations of ALLTEL's ILEC operations.

 

Although the Companybelieves that the application of SFAS No. 71 continues to be appropriate, it ispossible that changes in regulation, legislation or competition could result inthe Company's ILEC operations no longer qualifying for the application of SFASNo. 71 in the near future.  If ALLTEL'sILEC operations no longer qualified for the application of SFAS No. 71, theaccounting impact to the Company would be an extraordinary non-cash credit tooperations.  The non-cash credit wouldconsist primarily of the reversal of the regulatory liability for cost ofremoval included in accumulated depreciation, which amounted to $164.2 millionas of June 30, 2004.  ALLTEL doesnot expect to record any impairment charge related to the carrying value of itsILEC plant.  Under SFAS No. 71, ALLTELcurrently depreciates its ILEC plant based upon asset lives approved byregulatory agencies or as otherwise allowed by law.  Upon discontinuance of SFAS No. 71, ALLTEL would be required torevise the lives of its property, plant and equipment to reflect the estimateduseful lives of the assets.  The Companydoes not expect any revisions in asset lives to have a material adverse effecton its ILEC operations.

 

Most states in which theCompany's ILEC subsidiaries operate have adopted alternatives to rate-of-returnregulation, either through legislative or state public service commissionactions.  The Company has electedalternative regulation for certain of its ILEC subsidiaries in Alabama,Arkansas, Florida, Georgia, Kentucky, Missouri, Nebraska, North Carolina,Pennsylvania, South Carolina and Texas. The Missouri Public Service Commission issued an order, effectiveJuly 30, 2004, finding that the Company was not eligible to elect alternativeregulation in Missouri.  The Company ispresently seeking reconsideration by the commission of its decision, althoughthe commission’s action will not affect the Company's local service andintrastate access rates.  The Company ispresently evaluating the election of an available alternative regulation optionin Ohio and continues to evaluate alternative regulation options in otherstates where its ILEC subsidiaries are presently not subject to alternativeregulation. The FCC originally adopted the “all-or-nothing” rule to ensure that allstudy areas of a carrier and its affiliates are subject to a single form ofpricing regulation.  The acquiredNebraska and Kentucky properties operate under interstate price-cap regulationpursuant to waivers granted by the FCC. On April 17, 2002, the FCC extended ALLTEL’s waiver of the“all-or-nothing” rule with respect to its Nebraska properties and granted theCompany a waiver of the “all-or-nothing” rule with respect to the acquiredKentucky properties.  The waivers permitprice-cap regulation for these two properties while retaining rate-of-returnregulation for ALLTEL’s other ILEC properties. On February 26, 2004, the FCC released an order modifying the“all-or-nothing” rule to allow a rate-of-return carrier acquiring lines from aprice-cap carrier to choose between price-cap or rate-of-return regulation forthe acquired lines.  The FCC adopted anotice of proposed rulemaking in conjunction with the order proposing toestablish optional alternative regulation mechanisms for rate-of-returncarriers.  In the order, the FCC statedthat all outstanding waivers of the “all-or-nothing” rule would continue ineffect until the FCC issued a final order on the issue.

 

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A number of carriers havebegun offering voice telecommunications services utilizing the Internet as themeans of transmitting those calls.  Thisservice, commonly known as voice-over-Internet-protocol (“VoIP”) telephony, ischallenging existing regulatory definitions and raises questions whether suchservices should be regulated.  Whileseveral state public utility commissions have attempted to assert jurisdictionover VoIP services, federal courts in New York and Minnesota indicated that thestates are preempted with respect to jurisdiction by the FCC.  On March 10, 2004, the FCC released anotice of proposed rulemaking seeking comment on the appropriate regulatorytreatment of IP-enable communications services.  The proposed rulemaking sought comment on the differences betweenIP-enabled services and traditional telephony services, and the distinctionsbetween different types of IP-enabled services.  The FCC indicated that the cost of the public switched telephonenetwork should be borne equitably among those that use it in similar ways andasks which regulatory requirements should be extended to IP-enabled service,including requirements relating to E-911, disability accessibility, accesscharges, and universal service.

 

Although the FCC'srulemaking regarding IP-enabled services remains pending, the FCC has adoptedtwo orders establishing broad parameters for the regulation of suchservices.  Specifically, onFebruary 12, 2004, the FCC released an order declaring Pulver.com’sIP-based, peer-to-peer service that requires specialized telephone equipment orsoftware for computers is not a telecommunications service, but rather was anunregulated information service subject to federal jurisdiction.  On April 21, 2004, the FCC denied awaiver petition filed by AT&T requesting that its IP telephony service beexempt from access charges.  The FCCruled that AT&T’s IP telephony service, which converts voice calls to IPformat for routing over the public switched telephone network is a regulatedtelecommunications service subject to interstate access charges.  While the FCC rulemaking regarding theclassification of IP-enabled services is pending, ALLTEL continues to evaluatethe possible long-term implications of these determinations on its operations.

 

In April 2001, theFCC released a notice of proposed rulemaking addressing inter-carriercompensation.  Under this rulemaking,the FCC asked for comment on a “bill and keep” compensation method that wouldsignificantly modify the existing rules governing reciprocal compensation andaccess charge regulation.  A number ofstate proceedings have also been initiated by various wireline companies toaddress compensation with respect to traffic that originates or terminates withwireless carriers or CLECs.  The outcomeof the FCC and state proceedings could change the way ALLTEL receivescompensation from, and remits compensation to, other carriers and its endusers.  Several industry associationsintend to present proposals to reform inter-carrier compensation, but thespecific details of these plans have not been publicly released.  The FCC is expected to issue an order andfurther notice of proposed rulemaking on the subject.  Until this proceeding concludes, ALLTEL cannot estimate the potentialimpact of any changes to the inter-carrier compensation structure of its ILECrevenues and expenses.

 

In May 2001, the FCCadopted the Rural Task Force Order that established an interim universalservice mechanism that will govern compensation for rural telephone companiesfor the ensuing five years.  The interimmechanism has allowed rural carriers to continue receiving high-cost fundingbased on embedded costs.  OnJune 2, 2004, the FCC asked the Federal/State Joint Board on UniversalService (the “Joint Board”) to review the FCC's rules as they pertain to ruraltelephone companies and to determine what high-cost support mechanism should beadopted when the current funding program expires in June 2006.  At this time, ALLTEL cannot estimate theeffect of the changes to its universal service support, if any, that may occuronce the FCC adopts a permanent universal service compensation plan for ruralcarriers.  On December 13, 2002,the FCC released an order and further notice of proposed rulemaking adopting aninterim USF contribution methodology. The FCC changed the method for providing federal USF contributions fromthe historical interstate revenue-based arrangement to contributions based onprojected revenues.  In addition, theFCC ruled the USF line item on a customer’s bill could not exceed the relevantUSF contribution obligation of the carrier. The FCC also proposed three “connections-based” models to replace thecurrent revenue-based assessment methodology. The proposed connection-based methods would establish a universalservice charge based either on the number of customer connections, the capacityand nature of the connection, or on the number of working telephonenumbers.  The interim universal servicechanges have not had a material adverse effect on the Company’s wireline operations.  ALLTEL cannot predict at this time theimpact to its wireline operations of any permanent USF contribution plan thatthe FCC might adopt.

 

On November 8, 2002,the FCC requested that the Joint Board review certain of the FCC’s rulesrelating to the high-cost universal support levels and the process by whichcarriers are designated ETCs.  OnFebruary 27, 2004, the Joint Board issued its recommended decisionregarding a number of issues related to portable USF support for ETCs.  Among its recommendations, the Joint Boardsuggested that the FCC should adopt optional federal guidelines to assist withstate ETC designations and that support should be provided only for a singleprimary connection per customer.  OnJune 8, 2004, the FCC asked for comments on the Joint Board’s recommendeddecision, but did not elaborate or reach tentative conclusion on any of theJoint Board’s recommendations.  At thistime, ALLTEL cannot estimate what impact, if any, this proceeding may have onits universal service funding.

 

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On July 10, 2002,the Joint Board recommended that the FCC not modify the existing list ofservices supported by universal service. On July 10, 2003, the FCC adopted the Joint Board’s recommendationto retain the existing list of services supported by universal service that didnot include equal access offerings.  Inits February 27, 2004 decision, the Joint Board again declined to includeequal access in the definition of universal service.

 

On December 20,2001, the FCC released a notice of proposed rulemaking initiating the firsttriennial review of the FCC’s policies on unbundled network elements (“UNEs”)including UNE-P.  UNE-P is created whena competing carrier obtains all the network elements needed to provide servicefrom the ILEC at a discounted rate.  OnAugust 21, 2003, the FCC released the text of its Triennial ReviewOrder.  The FCC adopted new rulesgoverning the obligations of ILECs to unbundle the elements of their localnetworks for use by competitors.  TheFCC made national findings of impairment or non-impairment for loops, transportand, most significantly, switching.  TheFCC delegated to the states the authority to engage in additional fact findingand make alternative impairment findings based on a more granular impairmentanalysis including evaluation of applicability of FCC-established“triggers”.  The FCC created “massmarket” and “enterprise market” customer classifications that generallycorrespond to the residential and business markets, respectively.  The FCC found that CLECs were not impairedwithout access to local circuit switching when serving “enterprise market”customers on a national level.  The FCC,however, found CLECs to be impaired on a national level without access to localswitching when serving “mass market” customers.  State commissions had 90 days to ask the FCC to waive the findingof no switching impairment for “enterprise market” customers.  The FCC’s presumption that CLECs areimpaired without access to transport, high capacity loops and “mass market”switching were subject to a more granular nine-month review by statecommissions pursuant to FCC-established triggers and other economic andoperational criteria.  The FCC’sdecision gave the ILECs significant relief from broadband UNE obligations by imposingno requirement to unbundle packet switching over copper/fiber loops orfiber-to-the-home loops.  In addition,line sharing was eliminated as a UNE.

 

As part of the TriennialReview Order the FCC also opened a further notice of proposed rulemaking toconsider the  “pick and choose” ruleunder which a competing carrier could select from among the various terms ofinterconnection offered by an ILEC in its various interconnection agreements.  On July 13, 2004, the FCC released anorder eliminating the “pick and choose” rule, replacing it with an“all-or-nothing” rule.  Under the newrules, a requesting carrier may only adopt an effective interconnectionagreement in its entirety, taking all rates, terms and conditions of theadopted agreement.  The FCC explainedthat it eliminated the “pick and choose” rule to promote commercialnegotiations and produce agreements better tailored to meet carriers’individuals needs.

 

On March 2, 2004,the U.S. District Court overturned key portions of the FCC’s Triennial ReviewOrder.  The Court’s decision vacated thenationwide impairment standard, as well as the FCC’s delegation of authority tothe states, while generally upholding ILEC broadband relief.  The Court’s decision was to become effectiveon May 3, 2004.  On March 31, 2004,the FCC commissioners sent a letter to carriers urging them to begin a periodof commercial negotiation regarding unbundling network elements.  To provide additional time for thesenegotiations, the FCC requested and was granted a 45-day extension toJune 15, 2004 of the May 3, 2004 effective date of the Court’s decision tovacate the UNE rules.  The FCC andSolicitor General later decided not to pursue review of the decision andannounced that it is working on interim UNE rules that should be releasedshortly.  Until these scenarios unfoldand the proceeding has worked its way through the courts, the ultimate impactof the Triennial Review Order and interim UNE rules on ALLTEL’s ILEC operationscannot be determined.

 

On September 15,2003, the FCC launched its first comprehensive review of the rules thatestablish wholesale pricing of UNEs. The notice of proposed rulemaking sought comment on a variety of UNE andresale pricing-related issues and on a proposal to make total element long-runincremental cost methodology (“TELRIC”) rules more closely account for the“real-world” attributes of the incumbent carrier’s network.  If this proposal were adopted, the resultwould likely be higher UNE prices.

 

During the first quarterof 2002, the FCC initiated a rulemaking to evaluate the appropriate frameworkfor broadband access to the Internet over wireline facilities.  In the notice of proposed rulemaking, theFCC tentatively concluded that wireline broadband Internet access should beclassified as an “information service” rather than a telecommunications serviceand, therefore, should not be subject to common carrier regulation.  The FCC sought comments on their tentativeconclusion, but has not reached a final order. In a related proceeding released March 15, 2002, the FCC issued adeclaratory ruling concluding that cable modem service was an interstate“information service” and not a cable service or a telecommunicationsservice.  The FCC sought comment onwhether there are legal or policy reasons why it should reach differentconclusions with respect to wireline broadband Internet access and cable modemservice, but has not reached a final order. On October 6, 2003, the U.S. Court of Appeals for the Ninth Circuit(the “Ninth Circuit Court”) rejected the FCC’s classification of cable modemservice as solely an unregulated “information service”, finding a portion ofthe service to be a telecommunications service.  The FCC requested a rehearing before the full Ninth CircuitCourt, but the request was

 

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denied on March 31,2004.  The Ninth Circuit Court rulingwas scheduled to become effective April 8, 2004, but the Ninth CircuitCourt stayed the ruling while the FCC and the cable industry prepares a formalappeal to the U. S. Supreme Court.  TheU.S. Supreme Court granted an extension of the stay from June 30, 2004until July 30, 2004.  It remainsuncertain whether cable modem service will ultimately fall under common carrierregulation of the 96 Act and whether cable companies will be required toprovide nondiscriminatory access to their networks.  At this time, ALLTEL cannot estimate what impact, if any, thesebroadband proceedings may have on its ILEC operations.

 

Section 251(b) ofthe Communications Act of 1934 (the “34 Act”), as amended, requires, in part,that local exchange carriers provide local number portability to any requestingtelecommunications carrier.  Wirelesscarriers are generally defined as “telecommunications carriers” under the 34 Act,and are therefore eligible to port numbers with wireline carriers, which isreferred to as “intermodal porting”.  Aspreviously discussed under “Regulatory Matters – Wireless Operations”, onNovember 10, 2003, the FCC released a decision providing guidance onintermodal porting issues.  Theintermodal porting requirement took effect on November 24, 2003 forwireline carriers in the top 100 MSAs and on May 24, 2004 for wireline carriersoperating in markets below the top 100 MSAs. The majority of the Company’s wireline operations are conducted inmarkets below the top 100 MSAs and were subject to the later May 24, 2004implementation date for intermodal porting. To date, implementation of intermodal porting has not had a significantimpact on the Company’s wireline operating results.

 

Because certain of theregulatory matters discussed above are under FCC or judicial review, resolutionof these matters continues to be uncertain, and ALLTEL cannot predict at thistime the specific effects, if any, that the 96 Act, regulatory decisions andrulemakings, and future competition will ultimately have on its ILECoperations.

 

Communications SupportServices
|                                           |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
| **(Millions, except customers in  thousands)** |   | **2004**                               |   | **2003**                             |   | **2004** |   | **2003** |   |
| Revenues  and sales:                           |   |                                   |   |                                 |   |   |   |   |   |
| Product  distribution                          |   | $                                      | 95.9   |                                 | $      | 100.8 |   | $ | 195.0 |   | $ | 193.9 |   |
| Long-distance  and network management services |   | 72.9                                   |   | 81.1                                 |   | 151.9 |   | 162.1 |   |
| Directory  publishing                          |   | 48.7                                   |   | 35.3                                 |   | 74.9 |   | 59.7 |   |
| Telecommunications  information services       |   | 11.7                                   |   | 25.6                                 |   | 26.4 |   | 52.2 |   |
| Total  revenues and sales                      |   | 229.2                                  |   | 242.8                                |   | 448.2 |   | 467.9 |   |
| Costs  and expenses:                           |   |                                   |   |                                 |   |   |   |   |   |
| Cost  of services                              |   | 58.6                                   |   | 73.4                                 |   | 124.6 |   | 147.2 |   |
| Cost  of products sold                         |   | 127.9                                  |   | 124.1                                |   | 242.7 |   | 231.8 |   |
| Selling,  general, administrative and other    |   | 13.1                                   |   | 15.7                                 |   | 26.3 |   | 32.3 |   |
| Depreciation  and amortization                 |   | 8.8                                    |   | 8.8                                  |   | 17.3 |   | 18.1 |   |
| Total  costs and expenses                      |   | 208.4                                  |   | 222.0                                |   | 410.9 |   | 429.4 |   |
| Segment  income                                |   | $                                      | 20.8   |                                 | $      | 20.8 |   | $ | 37.3 |   | $ | 38.5 |   |
| Long-distance  customers                       |   | 1,717.6                                |   | 1,644.4                              |   | — |   | — |   |

 

Communications supportservices revenues and sales decreased $13.6 million, or 6 percent, and $19.7million, or 4 percent, for the three and six month periods ended June 30,2004, respectively, compared to the same periods of 2003.  As noted in the table above, the decrease inrevenues and sales in the three month period of 2004 reflected declines insales of telecommunications equipment and data products, long-distance and networkmanagement services and telecommunications information services, partiallyoffset by an increase in directory publishing revenues.  The decrease in the six month period of 2004reflected declines in long-distance and network management services andtelecommunications information services, partially offset by increases in salesof telecommunications equipment and data products and directory publishingrevenues. Sales of telecommunications and data products decreased $4.9 millionand increased $1.1 million in the three and six months ended June 30,2004, respectively, compared to the same periods in 2003.  Sales to non-affiliates increased $5.0million and $14.0 million in the three and six month periods of 2004,respectively, primarily attributable to increased sales of wireless handsets toretailers and other distributors. Conversely, compared to the same periods of 2003, sales to affiliatesdecreased $9.9 million and $12.9 million in the three and six months endedJune 30, 2004, respectively, primarily due to a reduction in capitalexpenditures by the Company’s wireline operations.

 

Revenues attributable tolong-distance and network management services declined $8.2 million and $10.2million in the three and six month periods ended June 30, 2004,respectively, as compared to the same periods in 2003.  Although the number of long-distancecustomers served increased during 2004, revenues derived from externalcustomers decreased $3.7 million and $4.1 million in the three and six monthperiods of 2004, respectively, primarily due to declining usage by residentialcustomers and a reduction in customer billing rates due to competition.  Revenues earned from affiliates for

 

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network managementservices also decreased $4.5 million and $6.1 million for the three and sixmonths ended June 30, 2004, respectively, compared to the same periods ayear ago, primarily due to a reduction in intercompany billing rates, whichtook effect April 1, 2004.  Telecommunicationsinformation services revenues decreased $13.9 million and $25.8 million in thethree and six months ended June 30, 2004, respectively, primarily due tothe December 2003 sale of certain assets and related liabilities,including selected customer contracts and capitalized software development costs,to Convergys.  The sold customercontracts represented approximately 48 percent of the total revenues and salesreported by the telecommunications information services operations in 2003.

 

Directory publishingrevenues increased $13.4 million and $15.2 million in the three and six monthsended June 30, 2004, respectively, as compared to the same periods in2003, primarily due to an increase in the number of directories contractspublished, including the initial publication of directories for the acquiredKentucky operations previously discussed. In addition, the increase in the six month period of 2004 also reflecteda change in accounting for directory contracts in which the Company has asecondary delivery obligation. Effective January 1, 2003, ALLTEL began deferring a portion of itsrevenues and related costs to provide for secondary deliveries.  As a result, revenues and related costsassociated with any directories for which secondary deliveries were required,but not yet made, were deferred, resulting in a reduction in directorypublishing revenues in the six month period of 2003 of $4.4 million.

 

Primarily due to thedecrease in revenues and sales noted above, communications support servicessegment income decreased $1.2 million, or 3 percent, in the six months endedJune 30, 2004, compared to the same period in 2003.  Although revenues and sales also decreasedin the three month period of 2004 compared to the same period of 2003, segmentincome remained unchanged primarily due to improved profit margins in thedirectory publishing operations.  Profitmargins for the directory publishing operations in 2003 had been adverselyaffected by increased selling, marketing and other start-up costs incurred inorder for the Company’s publishing subsidiary to begin providing all directorypublishing services, except printing, for all directory contracts to bepublished in 2004.  Previously, thesedirectory publishing services were contracted out to a third party.

 

Set forth below is asummary of the restructuring and other charges related to the communicationssupport services operations that were not included in the determination ofsegment income for the three and six months ended June 30:

 
|                                      |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|-------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| **(Millions)**                            |   | **2004**                |   | **2003**              |   | **2004** |   | **2003** |   |
| Severance  and employee benefit costs     |   | $                       | — |                  | $      | — |   | $ | 0.5 |   | $ | — |   |
| Relocation  costs                         |   | —                  |   | —                |   | 0.1 |   |   |   |
| Lease  and contract termination costs     |   | —                  |   | (0.5                  | )      | — |   | (0.5 | ) |
| Write-down  of software development costs |   | —                  |   | 3.8                   |   | — |   | 3.8 |   |
| Total  restructuring and other charges    |   | $                       | — |                  | $      | 3.3 |   | $ | 0.6 |   | $ | 3.3 |   |

 

**FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES**
|                                         |   | **Six Months  Ended  June 30,** |     |
|----------------------------------------------|--------|--------------------------------------|----------|
| **(Millions, except per share  amounts)**    |   | **2004**                             |     | **2003** |   |
| Cash  flows from (used in):                  |   |                                 |     |   |   |
| Operating  activities                        |   | $                                    | 1,248.1  |   | $ | 1,210.1 |   |
| Investing  activities                        |   | (465.1                               | )        | (677.9 | ) |
| Financing  activities                        |   | (753.3                               | )        | (963.9 | ) |
| Discontinued  operations                     |   | —                               |     | 792.7 |   |
| Effect  of exchange rate changes             |   | (0.1                                 | )        | 0.8 |   |
| Increase  in cash and short-term investments |   | $                                    | 29.6     |   | $ | 361.8 |   |
| Total  capital structure (a)                 |   | $                                    | 12,608.4 |   | $ | 12,598.2 |   |
| Percent  of equity to total capital (b)      |   | 55.8                                 | %        | 52.9 | % |
| Book  value per share (c)                    |   | $                                    | 22.81    |   | $ | 21.37 |   |

 

Notes:

(a)          Computed as the sum oflong-term debt including current maturities, redeemable preferred stock and totalshareholders’ equity.

(b)         Computed by dividingtotal shareholders’ equity by total capital structure as computed in (a) above.

(c)          Computed by dividingtotal shareholders’ equity less preferred stock by the total number of commonshares outstanding at the end of the period.

 

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Cash Flows-OperatingActivities

Cash provided fromoperations continued to be ALLTEL’s primary source of liquidity.  Cash provided from operations for the sixmonths ended June 30, 2004 increased slightly compared to the same periodof 2003.  The increase in cash providedfrom operations resulted from favorable changes in working capitalrequirements, primarily reflecting timing differences in the payment of incometaxes and the purchase of inventories. These favorable changes in working capital requirements were partiallyoffset by adverse timing differences in the collection of accounts receivableand the payment of trade payables.

 

Cash Flows-InvestingActivities

Capital expenditurescontinued to be ALLTEL’s primary use of capital resources.  Capital expenditures for the six monthsended June 30, 2004 were $480.5 million compared to $531.4 million for thesame period in 2003.  Capitalexpenditures in both years were incurred to construct additional networkfacilities, to deploy digital wireless technology in the Company’s existing andacquired wireless markets and to upgrade ALLTEL’s telecommunications network inorder to offer other communications services, including long-distance,Internet, DSL, and “walkie-talkie” communications services.  The Company funded substantially all of itscapital expenditures through internally generated funds.  Investing activities also included outlaysfor capitalized software development costs. Additions to capitalized software for the six months ended June 30,2004 were $14.8 million compared to $28.4 million for the same period in2003.  The Company expects capitalexpenditures including capitalized software development costs to beapproximately $1.2 to $1.3 billion for 2004, which will be funded primarilyfrom internally generated funds.

 

There were no cashoutlays for the purchase of property in the six months ended June 30, 2004compared to $132.1 million for the same period of 2003.  During the first six months of 2003, ALLTELpurchased wireless properties in Mississippi for $64.6 million in cash,acquired the remaining ownership interest in two wireless properties inMichigan for $60.0 million in cash, and purchased an additional ownership interestin a Wisconsin wireless property for $7.5 million in cash.

 

Investing activities forthe six months ended June 30, 2004 and 2003 also included proceeds fromthe return on investments of $36.9 million and $17.6 million,respectively.  These amounts primarilyconsisted of cash distributions received from ALLTEL’s wireless minorityinvestments.

 

CashFlows-Financing Activities

Dividend payments remaina significant use of capital resources for ALLTEL.  Common and preferred dividend payments were $231.3 million forthe six months ended June 30, 2004 compared to $218.1 million for the sameperiod in 2003.  The increase individend payments in 2004 primarily reflected growth in the annual dividendrate on ALLTEL’s common stock. In October 2003, the Company’s Board ofDirectors approved an increase in the quarterly common stock dividend rate from$.35 to $.37 per share, raising the annual dividend rate to $1.48 pershare.  The Company expects to continuethe payment of cash dividends during the balance of 2004.

 

ALLTEL’s maximumborrowing capacity under its commercial paper program is $1.5 billion.  ALLTEL classifies commercial paperborrowings as long-term debt, because they are intended to be maintained on along-term basis and are supported by the Company’s revolving creditagreements.  ALLTEL has a $1.0 billionline of credit under a revolving credit agreement.  During 2003, the Company amended this revolving credit agreementso that the expiration date of the entire $1.0 billion line of credit would beOctober 1, 2005.  On July 30,2003, the Company entered into an additional $500.0 million, 364-day revolvingcredit agreement that expired on July 28, 2004.  No borrowings were outstanding under the revolving creditagreements as of June 30, 2004, December 31, 2003 or June 30,2003.  On July 28, 2004, theCompany replaced its existing $1.0 billion revolving credit agreementwith a new five-year revolving credit agreement with a $1.5 billionline of credit.

 

Under the commercialpaper program, commercial paper borrowings are fully supported by the availableborrowings under the revolving credit agreements.  Accordingly, the total amount outstanding under the commercialpaper program and the indebtedness incurred under the revolving creditagreements may not exceed $1.5 billion. No commercial paper borrowings were outstanding at June 30, 2004,December 31, 2003 or June 30, 2003. Commercial paper borrowings outstanding at December 31, 2002 were$25.0 million.  During the first sixmonths of 2004, no borrowings were incurred by the Company under either itscommercial paper program or revolving credit agreements.  During 2003, the Company incurred additionalcommercial paper borrowings of $574.6 million, consisting of $124.6 million tofund the cost of the wireless property acquisitions in Mississippi andMichigan, and $450.0 million to retire a 7.125 percent senior unsecured notethat was due March 1, 2003.  Duringthe second quarter of 2003, the Company repaid all borrowings outstanding underits commercial paper program utilizing a portion of the cash proceeds ALLTELreceived in connection with the April 1, 2003, sale of the financialservices division of its information services subsidiary to Fidelity National.  ALLTELalso used a portion of the cash proceedsfrom the sale to retire all long-term debt outstanding under the RuralUtilities Services, Rural Telephone Bank and Federal Financing Bank programs asfurther discussed below.

 

35

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Retirements of long-termdebt were $252.9 million and $740.5 million for the six months endedJune 30, 2004 and 2003, respectively. Retirements of long-term debt in 2004 primarily consisted of therepayment of a $250.0 million unsecured note due April 1, 2004.  Retirements of long-term debt in 2003included the repayment of a $450.0 million unsecured note due March 1,2003 and the retirement of $249.1 million of long-term debt outstanding under theRural Utilities Services, Rural Telephone Bank and Federal Financing Bankprograms.  Retirements of long-term debtin 2003 also included the net reduction from December 31, 2002 incommercial paper borrowings of $25.0 million and scheduled long-term debt retirementsof  $16.4 million.

 

On January 22, 2004,ALLTEL’s Board of Directors adopted a stock repurchase plan authorizing theCompany to repurchase up to $750.0 million of its outstanding common stock overa two-year period ended December 31, 2005.  Under the repurchase plan, ALLTEL may repurchase shares, fromtime to time, on the open market or in negotiated transactions, ascircumstances warrant, depending upon market conditions and other factors.  Sources of funding the stock buyback programinclude available cash on hand, operating cash flows, borrowings under ALLTEL’scommercial paper program and proceeds from monetizing the Company’s investmentportfolio.  Through June 30, 2004,ALLTEL had repurchased, using available cash on hand, 4.8 million of its commonshares at a total cost of $243.0 million.

 

Cash flows from financingactivities also included distributions to minority investors, which amounted to$32.7 million and $28.3 million for the six months ended June 30, 2004 and2003, respectively.

 

Liquidity and CapitalResources

On August 4, 2004, ALLTEL announced that it had reached agreements with UnitedStates Cellular Corp. and TDS Telecom to purchase certain wireless properties inGeorgia, Mississippi, North Carolina, Ohio and Wisconsin for $140 million in cash. The transactions are subject to regulatory approvals and are expected to closein the fourth quarter of 2004.  The Company believes ithas sufficient cash and short-term investments on hand ($687.4 million atJune 30, 2004) and has adequate operating cash flows to finance itsongoing operating requirements, including capital expenditures, repayment oflong-term debt, payment of dividends, funding the stock repurchase plan, and financing thewireless property acquisitions discussed above.  Additional sources of fundingavailable to ALLTEL include (1) $1.5 billion of borrowings available to theCompany under its commercial paper program and revolving credit agreement, (2)additional debt or equity securities under the Company’s March 28, 2002,$5.0 billion shelf registration statement, of which approximately $730 millionremained available for issuance at June 30, 2004 and (3) additional debtsecurities issued in the private placement market.

 

ALLTEL’s commercial paperand long-term credit ratings with Moody’s Investors Service (“Moody’s”),Standard & Poor’s Corporation (“Standard & Poor”) and Fitch Ratingswere unchanged from December 31, 2003 and were as follows:

 
| **Description**                 |   | **Moody’s** |   | **Standard  & Poor** |   | **Fitch** |   |
|---------------------------------|--------|------------------|--------|--------------------------|--------|-----------|--------|
| Commercial  paper credit rating |   | Prime-1          |   | A-1                      |   | F1        |   |
| Long-term  debt credit rating   |   | A2               |   | A                        |   | A         |   |
| Outlook                         |   | Stable           |   | Negative                 |   | Stable    |   |

 

Factors that could affectALLTEL’s short and long-term credit ratings would include, but not be limitedto, a material decline in the Company’s operating results and increased debtlevels relative to operating cash flows resulting from future acquisitions orincreased capital expenditure requirements. If ALLTEL’s credit ratings were to be downgraded from current levels,the Company would incur higher interest costs on new borrowings, and theCompany’s access to the public capital markets could be adverselyaffected.  A downgrade in ALLTEL’scurrent short or long-term credit ratings would not accelerate scheduledprincipal payments of ALLTEL’s existing long-term debt.

 

The revolving creditagreements contain various covenants and restrictions including a requirementthat, as of the end of each calendar quarter, ALLTEL maintain a totaldebt-to-capitalization ratio of less than 65 percent.  For purposes of calculating this ratio under the revolving creditagreements, total debt would include amounts classified as long-term debt(excluding mark-to-market adjustments for interest rate swaps), currentmaturities of long-term debt outstanding, short-term debt and any letters ofcredit or other guarantee obligations. As of June 30, 2004, the Company’s total debt to capitalizationratio was 44.1 percent.  In addition,the indentures and borrowing agreements, as amended, provide, among otherthings, for various restrictions on the payment of dividends by theCompany.  Retained earnings unrestrictedas to the payment of dividends by the Company amounted to $5,776.2 million atJune 30, 2004.  There are norestrictions on the payment of dividends among members of ALLTEL’s consolidatedgroup.

 

 

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In connection with the sale of the Company's financial services divisionpreviously discussed, ALLTEL received shares of Fidelity National common stock. As of June 30, 2004, ALLTEL owned approximately 11.2 million shares of FidelityNational common stock, representing an approximate seven percent interest inFidelity National.  

 

Under the Company’slong-term debt borrowing agreements, acceleration of principal payments wouldoccur upon payment default, violation of debt covenants not cured within 30days or breach of certain other conditions set forth in the borrowingagreements.  At June 30, 2004, theCompany was in compliance with all of its debt covenants.  There are no provisions within the Company’sleasing agreements that would trigger acceleration of future lease payments.

 

The Company does not usesecuritization of trade receivables, affiliation with special purpose entities,variable interest entities or synthetic leases to finance its operations.  Additionally, the Company has not enteredinto any material arrangement requiring the Company to guarantee payment ofthird party debt or to fund losses of an unconsolidated special purpose entity.

 

Recently IssuedAccounting Pronouncements

Under the MedicarePrescription Drug, Improvement and Modernization Act of 2003, (the “Act”)beginning in 2006, the Act will provide a prescription drug benefit underMedicare Part D, as well as a federal subsidy to plan sponsors of retireehealthcare plans that provide a prescription drug benefit to their participantsthat is at least actuarially equivalent to the benefit that will be availableunder Medicare.  The amount of thefederal subsidy will be based on 28 percent of an individual beneficiary’sannual eligible prescription drug costs ranging between $250 and $5,000.  On May 19, 2004, the Financial AccountingStandards Board issued Staff Position No. 106-2, “Accounting and DisclosureRequirements Related to the Medicare Prescription Drug, Improvement andModernization Act of 2003” (“FSP No. 106-2”). FSP No. 106-2 clarified that the federal subsidy provided under the Actshould be accounted for as an actuarial gain in calculating the accumulated postretirementbenefit obligation and annual postretirement expense.   FSP No. 106-2 became effective as ofJuly 1, 2004.  The Department of Health and Human Services has yet toissue final regulations on the determination of actuarial equivalence and thefederal subsidy.  Until such regulations are finalized, ALLTEL cannot fullyquantify the effects, if any, that the Act will have on its future benefit costsor accumulated postretirement benefit obligation.  Accordingly, the effectsof the Act have not been reflected in the accompanying unaudited consolidatedfinancial statements.

 

Critical AccountingPolicies

ALLTEL prepares itsconsolidated financial statements in accordance with accounting principlesgenerally accepted in the United States. In its Annual Report on Form 10-K for the year ended December 31,2003, ALLTEL identified the critical accounting policies which affect its moresignificant estimates and assumptions used in preparing the Company’sconsolidated financial statements. These critical accounting policies include accounting for servicerevenues, evaluating the collectibility of trade receivables, accounting forpension and other postretirement benefits, calculating depreciation andamortization expense and determining the fair values of goodwill and otherindefinite-lived intangible assets. There have been no material changes to ALLTEL’s critical accountingpolicies during the six-month period ended June 30, 2004.

 

Legal Proceedings

ALLTEL is party to variouslegal proceedings arising in the ordinary course of business.  Although the ultimate resolution of thesevarious proceedings cannot be determined at this time, management of theCompany does not believe that such proceedings, individually or in the aggregate,will have a material adverse effect on the future results of operations orfinancial condition of ALLTEL.  Inaddition, management of the Company is currently not aware of any environmentalmatters that, individually or in the aggregate, would have a material adverseeffect on the consolidated financial condition or results of operations of theCompany.

 

Other Information

On June 17, 2004,ALLTEL received a request from the staff of the Enforcement Division of the SECto provide by July 19, 2004, on a voluntary basis, information regarding themethodologies used to calculate and internal control procedures performed by the Companyto ensure the accurate collection and public disclosure of the number of wireless customers and wireline access linesreported by ALLTEL in its periodic and current reports filed or furnished tothe SEC under the Securities Exchange Act of 1934, as amended, and quarterlyearnings calls and releases.  The Company provided written responses to the SEC staff onJuly 19, 2004, in response to the SEC's request.

 

37

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**ALLTEL CORPORATION**

**FORM 10-Q**

**PART I – FINANCIAL INFORMATION**

 

**Item 3. Quantitative andQualitative Disclosures About Market Risk**

The Company’s marketrisks at June 30, 2004 are similar to the market risks discussed inALLTEL’s Annual Report on Form 10-K for the year ended December 31,2003.  The Company is exposed to marketrisk from changes in marketable equity security prices, interest rates, andforeign exchange rates.  The Company hasestimated its market risk using sensitivity analysis.  For marketable equity securities, market risk is defined as thepotential change in fair value attributable to a hypothetical adverse change inmarket prices.  For all other financialinstruments, market risk is defined as the potential change in earnings resultingfrom a hypothetical adverse change in market prices or interest rates.  The results of the sensitivity analysis usedto estimate market risk are presented below, although the actual results maydiffer from these estimates.

 

Equity Price Risk

Changes in equity pricesprimarily affect the fair value of ALLTEL’s investments in marketable equitysecurities.  Fair value for investmentswas determined using quoted market prices, if available, or the carrying amountof the investment, if no quoted market price was available.  At June 30, 2004, investments of theCompany were recorded at fair value of $741.1 million, compared to $722.7million at December 31, 2003.  Theincrease in fair value primarily reflected the increased market value of theFidelity National common stock acquired by ALLTEL in connection with theApril 1, 2003 sale of its financial services division, as previouslydiscussed.  Marketable equity securitiesamounted to $419.5 million and included unrealized holding gains of $93.8million at June 30, 2004. Comparatively, investments in marketable equity securities were $395.8million at December 31, 2003 and included unrealized holding gains of$73.6 million.  At June 30, 2003,investments in marketable equity securities amounted to $313.7 million andincluded unrealized holding gains of $23.5 million.  A hypothetical 10 percent decrease in quoted market prices wouldresult in a $41.9 million decrease in the fair value of the Company’smarketable equity securities at June 30, 2004.

 

Interest Rate Risk

The Company’s earningsare affected by changes in variable interest rates related to ALLTEL’s issuanceof short-term commercial paper and interest rate swap agreements.  The Company enters into interest rate swapagreements to obtain a targeted mixture of variable and fixed-interest-ratedebt such that the portion of debt subject to variable rates does not exceed 30percent of ALLTEL’s total debt outstanding. The Company has established policies and procedures for risk assessmentand the approval, reporting, and monitoring of interest rate swapactivity.  ALLTEL does not enter intointerest rate swap agreements, or other derivative financial instruments, fortrading or speculative purposes. Management periodically reviews ALLTEL’s exposure to interest ratefluctuations and implements strategies to manage the exposure.

 

As of June 30, 2004,the Company had no borrowings outstanding under its commercial paperprogram.  The Company has entered intosix, pay variable receive fixed, interest rate swap agreements on notionalamounts totaling $1.0 billion to convert fixed interest rate payments tovariable as of June 30, 2004.  Thematurities of the six interest rate swaps range from March 1, 2006 toNovember 1, 2013.  The weightedaverage fixed rate received by ALLTEL on these swaps is 5.5 percent, and thevariable rate paid by ALLTEL is the three month LIBOR (London-Interbank OfferedRate).  The weighted average variablerate paid by ALLTEL was 1.2 percent at June 30, 2004.  A hypothetical increase of 100 basis pointsin variable interest rates would reduce annual pre-tax earnings byapproximately $10.0 million. Conversely, a hypothetical decrease of 100 basis points in variableinterest rates would increase annual pre-tax earnings by approximately $10.0 million.

 

Foreign ExchangeRisk

The Company’s businessoperations in foreign countries are not material to the Company’s consolidatedoperations, financial condition and liquidity. Foreign currency translation gains and losses were not material to theCompany’s consolidated results of operations for the three and six months endedJune 30, 2004 and 2003. Additionally, the Company is not currently subject to material foreigncurrency exchange rate risk from the effects that exchange rate movements offoreign currency would have on the Company’s future costs or on future cashflows it would receive from its foreign subsidiaries.  The Company has not entered into any significant foreign currencyforward exchange contracts or other derivative financial instruments to hedgethe effects of adverse fluctuations in foreign currency exchange rates.

 

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**ALLTEL CORPORATION**

**FORM 10-Q**

**PART I – FINANCIAL INFORMATION**

 

**Item 4.****           Controls and Procedures**

 

(a)                            Evaluationof disclosure controls and procedures.

 

The term “disclosure controls and procedures” (defined in SEC Rule13a-15(e)) refers to the controls and other procedures of a company that aredesigned to ensure that information required to be disclosed by a company inthe reports that it files under the Securities Exchange Act of 1934 (the“Exchange Act”) is recorded, processed, summarized and reported within requiredtime periods. ALLTEL’s management, with the participation of the ChiefExecutive Officer and Chief Financial Officer, have evaluated the effectivenessof the Company’s disclosure controls and procedures as of the end of the periodcovered by this quarterly report (the “Evaluation Date”).   Based on that evaluation, ALLTEL’s ChiefExecutive Officer and Chief Financial Officer have concluded that, as of theEvaluation Date, such controls and procedures were effective.

 

(b)                           Changesin internal controls.

 

The term “internal control over financial reporting” (defined in SECRule 13a-15(f)) refers to the process of a company that is designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. ALLTEL’s management, with the participation of the Chief ExecutiveOfficer and Chief Financial Officer, have evaluated any changes in theCompany’s internal control over financial reporting that occurred during theperiod covered by this quarterly report, and they have concluded that there wasno change to ALLTEL’s internal control over financial reporting that hasmaterially affected, or is reasonably likely to materially affect, ALLTEL’sinternal control over financial reporting.

 

**PART II – OTHER INFORMATION**

 

**Item 2.****           Changes in Securities, Use ofProceeds and Issuer Purchases of Equity Securities**

 

(e)                      OnJanuary 23, 2004, ALLTEL announced a $750.0 million stock repurchase planthat expires on December 31, 2005. During the first quarter of 2004, the Company repurchased 4,825,600shares of its common stock at a total cost of $243.0 million, or an averagecost of $50.36 per share.  There were norepurchases under the stock repurchase plan during the second quarter of 2004as indicated in the table below.

 
| **Period**             |   | **Total  Number of  Shares Purchased** |   | **Average  Price  Paid per Share** |   | **Total  Number of  Shares Purchased as  Part of Publicly  Announced Plans** |   | **Maximum  Number of  Shares (or Approximate  Dollar Value) that May  Yet Be Purchased Under  the Plans** |   |
|------------------------|--------|----------------------------------------|--------|------------------------------------|--------|------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------|--------|
| April 1-30,  2004 |   | —                                 |   | —                             |   | —                                                                       |   | $507.0 million                                                                                            |   |
| May  1-31, 2004        |   | —                                 |   | —                             |   | —                                                                       |   | $507.0 million                                                                                            |   |
| June 1-30,  2004  |   | —                                 |   | —                             |   | —                                                                       |   | $507.0 million                                                                                            |   |
| Total                  |   | —                                 |   | —                             |   | —                                                                       |   |                                                                                                      |   |

 

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**ALLTEL CORPORATION**

**FORM 10-Q**

**PART II – OTHER INFORMATION**

 

**Item 4****.****           Submissionof Matters to a Vote of Security Holders**

 

The Company’s 2004 Annual Meeting of Stockholders was held onApril 22, 2004.  At the meeting,the following items were submitted to a vote of stockholders:

 

(1)          The election of fourdirectors, constituting the class of the Board of Directors who will serve athree-year term expiring at the 2007 Annual Meeting of Stockholders:

 
| **Nominee**                   |   | **Votes For** |   | **Votes  Withheld** |   |
|-------------------------------|--------|---------------|--------|---------------------|--------|
| Scott T. Ford                 |   | 262,954,450   |   | 5,906,115           |   |
| Lawrence L.  Gellerstedt, III |   | 263,489,464   |   | 5,371,101           |   |
| Emon A. Mahony, Jr.           |   | 261,633,163   |   | 7,227,402           |   |
| Ronald Townsend               |   | 263,775,311   |   | 5,085,254           |   |

 

(2)          The appointment ofPricewaterhouseCoopers LLP to audit ALLTEL’s consolidated financial statements forthe fiscal year ending December 31, 2004 was ratified with 263,712,621votes for, 3,354,336 votes against and 1,793,608 abstentions.

 

(3)          A stockholder proposalto change ALLTEL Corporation’s employment opportunity policy was defeated with56,612,433 votes for, 149,470,989 votes against, 18,275,743 abstentions, and44,501,400 broker non-votes.

 

**Item 6.****           Exhibits and Reports on Form 8-K**

 

(a)                      See theexhibits specified on the Index of Exhibits located at Page 42.

 

(b)                     Reports onForm 8-K:

 
| Current Report on Form  8-K dated April 22, 2004, reporting under Item 12, Disclosure of Results  of Operations and Financial Condition, the Company’s Press Release announcing  ALLTEL’s 2004 first quarter unaudited consolidated results of operations. |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                      |
| Current Report on Form  8-K dated April 23, 2004, reporting under Item 11, Temporary Suspension  of Trading Under Registrant’s Employee Benefit Plans, an impending blackout  period to be imposed under the ALLTEL Corporation 401(k) Plan.                    |
|                                                                                                                                                                                                                                                                      |
| No other reports on  Form 8-K have been filed during the quarter for which this report is filed.                                                                                                                                                                          |

 

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SIGNATURE

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|   | ALLTEL  CORPORATION                                 |   |
|--------|-----------------------------------------------------|--------|
|   | (Registrant)                                        |   |
|   |                                                |   |
|   |                                                |   |
|   | /s/ Jeffery R.  Gardner                             |   |
|   | Jeffery R.  Gardner                                 |   |
|   | Executive Vice  President - Chief Financial Officer |   |
|   | (Principal  Financial Officer)                      |   |
|   | August 6,  2004                                |   |

 

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**ALLTEL CORPORATION**

**FORM 10-Q**

**INDEX OF EXHIBITS**

 
| **Form 10-Q**   |   |                                                                                                                                                                                                                                                                                                                             |   |   |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| **Exhibit No.** |   | **Description  of Exhibits**                                                                                                                                                                                                                                                                                                     |   |   |
| (10)(a)(1)      |   | Five Year Revolving  Credit Agreement dated as of July 28, 2004 between ALLTEL Corporation  and Bank of America, N.A., JPMorgan Chase Bank, Banc of America Securities  LLC and J.P. Morgan Securities Inc., Citicorp USA, Inc., KeyBank National  Association, Wachovia Bank, National Association, and Barclays Bank PLC. |   | (a)    |
|            |   |                                                                                                                                                                                                                                                                                                                             |   |   |
| (10)(c)(7)(a)   |   | Change in Control  Agreement by and between the Company and C.J. Duvall Jr. effective as of  January 22, 2004.                                                                                                                                                                                                              |   | (a)    |
|            |   |                                                                                                                                                                                                                                                                                                                             |   |   |
| (10)(c)(8)(a)   |   | Change in Control  Agreement by and between the Company and Sharilyn S. Gasaway effective as of  January 22, 2004.                                                                                                                                                                                                          |   | (a)    |
|            |   |                                                                                                                                                                                                                                                                                                                             |   |   |
| (10)(c)(9)(a)   |   | Change in Control  Agreement by and between the Company and Scott H. Settelmyer effective as of  January 22, 2004.                                                                                                                                                                                                          |   | (a)    |
|            |   |                                                                                                                                                                                                                                                                                                                             |   |   |
| (10)(k)(9)      |   | Amendment No. 4 to  ALLTEL Corporation Pension Plan (January 1, 2001 Restatement).                                                                                                                                                                                                                                          |   | (a)    |
|            |   |                                                                                                                                                                                                                                                                                                                             |   |   |
| (10)(o)(7)      |   | Amendment No. 6 to  ALLTEL Corporation 401(k) Plan (January 1, 2001 Restatement).                                                                                                                                                                                                                                           |   | (a)    |
|            |   |                                                                                                                                                                                                                                                                                                                             |   |   |
| 31(a)           |   | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                       |   | (a)    |
|            |   |                                                                                                                                                                                                                                                                                                                             |   |   |
| 31(b)           |   | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                       |   | (a)    |
|            |   |                                                                                                                                                                                                                                                                                                                             |   |   |
| 32(a)           |   | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                   |   | (a)    |
|            |   |                                                                                                                                                                                                                                                                                                                             |   |   |
| 32(b)           |   | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                   |   | (a)    |

 

(a) Filed herewith.

 

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